When switching to nearshoring, companies should ensure that suppliers have access to all relevant raw materials.
Near- & Friendshoring
On the safe side
Near- and friendshoring are no longer short-lived fads: around two-thirds of the respondents to our survey intend to restructure their supply chains accordingly in the coming years. When it comes to procuring raw materials, the strategy reaches its limits – yet, even here, diversification is not impossible.
The main reason for the desire for familiar ground is a considerable loss of trust: nine out of 10 respondents say they take the current geopolitical tensions into account when making decisions in supply chain management. Just 11% are optimistic that the current conflicts can be resolved through political dialogue. A majority, meanwhile, fear a dissolution of the existing structures. Another 27% think a bloc is likely to form, while 29% expect a multipolar world order. This makes it all the more important to find partners in countries whose geographical or political proximity and reliability can be depended upon.
Opening up new markets, even beyond EU borders
Around two-thirds of the survey respondents are looking toward Eastern Europe. In particular, the Czech Republic and Poland are mentioned as countries within which companies want to look for new suppliers. The advantages are obvious: the countries are EU members and have well-educated citizens, modern companies, and a functioning infrastructure.
Yet even in regions located not far beyond the borders of the European Union, there are potential partner countries with friendly ties where the search for suppliers is promising. Companies should look at all near- and friendshoring markets rather than rely solely on already proven regions. Before buyers embark on their search, however, it is necessary to take an inward look.
// Are you planning to restructure (e.g. diversification, shortening, multiple sourcing …) your supply chains in the next 5 years?
Yes
No
No answer
60
plan to restructure the supply chain in the next 5 years
28
retain their supply chain structure and are not increasingly involved in nearshoring activities
Searching for partners together
The establishment of new supply relationships always involves financial outlay and organizational effort. That is why restructuring measures within supply chains are cross-functional projects. Procurement teams should work closely with supply chain management, logistics, production, and product development to find the optimal solutions for their own company.
The key to success when shifting the supply chain lies in the selection of the appropriate product groups. To identify these, the criticality of components and the importance of the products in which they are installed are evaluated in terms of business operations, sales, and business development. The more critical a primary product is to a company’s own business success, the more sensible it is to secure at least part of the demand regionally in order to strengthen the company’s resilience.
// What is your primary approach to redesigning your supply chain structure?
New suppliers, new customers
The teams also need to understand exactly how the supply chains of key components have been set up thus far and what criteria proved decisive when selecting the current suppliers.
- Are these points still relevant?
- Which characteristics continue to be absolutely necessary?
- Is the emphasis on individual aspects shifting so that near- and friendshoring are an option?
To find suitable answers to these questions, a classic total cost of ownership analysis is recommended, which should be supplemented by an examination of “lost revenue” risks. That’s because diversifying supply sources and switching to regional suppliers enables greater flexibility, more efficiency, and increasing adaptability in order to respond to unforeseeable events.
Besides strengthening the company’s own resilience, this helps to ensure the continuity of business activities and build customer trust. Moreover, it provides the opportunity to generate additional sales if your own company is able to deliver at short notice while competitors are not. Nothing is as costly as a stoppage in production due to a lack of supplies or the inability to react to short-term fluctuations in demand.
Greater flexibility in raw material procurement
Nearshoring doesn’t necessarily lead to higher costs – rather, it can result in cost advantages. This is the case, for instance, if companies are able to scale down their own warehouse due to short delivery routes, thereby reducing the amount of capital tied up. In addition, companies can react more flexibly to changing demand because they can usually buy smaller quantities from regional partners – transport costs are a significantly lower factor than with offshore suppliers.
When switching to nearshoring, companies should make sure that suppliers have access to all relevant raw materials. To avoid supply bottlenecks or quality problems caused by raw materials, it should be established where suppliers obtain their raw materials, whether they always maintain adequate safety stock levels, and whether the materials in question can be procured regionally.
Not many raw materials are extracted within the EU. All the same, it can make sense to diversify the supply sources for raw materials and procure part of the required quantity from a regional intermediate dealer. The advantage is that the company’s own stock level can be permanently reduced. In addition, intermediate dealers bundle the needs of their customers and thus have greater room for negotiation. Wherever possible, companies should diversify their raw material suppliers so that at least some of them are located in geopolitically and economically stable regions of the world in order to ensure that the supply is as secure as possible.
Better sustainability
Another argument in favor of nearshoring is a lower carbon footprint due to shorter transport routes. Many companies have set themselves decarbonization targets. However, according to a study by the Boston Consulting Group, currently only 14% of companies are achieving these targets. As such, there is real scope here to cut carbon dioxide. Whether fewer carbon emissions are generated in the supplier’s own production operation compared with suppliers further afield mainly depends on the energy mix of the companies involved. Regions where a lot of “green” energy is already available offer advantages here.
Keeping track of opportunities and risks
Companies should also conduct a risk assessment when making the switch to nearshoring: a unilateral regional focus without diversification exposes the company to a “cluster risk” – in the event of natural disasters, for example. An overly optimistic view of regional suppliers without a comprehensive analysis on the basis of objective parameters can also make switching a worse choice compared with global options, despite the geographical proximity.
Authors
Jan Mersmann
Principal
is a Principal at Inverto in Cologne. He advises customers from the automotive sector, medical technology and the process industry, with a particular focus on process optimization
Jasmin Mikl
Senior Consultant
is a Project Manager at Inverto in Vienna. She supports clients across a range of industries in analyzing and optimizing SCM and logistics processes, as well as in drawing up logistics and warehousing strategies.