From offshoring to nearshoring

Source: Google

By Naveed Qazi | Editor, Globe Up Front

Over the past few decades, international business organisations were increasingly relying on strategies based on outsourcing and off-shoring capabilities. 

The core strategy was to sub contract manufacturing units and services by employing cheap labour with a standardised global policy. 

Outsourcing was adopted by a firm if weaker management policies were prevalent in managing operations due to a non-trained staff, due to problems in innovation capabilities and lack of technological resources. 

Off shoring strategies have had a major contribution in reaping the economies of scale, as it provided an edge to these organisations over its competitors.

 In recent years, however, the trend of off shoring is under considerable review. The increasing cost of off shoring is resulting in inflexible supply chains, due to high labour costs, increased costs on raw materials, rise in global commodity price index, inefficient delivery cycles and high ocean freight charges which have hit an increase of over 135 percent over the years. Since the last few years, near shoring has been looked as a reliable alternative to outsourcing by the academia of supply chain management. There are three major groupings for near shore locations developed around the world.

The first grouping of twenty countries surrounds United States and Canada, second grouping of twenty seven countries surrounds Western Europe, while the third grouping lies in East Asia. These near shore locations are classified according to geographical, cultural, political, economic, historical and temporal (similar time zones) factors. In recent times, United States has started near shoring to Caribbean; Germany is near shoring to Bulgaria and Belarus, while Japan is near shoring to China. The laws of demand and supply cause lowest value part of supply chains move towards low wage countries like China, India, Brazil and Mexico. But at the same time, a company has to adapt to market changes due to changing economic environment. In recent years, Mexico has taken over China as a low cost landing country, due to rising inflation in China. This indicates that Eastern Europe and Mexico are two new major attractions for near shoring, as it will help American and European companies in faster transportation and reduction in freight costs. Agreements like NAFTA and EU regulations will also greatly benefit near shoring operations.

 Distance introduces difficulties in communications, supervision and in making relationships. Proximity of near locations reduces remoteness. Working in same time zones acts as a competitive advantage. Furthermore, near shoring has represented threats to giant Indian software firms as well. Costa Rica has recently positioned itself as a hub for Central American and Andean region. Tallinn, Estonia’s capital has become one of the world’s most important centres for telecommunications. Therefore, it can be pointed out that near shoring is helping companies to prioritise labour recruitment based on geographical contiguity and talent rather than low cost and mass labour. Similarities in infrastructure, cultural and linguistic factors also hugely influence near shoring operations. Nearshoring trends have several strategic advantages and positive implications than off shoring. There is a lower risk involved in near shoring processes due to greater amount of cultural bondage, easier communication and transportation.

Near shoring involves a part of its supply chain operations nearer to its markets. Environmental and free trade facilitation issues makes near shoring a reliable process. Therefore, near shoring to places like Central and Eastern Europe by Western European countries could strengthen the European region due to a pool of high skilled labour. For United States businesses, near shoring to Canada and Mexico is an attractive option. These new business zones could provide sweeping changes in world supply chain relationships. Off shoring has tried to explore businesses in various continents but it has failed in adapting to the changing economic environment of the world. It has increased the work process of firms who have to manage distant and complex supply chain relationships. Many companies in the West are looking to reap the local continental advantages of America and Europe giving full access to the trends of near shoring operations.


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