What is nearshoring?

At the turn of this century, as globalization and free trade were reshaping the world economy, companies began to look for ways to save costs. Nearshoring is a new trend in which companies relocate manufacturing facilities closer to their home markets, lowering transportation expenses and significantly raising productivity. To take advantage of nearshoring opportunities, companies must meet certain requirements.

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Nearshoring allows companies to be closer to their markets, simplify supply chains, and reduce transportation and other costs. When a company relocates manufacturing to a foreign country, it must ship goods back home to reach customers. This increase costs for the company due to shipping fees and delays in delivery. By moving production closer to their markets, companies reduce supply chain costs.

Many factors currently facilitate nearshoring in the electronics sector: low-wage workers, high technology competencies among manufacturers, and reliable political environments. For example, China offers competitive wages compared with other countries in Asia, and a growing number of multinationals have already set up shop there while Mexico is a relatively close market with a skilled labor force at competitive prices.

Nearshoring Benefits

By locating manufacturing operations in the same geographic region, companies can achieve significant cost savings. Reducing shipping costs, for example, has a positive effect on profit margins and helps businesses to better compete in their local markets. The shorter distance from factory to market also has its advantages; goods are less likely to be damaged en route or arrive late due to delays at the port. Additionally, reduced shipping volume and the reduction of inventory kept on-site will indirectly lower the costs associated with raw material storage and management. Finally, companies can benefit from greater flexibility regarding production schedules; fewer shipments mean less time spent loading and unloading goods, leaving more time for manufacturing operations to flow smoothly and efficiently.

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Besides cost savings, many companies are seeking out the benefits of nearshoring due to the increased efficiency and flexibility of their manufacturing operations. Beyond simply lowering operational costs and offsetting negative effects on cash flow, nearshoring offers companies the ability to make substantial improvements in production quality, process efficiencies, and product design.

The benefits of nearshoring should be taken into account when organizing a supply chain. In addition to the potential for cost savings, several other advantages can help an organization increase its competitiveness: closer proximity between production facilities allows for better coordination and more efficient use of resources. For example, firms may locate one or more new facilities in a geographic region where skilled labor is readily available and utilize existing facilities as sources of supply.

When selecting a location for nearshoring, companies should consider the impacts of a changing economic climate or political developments in the region. Numerous countries in Asia and Latin America have undergone economic reforms in recent years; such reforms are often accompanied by instability and political upheaval, potentially disrupting supply chains. Companies should seek out stable locations with strong government support. Similarly, companies relying on trade agreements may wish to check the terms of such agreements before relocating operations to a new region.

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