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Why nearshoring is the way to go

Gijs Klomp - Profile
written by Gijs Klomp
Published on:
Future logisticsImpact by responsibility
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In today’s global business landscape, nearshoring has emerged as a compelling alternative to offshoring for companies seeking to streamline their operations, ensure reliable supply chains and cut costs. Nearshoring involves moving business operations or processes to a nearby country or region, often on the same continent, to take advantage of lower costs, proximity, similar time zones, and cultural alignment. Additionally, there’s a rising interlinked trend called friendshoring, where supply chains move to politically and economically stable and allied countries. But, why are nearshoring and friendshoring so in demand? 

Supply chain reliability

Nearshoring can significantly improve supply reliability. By moving manufacturing or sourcing closer to home, companies can shorten transportation times and mitigate shipping problems. This reduces delays like customs issues, ensuring smoother operations. Additionally, nearshoring allows for better and closer oversight and management of suppliers, leading to improved communication, quality control, and responsiveness to changes in demand or supply chain disruptions. 

Overall, the proximity provided by nearshoring enhances supply chain resilience and reliability, helping companies to meet customer demands more consistently and efficiently.

Reduction of transportation costs

According to CBRE Supply Chain Advisory, transportation costs often represent 50% to 70% of a company’s logistics spend, overshadowing fixed facility expenses which, including the cost of real estate, account for only 3% to 6%. Therefore, despite nearshoring not always matching the affordability of more distant offshoring in terms of, for example, wage costs, it offers potential cost savings through reduced transportation expenses and minimised supply chain risks, without compromising quality.

CBRE estimates that it takes roughly an 8% increase in fixed facility costs to equal the impact of just a 1% increase in transportation costs. Based on this formula, increasing inventories by adding more warehouse and production space closer to the target markets could significantly reduce costs. However, it’s crucial to consider the broader perspective. Transportation costs may be lower, but companies must also be mindful of other costs, for instance, labour. 

Cultural alignment and time-zone compatibility

Nearshoring allows companies to maintain closer geographical and typically also cultural proximity to their outsourcing partners. Cultural alignment is crucial because it fosters effective communication, understanding, and collaboration between teams in different locations. It helps minimise misunderstandings, increases productivity, and enhances overall efficiency in the offshored operations. 

The time difference for a common offshoring partnership between a European company and Asia can be up to seven hours. Nearshoring to countries with similar time zones can help reduce delays in communication and project execution, as teams can work within comparable business hours.

Reduced Carbon Footprint

The environmental impact of transportation operations and extended supply chains has long been a concern for the logistics industry and, with growing awareness of climate change and sustainability, customers, investors, and governments increasingly expect the industry to prioritise environmental responsibility. The good news is that sustainable practices can lead to cost savings through improved efficiency, reduced fuel consumption, and minimised waste. 

Nearshoring enables businesses to make a big difference for the environment by reducing their carbon footprint due to shorter transportation routes. By relocating production or sourcing activities closer to the market, nearshoring typically involves shorter distances for raw materials, components, and finished goods. This can result in decreased fuel consumption, lower greenhouse gas emissions, and an overall reduced carbon footprint associated with logistics and transportation.

This is especially the case when nearshoring to a country with strong regional sustainability initiatives, like a European Union (EU) member state. The European Green Deal, approved in 2020, is a set of policy initiatives by the European Commission with the overarching aim of making the EU climate neutral in 2050. Here, nearshoring helps companies benefit from the advanced infrastructure and environmental regulations which will boost its sustainability efforts.

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