In the years that followed, global supply chains were established in various industries.
Regionalizing supply chains
WHEN THE HOME PORT CALLS
The globalization of supply chains has helped European companies to become more efficient in recent years. But as current crises worsen, the risks are becoming clearer. For this reason, nearshoring is now on the agenda of management meetings at many companies. What are the advantages of nearshoring – and is regionalization worthwhile even with volatile logistics costs?
IBM’s employees were so fond of the company that they gave it a pet name: Big Blue. It sounded powerful, sublime and ironically, it also sounded like a blue whale disappearing into the distance. That was the situation at IBM in the early 2000s.
America’s former favorite has since shifted jobs en masse to low-wage countries like India, Brazil and China, stating that IBM was a global company and that labor costs were simply too high in the USA.
Offshoring formerly the go-to strategy
At that time, IBM was an extremely controversial example of offshoring, but many other companies soon followed suit. Industry giants like Siemens also relocated jobs and production sites abroad, as did manufacturers in the clothing and toy manufacturing sectors. They all saw Asia or South and Central America as a great opportunity, because ultimately the labor costs were a price advantage, despite additional logistics costs. This led to many companies reducing the amount they produced in Europe or the USA – or relocating their business altogether.
In the years that followed, global supply chains were established in various industries in a number of different countries, and products were sent all around the world before reaching the end consumer. The system worked well and made good economic sense – for the time being, that is. Because the concept of free trade has been weakening for some years now – economic tensions between China and the USA, protectionism and new tariffs have created uncertainty on the markets. Since the coronavirus pandemic, the rules of the global game have changed.
The collapse of supply chains – and the consequences
Logistics costs have risen sharply in recent years. Due to the pandemic, production and vital hubs all over the world – such as ports and airports – ground to a halt, bringing global logistics networks to a standstill. This resulted in enormous cost increases and bottlenecks. There was suddenly one issue being hotly debated in many executive boardrooms: How do we source our products and raw materials for production? As the situation eased, some companies tried to prepare for the future and reduce their reliance on factors outside of their control by keeping as much stock as possible.
It was clear though, that alternatives to the global just-in-time approach would need to be found in the medium term, so as to ensure a resilient supply chain. A regional, diversified multi-sourcing strategy allows supply chains to become much more resilient. Discussions then moved on to bringing production back closer to sales markets again, according to executives from 1,500 companies in 15 industrialized countries who were surveyed by BCG in February 2022. Even though nearshoring and reshoring have been in the spotlight for some years now, it was thanks to the pandemic that they suddenly shot to the top of the priority list at many businesses around the world.
So, how do things stand now?
The many benefits of nearshoring
A good three years after the pandemic, interest has subsided slightly. Logistics costs have temporarily fallen again and the risk of supply chain failures has decreased. Yet the number of early adopters is on the increase: Companies looking to the future, such as fashion giant C&A, have reverted to producing in Germany again after over 20 years; ski specialist Salomon is bringing production of its footwear back to its high-tech factory in France; and IT service providers are suddenly no longer moving to India but to the Algarve in Portugal. The country scores with high quality coupled with low labor costs compared to Northern Europe and has now received so many requests to establish company bases that sometimes they would get the response: “Sorry, we haven’t got any more capacity.”
This is hardly surprising, as there are many advantages of regional supply chains. Nearshoring reduces supply chain risks and increases transparency. If we look at existing and future regulations, which often involve the control of the business’ own suppliers and upstream suppliers being located only a short distance away offers enormous benefits.
Furthermore, there is an increasing focus on sustainability: Are the materials sustainable? Is production sustainable? How can CO2 emissions be reduced?
Thanks to highly automated, state-of-the-art production and shorter supply chains, nearshoring can play a crucial role in the green revolution.
In addition, partially relocating production and developing parallel production capacities close to sales markets can increase flexibility. Especially in the end-customer market, the last few years have shown that volatility is rising sharply. Companies find it difficult to respond to this when delivery by sea takes several weeks.
Relocating often makes economic sense, too. When senior managers calculate the total cost and price in premiums for risk and sustainability, suppliers in Asia are no longer always the cheapest option. To obtain a systematic overview, it’s important to consider the Total Cost of Ownership (TCO). This also includes working capital effects due to excessive inventories as well as the benefits of a shorter time-to-market.
Advantage for early adopters: benefitting from incentives
Nearshoring requires an initial investment that a company must be willing to make. Although in the medium term, this is worth it from the perspective of risk management, sustainability, and transparency, as it is critical to put plans in place before the next crisis arrives and supply chains grind to a standstill once more.
Early adopters can currently secure advantages such as economic policy incentives. Countries like Portugal, Turkey, and Morocco offer attractive subsidies or other tax advantages. To make a well- informed decision, however, cross-company analyses must be carried out.
Nearshoring Survey 2023 – Regionalization Trend
What are your current priorities to optimize the resilience of your supply chain? Are nearshoring or friendshoring still on your agenda or have never been? Share your assessment with us!
Nearshoring: An optimal process might look like this
Companies that consider nearshoring will ideally begin by carrying out an analysis of the current situation, which they can then use to determine the next steps. This could be establishing a second regional supplier, or by giving production as a whole a more regional focus. Both options need to be initiated at C-level and checked against the company’s overall strategy and the supply chain strategy.
Successive conversion of product groups to alternative cash markets
Opportunity & Risk Analysis
- Structured analysis to identify supplier risk
- Pre-selection of relevant categories
Market Research & Selection
- Identification and reseach of relevant nearshoring procurement markets
- Supplier long- and short list per category
Assessment & Audit
- Joint definition of evaluation criteria
- Quality and risk assessment per supplier and category
Sourcing
- Tender preparation and execution
- Offer and scenario analysis
- Negotiations/Auctions
Ramp-Up & Enablement
- implementing new suppliers
- e.g. order processing, quality inspection and price verification
Continuous Supplier Management
- Run process for other categories
- Selection of categories based on nearshoring potential
Step 1: Analyzing the risks
The first step toward possible regionalization is to carry out a risk analysis. In doing so, it is important to analyze exactly which product groups are suited to a nearshoring process. A comprehensive review of the Total Cost of Ownership is an important part of the evaluation. Alongside the purely product-related costs, this figure should also include the costs for logistics and overheads, e.g. for compliance and administration. In addition, the calculation needs to take risk and sustainability premiums into consideration.
This step should include an overarching review and evaluation of the risks: What are the risks? How likely are they to occur? And what alternatives already exist in the supply chains today that could potentially be developed further? Furthermore trade policy risks and sustainability criteria must also be taken into account. Most companies currently still focus on their immediate suppliers, but not on upstream suppliers. However, this is often where the risks that may become important in the future can occur. Only a comprehensive risk analysis will fully consider this aspect.
As part of checking and evaluating the risks, a structured overview of the entire supplier pool can be created. This then serves as a basis for decision-making.
Checklist
Total Cost of Ownership perspective(TCO)
#a0d60a;"> • Product price incl. cost breakdown and pricing of individual cost components
• Transport prices through altered supply chains, in part also including transport routes of certain upstream products (Important: Analyze different transport route scenarios to reflect fluctuations in the real world as accurately as possible)
• Overhead costs due to reduced or increased regulation, administration, employee training, product tests, etc.
• Sustainability costs: Reductions in CO2 emissions, potentially on the basis of the current CO2 price
• Risk-related costs: Quantifying default risks
Step 2: Evaluating the alternatives
Once a risk analysis has been carried out, the next step is to look at procurement. This is where you ascertain the location of other potential suppliers. They might be in Eastern Europe for the European sales market, for example, and in Central America for the USA. In both regions, labor costs are still considerably lower. Strategies like friendshoring should be included. This has come to the fore more than ever given Russia’s invasion of Ukraine. Essentially, it is better to choose a trustworthy country with stable political ties and where costs are a little higher rather than be caught off-guard by a political crisis down the road that could have far-reaching consequences for your own company’s supply chain, reputation, and, ultimately, its very existence.
Depending on the industry, increased automation may even open up the possibility of bringing the majority of production to high-wage countries like Germany– as was the case with Gigaset. The office telephone manufacturer has built an ultra-modern facility where virtually everything is done automatically in Bocholt, in the north-west of the country. Kitchen accessories manufacturer Fackelmann has also brought part of its production back to the Franconian countryside.
Including new suppliers in these considerations is just as important as constructing new production sites with trusted suppliers. A parallel infrastructure could be set up with a supplier previously located in Asia. The advantage is that processes and standards are already established and this type of collaboration can strengthen supplier commitment.
