Why Companies Are Moving Closer to Nearshoring Strategies

Hannah Kain founded ALOM in 1997 in Silicon Valley, CA, and has since led the company to become a world-class organization dedicated to achieving the supply chain goals of Fortune 500 companies and emerging leaders throughout the U.S. and around the globe. She was honored for Lifetime Achievement in the 2024 SDCE Supply Chain Pros to Know award competition.

Rosemary Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting. She has extensive knowledge and experience in manufacturing and outsourcing in Asia, Europe and the U.S. and has authored 42 Rules for Sourcing and Manufacturing in China, an Amazon bestseller.

This comprehensive Q&A digs into what’s motivating corporations to shift their strategy away from offshoring manufacturing and embracing nearshoring. This thought-provoking discussion delves into how that shift will impact supply chains around the world.

Q: How do you define “nearshoring” and “reshoring,” and why are these concepts crucial today?

Coates: I run the Reshoring Institute, so we are focused on trying to bring manufacturing back to the U.S. But a lot of our clients are also considering low-cost markets in the areas. And we also deal with nearshoring, which is manufacturing and clustering around the main markets in North America. So, nearshoring would be like bringing manufacturing back to Canada or Mexico or somewhere nearby, maybe the Caribbean. And then reshoring is actually bringing manufacturing back and expanding manufacturing in the U.S.

Kain: When I look at manufacturing over the last several decades, we have outsourced a lot to different parts of the world that are far away, and it has inserted complexity into the supply chain. And that’s coming back to bite us right now. It’s also, in many ways, especially in the U.S., creating domestic security precautions that many of us are concerned about. So, when I look at nearshoring, it just makes sense to produce things closer to the market. It’s more sustainable, less complex, and less risky. And when I look at reshoring, it’s certainly a big opportunity for U.S. manufacturers.

Q: How much did the pandemic influence the shift toward nearshoring?

Coates: I spent a good part of 15 years helping companies offshore to China because, as a management consultant, that was the preferred strategy for most companies from about 2000 to 2012.

In 2012, during the presidential election, both Barack Obama and Mitt Romney were China-bashing like crazy. That was the tipping point when our clients started talking to us about the possibility of manufacturing in the U.S. and whether they could do it economically. But when the pandemic hit, as Hannah mentioned, the biggest issue became risk.

All of a sudden, companies were struggling to find domestic suppliers, keep inventory in the pipeline, and operate under lean methodologies. They were stuck with production lines without enough parts to produce their products. The pandemic introduced risk for the first time, making companies realize they needed a different strategy.

Q: Was the supply chain disruption caused primarily by COVID, or were there other factors?

Kain: I don’t think the supply chain disruption should be primarily attributed to COVID. The pandemic was a contributing factor, but there are many other factors in the equation. Most organizations, not all, failed to consider risk and complexity as part of their supply chain. They pursued the lowest possible unit cost without calculating the total supply chain cost. They didn’t have any modeling around risk and risk avoidance in the supply chain.

Q: Was cost the primary motivator when companies offshored their operations?

Coates: Absolutely. There was very little effort put into total cost of ownership modeling. Most executives were laser-focused on low-cost operations and low-cost labor. Not just labor, but also facility costs, government regulations, and oversight. That made the total cost of operating in low-cost countries much less expensive. Executives didn’t worry much about logistics, risk, or having to keep their people up all night talking to China. Now, with a tremendous increase in logistics costs, it has become less favorable to manufacture overseas. One of my clients now pays 17 times more in logistics costs than they did in 2019. We used to get a container from Shanghai to Los Angeles for $1,500. Now, it’s $20,000. A lot of small companies can’t handle that kind of cost increase and have gone out of business.

Q: Is nearshoring less expensive than offshoring now?

Kain: It’s not as easy anymore to say that nearshoring is more expensive or less expensive than offshoring. It requires more analysis. We see many manufacturers ordering parts with long lead times and facing higher minimum order quantities from suppliers. On top of that, many overseas manufacturers now have variable pricing, where they set the price when it hits the production line, creating huge uncertainty. There’s also the cash outlay, transit costs, and transit time. With so much variability, it’s harder to manage. You always had uncertainty with currency and tariffs, but now it’s way worse. You don’t know what the tariffs will be when you take delivery a year from now, and that makes managing risk harder.

Q: How are organizations thinking about nearshoring and reshoring to be closer to their end-users?

Coates: In the past two years, we’ve seen a very high level of interest in reshoring. Most companies are taking an interim step by finding domestic suppliers. For example, industries like injection molding, which went overseas in the mid-2000s, are now looking for U.S. suppliers to reduce risk. Another change we’re seeing is companies building up a little more inventory. Pre-pandemic, we aimed for just-in-time production and frictionless supply chains with no extra inventory. That backfired during the pandemic, and companies are now adding some buffer stock to avoid stockouts.

Q: Should manufacturers focus on nearshoring or reshoring for agility?

Kain: Yes, manufacturers need to focus on building agility into their supply chains. We’re entering a new era of demand swings in the market, driven by social media and fast-changing consumer expectations. To avoid long lead times and build agility into the supply chain, manufacturers need to react faster to market demands. Nearshoring and reshoring are critical steps in achieving that.

Q: Are you both in favor of nearshoring?

Coates: Absolutely. Anything you can produce closer to the marketplace gives you a strategic advantage, not just in logistics costs but also in delivery speed. Amazon has taught us to expect quick delivery, and that has filtered down into industrial buying. Companies can’t wait around six weeks for something to ship overseas. Nearshoring in a nearby country or having inventory close by helps them meet these demands.

Kain: I’m very much in favor of nearshoring for several reasons. It’s more sustainable, increases agility, reduces risk, and simplifies the supply chain. However, it’s not an overnight solution. It will take many years to de-risk supply chains the way some are expecting.

Q: What are the challenges to nearshoring and reshoring?

Kain: Labor is a significant challenge. We’re facing a shortage of about 2 million people in supply chain jobs and 4 million in manufacturing. That’s daunting. Manufacturers must go where the workforce is and set up systems to train and upskill staff. Automation helps, but in the end, it’s all about people.

Coates: It’s a huge task, but you take it one step at a time. We surveyed 50 manufacturing companies in New York, and 80% said they were trying to find domestic sources. Many companies are also choosing Mexico for nearshoring. It’s not always appropriate to leave China if your market is in Asia, so companies should balance keeping some manufacturing in China to serve the Asian market and bringing some production back to the U.S. to serve North America.

Q: Are there parts of the U.S. more suited for manufacturing?

Coates: Yes, there are lower-cost environments in places like Texas and throughout the South. But some companies still choose Silicon Valley despite higher costs to be close to designers. Every company’s needs are different, and site selection is based on many factors.

Kain: The most important factor these days is skilled labor. We’re all competing for staff with the right skill sets. Manufacturers must go where the workforce is and invest in training and upskilling. Without a skilled workforce, no manufacturer can be successful.

Q: Are you optimistic about the future of nearshoring and reshoring?

Coates: I’m very optimistic. Executives are now taking a global approach to manufacturing and understanding all the risks involved. It’s a different world from 20 years ago, and I think the future looks bright.

Kain: I agree. The supply chain crisis has forced organizations to think more strategically about risk, governance, and sustainability. Companies are now doing risk modeling and trying to build more production closer to their markets, which is a very positive change.

This Q&A was excerpted from a transcript of an episode of “Smart Supply Chain”. You can listen to the podcast episode here. 

Photo by David Bohrer / National Assoc. of Manufacturers