Nearshoring your supply chain to Mexico or Canada might save you time and money.
When you closely examine the offshoring trends of companies in the USA in the 80’s to perhaps 2010, you would see that there were several advantages. Not just the potential manufacturing costs but the labor and other supply chain costs like shipping were affordable. That time might now be past as supply chain, shipping and labor costs have all risen dramatically. Whether it started with trade war disputes or was hastened by COVID-19, more companies are now using business partners in other parts of Asia, Europe, Latin America or even North America.
A June 2020 survey from research company Gartner of 260 global supply chain leaders found 33% had moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years. Other sources indicate a double-digit decline in U.S. imports of manufactured goods from China from 2018 to 2019 – in no small measure due to the trade tensions between the two countries. The result: an offset in imports from other countries and the acceleration of nearshoring supply to the Americas. For instance, in the same period, U.S. manufacturing imports from other low-cost Asian countries increased by $31 billion, while imports from Mexico increased by $13 billion.
To better understand this shift to nearshoring and its impact for entrepreneurs, we turned to Nathan Resnick, CEO and Founder of Sourcify, a San Diego-based startup founded in 2017 that is focused on helping companies find global manufacturing sources for their products. ‘Given the political and social climate in China, brands of various sizes have seriously started to pivot towards manufacturing other parts of Asia and in North America. On a macro scale, there are now many state and federal incentives for businesses to produce locally in the USA,’ said Resnick.
His point of view is to look forward and make data dependent decisions on key drivers of cost in the manufacturing process. Three critical areas to be aware of include:
Freight and insurance costs. The long spans of ocean separating Asian supply locations from the Americas come with a comparatively high cost of shipping and insurance relative to a near-shore location like Mexico. Not surprisingly, shipping costs from China to the U.S. West Coast were 30% higher than the same period in 2019; costs to the East Coast almost doubled.
Lead times. By bringing their suppliers closer to the distribution points for their products, companies reduce long lead times, among other benefits. Doing so enables a company’s products to reach the end customer faster, which also has a direct impact in working capital (shorter hold times and lower inventory needs).
Labor costs. The difference in labor costs, for example, between Mexico and China has become clearer in recent years. Mexico labor rates have remained relatively flat. According to Statista, from 2019 to 2020, manufacturing labor costs per hour for China increased from $5.78 to $6.50 USD, while Mexico experienced a much smaller increase from $4.66 to $4.82 USD over the same time period.
If you are an entrepreneur or a company looking to bring your supply chain or manufacturing nearshore, Nathan provides a short, but important, checklist to review.
Understand your net costs. Carefully review all costs when consider a change to your supply chain or manufacturing. The key is also to look forward monitoring key trends to indicate future potential costs.
Be aware of raw material resources. While you might not always understand the raw materials that go into your products production, understand them well enough to make key decisions that affect your future product supply.
Check any local, state, federal or regional country incentives. Global competition for your business is good. In the USA, there might be quite a few incentives that are increasing every day that you can leverage. Also, countries like Mexico and even Canada are getting aggressive in pursuing more business for their respective countries.
Comprehend partner capabilities and capacity. When making a nearshore supplier or manufacturing decision, it’s not just about the location. Your potential partner is critical. Do your due diligence, check references, visit the location, request samples if possible, start with a small order and then move forward with any changes.
Calculate lead time advantages. Understand not just the cost implications or savings of going nearshore but take a careful look at what ‘time’ is costing you today or what advantages it can provide you in your marketplace or for your customers.
