Due to rising wages and growing logistics costs in China, a growing number of U.S.-based manufacturers are turning to Mexico for production. Corporate powerhouses including Ford and Emerson have already embraced this type of "nearshoring" strategy and opened new production facilities south of the border. While wages play a big role, this trend can be attributed to a series of changing opportunities and challenges currently confronting the global manufacturing supply chain.
Reasons behind nearshoring
- Transportation Costs: Transportation is one of the most costly elements of production, so facilities with closer proximity to the U.S. hold a big appeal. Fuel and wages are the most obvious and significant expenses, but other factors such as transit times, efficiency and opportunity costs can also play a role.
- Reduced Product Lifecycles:The average product development lifecycle has significantly decreased over the last two generations, falling from 20 years to just three. As a result, companies have experienced increased pressure to get products to market sooner, forcing supply chains to manage large production volumes in a shorter timeframe.
- Faster Shipping Practices: Companies and consumers are placing higher value on speedy shipments as the advent of same-day delivery options becomes the new standard. Nearshoring to Mexico allows companies to minimize the distance between the point of production and consumption, accelerating the delivery process and limiting the risk of supply chain disruption.
- Growing Local Markets: By shifting production to a new region, companies are also shifting an economic base to that region, helping businesses in the area. Developing a new production site can benefit those living in surrounding areas by raising property values, creating job growth and stimulating consumption.
Conquering the Challenges of Nearshoring
While there are many reasons why companies choose to nearshore production, it doesn't happen without some significant challenges.
The North American Free Trade Agreement (NAFTA) has improved trade between the U.S. and Mexico over the years, but organizations looking to nearshore must still be mindful of regulatory restrictions. It wasn't long ago that Mexican trucks were banned from making long-haul deliveries in the U.S., despite NAFTA's rule. Companies need to be wary of possible impacts of future trade conflicts and take the necessary precautions. By working with local governments to form 3PL arrangements, businesses can mitigate potential supply chain complications.
Cultural and language barriers can also impact the success of a nearshoring strategy. Moving production to a new territory requires new suppliers, but evaluating potential partners can be challenging in an unfamiliar market. Talent also matters, as certain skills may be lacking (or in excess) among the local labor pool. To make the selection process more efficient, companies must have the appropriate communication background, as well as the necessary technology to help bridge language gaps. Understanding the territory ahead of time can provide businesses with essential insight on the cultural challenges and opportunities.
Reaping the Benefits of Nearshoring
As interest in nearshoring grows, information is the most important resource organizations can leverage, as firms with access to up-to-date data are equipped to make the most intelligent decisions and to encounter fewer hidden costs. However, procurement is often the keeper of key supply market data and is frequently kept out of the loop until late in the process. This is unfortunate, because procurement teams can bring a number of key skills and data sets to the table that can help companies broaden their understanding of how to navigate supply chain issues and best serve customers while also cutting costs.
Nearshoring offers tangible benefits to today's global manufacturing companies, but navigating a strategy to relocate production closer to home is no simple matter. When manufacturers use all the comprehensive procurement resources they have accessible, they'll be able to master the factors of nearshoring and appreciate the breadths of its benefits.