Last month, Mark explored how many companies are moving beyond globalisation, resulting in the trend towards regional supply chains. In this month’s article, Mark explores how businesses are increasingly implementing near-shoring strategies, further contributing to the trend towards regional supply chain ecosystems.

During the 1990s and 2000s, international trade experienced a substantial boost from mass globalisation, resulting in a huge increase in the volume of inter-continental freight flows and yielding a bonanza for logistics service providers and freight forwarders around the world.

Globalisation frenzy – key drivers.png

This globalisation frenzy was fuelled by an unprecedented combination of three key drivers in the pursuit of lowest-cost manufacturing – the out-sourcing of business activities to third parties, the off-shoring of production to low-cost countries and the un-bundling of vertically integrated manufacturing clusters into dispersed specialist activities.

Capitalising on abundant supplies of low-cost labour, massive amounts of production were outsourced and offshored to emerging markets across Asia, empowering the region – in particular, China – to become the factory of the world.

Unintended Consequences of Global Supply Chains

More recently however, as we enter the era of ‘Emerging Markets Developing’, companies are experiencing the unintended consequences of this globalisation frenzy, namely the increasing cost burden of global supply chains.

The endless pursuit of low-cost labour solutions has had ramifications for system-wide costs, further amplified as the rising labour rates in China and elsewhere in Asia gradually erode the manufacturing cost advantage of these locations over developed market solutions.

 

Unintended Consequences – Additional Cost Burdens of Globalised Supply Chains (Source: University of Tennessee – Global Supply Chains)

 

Near-Shoring – bringing it closer to home

·      OFF-SHORING: moving manufacturing and/or assembling of products overseas to low-cost countries based on labour rate differentials

·      NEAR-SHORING: moving manufacturing and/or assembling of products closer to the location of demand, where the products are consumed

·      ON-SHORING (Re-Shoring): moving manufacturing and/or assembling of products back into the country location of demand, where the products are consumed

Companies across the developed markets in the USA and Europe are now moving, or are considering moving, some of their off-shored production closer to home – ‘Near-Shoring’. Others are undertaking ‘On-Shoring’ initiatives – also known as Re-Shoring – bringing production all the way home, to produce in the domestic market.

Whatever the terminology, these initiatives involve the repatriation of manufacturing, production and assembly activities from remote locations such as China, to geographic regions located much closer to the end consumer market.

In many applications, near-shoring revisits lower-cost locations that are in closer proximity to the final consumption markets – for example, Mexico for North America and countries like Poland and Hungary to serve Western Europe. North Africa is now also on the agenda as a production base from which to serve the European markets.

Hence, for many businesses there will be production activities – though by no means all – that migrate ‘closer-to-home’.

Implementing such near-shoring initiatives will result in supply chains that are configured as ‘Made in North America for America’, or ‘Made in Eastern Europe for Europe’. 

 
 

Emerging Markets Developing

However, this will not result in a mass exodus from manufacturing in Asia.

This is largely because of the well-established, finely tuned and highly efficient global supply chain ecosystems that service the Asia-Europe and Asia-America trades, but also because the potential of the domestic consumer markets in the emerging economies is so enormous.

According to the OECD, by the year 2030, Asia will be home to two-thirds of the world’s middle class (up from just 28% in 2009), whilst Transport Intelligence (Ti) forecast that 1.8 billion people in emerging markets will enter the ‘consuming class’ by 2020.

Indeed, ‘Made in Asia for Asia’ will gradually become a leading model for regional supply chain ecosystems that serve these rapidly growing markets in the Far East. 

Regional Supply Chains drive business benefits

These near-shoring strategies will reinforce the trend towards more regional supply chains, which can generate substantial benefits for business – in terms of time, cost and service, whilst also reducing risk:

Benefits of Regional Supply Chains

  • Shorter distances result in lower transportation costs
  • Closer to home is easier to manage (overcoming some of the challenges of managing across time zones, languages, cultures, business practices and work standards)
  • Better control over product quality through proximity to suppliers
  • Mitigated impact of rapidly increasing labour rates in what were ‘low-cost’ environments
  • Improved ability and responsiveness to tailor products for local domestic consumer markets
  • Reduced supply chain risk: less distance, fewer borders, fewer complications, less risk.

A mixed future for manufacturers

More and more companies are rethinking their supply chains and considering the repatriation of some manufacturing activities closer to the end consumer market. The result is a clear shift towards near-shoring, resulting in more regional supply chains.

Indeed, the benefits of near-shoring are plentiful. Yet the cost benefit of some low-cost manufacturing locations remains compelling, particularly as we witness emerging markets developing.

At the same time, well-established global supply chain ecosystems, coupled with the domestic market potential in emerging economies, mean that the solution for many producers is likely to involve a mix of multiple regional supply chains – with some of the ecosystems being near-shored closer to home, whilst others empower manufacturers to serve the growth markets through ‘Made in Asia for Asia’ strategies.