Facing rapidly rising wages in China and growing logistics costs, it is no surprise that America's southern neighbor, Mexico, is starting to look more attractive to global manufacturers. Mexico closer to the U.S. market, even if its labor costs are on par with wages throughout Asia. Already, major firms from Ford to Emerson have taken the plunge and developed new production facilities south of the U.S. border.
The Argument for Nearshoring
The attraction to nearshoring goes beyond addressing Chinese wage hikes. It stems from intertwined and constantly-changing supply chain challenges and opportunities including the need to keep pace with competitors, nurture a wider customer base and satisfy market demands. Top drivers of the current nearshoring trend include:
• Transportation cost reduction: The high cost of transportation is the single-largest pain point driving firms to relocate their production facilities closer to the U.S. While this includes direct costs like fuel and wages, “soft” factors like efficiency, transit times and opportunity costs also play a role. Sourcing from Mexico also mitigates the growing supply chain risks that have wreaked havoc at coastal ports such as the recent delays at the Port of Los Angeles/Long Beach or the lack of capacity for post-Panamax vessels.
• Compressed product lifecycles: The velocity of product development and turnover has increased exponentially. Within the last two generations, the average product development lifecycle dropped from nearly 20 years down to three. For high-tech firms, a product’s lifecycle may be as short as six months. As a result, the typical time-to-market window has shrunk dramatically, demanding supply chains capable of handling a large volume over a shorter time span.
• Go-to-market pressures: With the rise of same-day delivery options and other highly competitive shipping practices, companies and consumers alike place a premium on order fulfillment. For North American markets, nearshoring to Mexico reduces the distance between the point of production and consumption, mitigating the threat of supply chain risks that could manifest in between.
• Local market development: Shifting production to a different country or region can also help businesses cultivate new markets. Breaking ground on a new production site can quickly increase the property values around it, mobilize a previously untapped talent pool and inject resources and capital into the area to stimulate local consumption.
Overcoming Obstacles to Nearshoring
The benefits of nearshoring are fairly clear, but there are also clear challenges. Companies must also consider supply chain, regulatory and regional issues in order to capitalize on a new market's potential.
• Get Procurement Involved Early: Procurement is often absent in the early stages of a nearshoring strategy. This is a mistake, as the strategic value of procurement goes well beyond cost savings. Shortages, unpredictable deliveries and delayed shipments are among the many ways a nearshoring strategy can unravel and make a mark on an organization’s brand. By involving procurement teams in discussions around supply market issues and how to best serve customers – rather than just how to cut costs – organizations can more fully realize the benefits of nearshoring as well as lower production costs without sacrificing customer satisfaction.
• Be Vigilant About Regulations: Despite the benefits NAFTA has brought to trade between the U.S. and Mexico, businesses planning to nearshore need to stay aware of various regulatory hurdles. Until recently, Mexican trucks were prohibited from making long-haul deliveries within the U.S. (and vice versa), undermining NAFTA provisions slated to have taken effect in 2000. Though free trade issues have evolved since that time, companies must remain vigilant about the potential impacts of future trade conflict, tariffs and other penalties.
Of course, Mexico has its own set of labor laws and compliance concerns. Legal compliance isn’t enough, as regional market differences including private sector and cultural factors are critical components of a successful nearshoring process. For example, liability coverage for theft or loss can be difficult to acquire in Mexico, and should be accounted for when calculating the cost of doing business there. Especially in an unfamiliar market, supply chain visibility is key. Partnering with local governments in 3PL arrangements can help organizations avoid supply chain “black holes.”
• Cultivate Regional Expertise: Cultural and language barriers can prove fatal to a nearshoring effort if not handled properly. Successfully moving production to any new region depends on having reliable, qualified suppliers and partners. Properly vetting suppliers is crucial but difficult in an unfamiliar market. Companies need both the social savvy to communicate with potential partners and the appropriate technology to quickly identify regional expertise and bridge language gaps.
While some skills may be in short supply, others might be found in abundance. By understanding the market landscape ahead of time, businesses can enter the region with better insights about cultural challenges and opportunities.
Making the Most of Nearshoring
As companies leverage ever-more sophisticated technology and collaboration tools to work with suppliers around the world, a true global market continues to drive continuous assessment of supply chain strategies and approaches. Interest in nearshoring has grown in part because global procurement networks are better equipped to manage these transitions. The availability of technology can demystify an unknown sourcing landscape and has proven instrumental in facilitating new and innovative production strategies.
Information is one of the most valuable resources an organization can possess when nearshoring. Firms with access to up-to-date data are equipped to make the most intelligent decisions and to encounter fewer hidden costs. Location represents only one of many variables that influence the sourcing process. Manufacturers that take advantage of comprehensive procurement resources will be better positioned to navigate all of the factors involved in nearshoring and realize the full scope of its benefits.
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