Nearshoring Vs. Reshoring: What’s the Difference?

Over the past few years, there’s been increasing interest in bringing U.S. manufacturing back to American shores, or “reshoring.” But “nearshoring,” or moving operations to nearby countries, rather than very far away, is becoming increasingly popular as a more economical, practical alternative to offshoring.

It’s important to have a solid understanding of both concepts when deciding on the best strategy for your company. Below, we’ll take a deeper look at these two options and compare their benefits and drawbacks.

Reshoring

With steep tariff hikes increasing the costs of doing business overseas, and reshoring tax benefit programs offering significant savings opportunities, reshoring is proving to be a lucrative move for many manufacturers. In fact, many CEOs and CFOs are realizing that total cost of ownership (TCO) would be lower if their manufacturing operations were based domestically. 

This is due to a few different factors. Firstly, as the demand for skilled workers overseas steadily increases, so too have labor rates; in China, the labor rate has increased by 500% in just 12 years. Plus, poor-quality workmanship or materials often come with hidden costs, driving up warranty-related costs and hurting companies’ reputations.

Reshoring allows companies greater control over operations and easier monitoring of the production process. With goods being manufactured closer to consumers, businesses are better able to keep an eye on processes and quickly address issues as they arise. Also, shorter lead times and lower shipping costs allow for significant savings. Besides offering bottom-line benefits, though, bringing manufacturing back to U.S. soil also helps stimulate the economy and close the skills gap while boosting overall brand reputation, positioning companies as forward-thinking industry leaders.

Read more: Addressing The Multi-generational Workforce & The Top 4 U.S. Manufacturing Challenges

Nearshoring

Nearshoring, on the other hand, serves as an alternative to complete offshoring, bringing manufacturing operations closer to the point of use. For instance, a United Kingdom-based manufacturer may choose to outsource production to a neighboring European country. Although costs are usually higher than offshoring, the discrepancy between nearshoring and offshoring costs is becoming slimmer and slimmer; as mentioned earlier, wages are continuing to rise in popular offshoring locations such as Malaysia, India, China, and the Philippines.

This allows for faster turnaround times than offshoring, as well as greater control over production processes and, in many cases, fewer cultural discrepancies and language barriers, along with lower travel costs. Nearshoring also greatly reduces the risk of having intellectual property stolen — a major concern for many manufacturers today. Manufacturing closer to end users promotes higher customer responsiveness, allowing for constant improvement and innovation based on consumer feedback.

Furthermore, while the value of lean supply chains is often emphasized, having too lean a supply chain can be dangerous. For instance, in the case of the 2011 tsunami in Japan, many companies’ supply chains were completely wiped out due to a lack of geographical diversification. Nearshoring would have lessened the fallout and disruption from this natural disaster. Plus, countries located near one another are often subject to similar financial and legal policies, resulting in greater social and economic stability within the region.

More Manufacturing Resources

Here at Thomas, we’re committed to staying up to date on all manufacturing and industrial trends, and our experts are always looking for ways to help guide fellow industry professionals through complicated business decisions. Here are additional manufacturing resources to help your company grow:

Editor's Note: According to the latest Thomas Industrial Survey, two in three manufacturers (69%) indicate they are ‘likely’ to ‘extremely likely’ to reshore (up from 54% in February), with Agricultural, Energy/Utilities and Food & Beverage leading in interest. Read more of the July 2020 report here.

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