Near-shoring This new purchasing trend is closer to home
Procurement strategies are extremely customized. This is not only due to the respective industry and the initial situation the company finds itself in. Company-specific goals, manufacturing processes, necessary raw or building materials, and marketing are also affected. It’s therefore worthwhile for buyers to be aware of all the sourcing options. After all, a sound strategy reduces or avoids dependencies, ensures a good negotiating position, and strengthens sustainability generally along with the supplier relationship specifically.
Triggered by the corona pandemic and intensified by the Ukraine war, countless globally linked supply chains are in turmoil. Specifically, the weaknesses of so-called offshoring, whereby production is relocated to distant foreign countries to benefit from low manufacturing costs, emerged clearly during these times.
Near-shoring as a current purchasing trend
As an alternative to off-shoring, companies are increasingly turning to near-shoring. They’re withdrawing from distant continents, such as Africa, also due to the German Supply Chain Act. Instead, the focus is increasingly on manufacturing capacities within the company's own national borders or in a nearby country. The trend toward near-shoring with a more reliable supply of goods provides easier control and less dependence on external circumstances. At the same time, production prices are also rising; yet these can be offset by lower transport costs.
The benefits of near-shoring
Ease of communication
Manufacturing in a nearby country improves communication for several reasons. You’re dealing with the same time zone or one close by, a low language barrier, and the good English skills often available in other European countries.
Easier to reach
The transportation of goods and the logistical processes can be organized more clearly in near-shoring. Companies are easier to reach and products are often transported by road or rail instead of by ship.
A collaborative understanding
The cultural differences to other European countries aren’t as drastic as compared to Asia or South America, which results in fewer misunderstandings.
Protecting the environment
The shorter transportation distances protect the environment and are thus in line with the sustainability movement that has emerged because of the climate change. This lets companies to meet the increased demand for environmentally friendly products and services while reducing their environmental footprint.
The disadvantages of near-shoring
Overcoming obstacles
Relocating production facilities to a new country presents time-consuming and costly logistical challenges.
Delaying operations
Good and accurate planning is the key to successful near-shoring. Production in the new market needs to be set up before operations in the current country cease to avoid delays in operations.
Finding new partners
When changing countries, old business relationships often need to be terminated and new ones established. This requires establishing a basis of trust and intensively cultivating the new relationships.
Shortage of skilled workers
A major problem in many countries is the shortage of skilled workers. Finding the right people in the new market can be very challenging.
Near-shoring as a strategy for stable supply chains
The December 2022 issue (No. 23) of the German purchasing trade journal MI Einkäufer im Markt deals with a case study in the construction industry. The company in question is Strabag, which is pulling out of Africa because of the Supply Chain Act*. A project with a construction period of two years requires an estimated 1,000 products, spare parts, and construction materials from different suppliers. More staff would need to be hired to monitor all the direct local suppliers. The example shows in which cases near-shoring strategies may well be effective in the future, and that the M factor is often still ignored in decision-making.
In summary, it’s become clear that near-shoring can make for more resilient and stable supply chains, yet it’s not a surefire winner and entails drawbacks as well. For this reason, I recommend that companies thoroughly weigh the pros and cons of off-, near- or re-shoring for their specific starting position.
The advantages and disadvantages of the different purchasing strategies are also described in my current book Purchasing in Transition [Der Einkauf im Wandel]. Needless to say, I'd be happy to provide you with more information on off-, near- and re-shoring in an appointment free of charge or on LinkedIn.
For more on this and other sustainable purchasing strategies, listen to my podcast.
*The Supply Chain Act, which came into force at the beginning of 2023, requires large companies to follow human rights and environmental protection standards throughout the supply chain. The German law currently applies to companies with 3,000 or more employees. Beginning in 2024, companies with 1,000 or more employees will also be subject to the law. Besides, stricter regulation is already being negotiated in the EU.