Nearshoring, local sourcing, regional supply chain: whatever you call it, it’s a hot topic.

Nearshoring in supply chain management is the practice of transferring suppliers and service providers to more local options. This strategy is often adopted to reduce the geographical distance between the site of production and the end market, with the main expected positives being better control over the supply chain, reducing transportation costs and improving the speed and flexibility of operations.

We’ve spoken a lot about the many factors impacting supply chain turbulence, such as geopolitical instability, natural disasters or the aftermath of the Covid-19 pandemic, but let’s take a look at the other reasons procurement leaders may look to nearshoring when setting their strategy.

Risk Mitigation: Nearshoring reduces exposure to the risks associated with long supply chains, for example political instability, tariffs and shipping disruptions.

Improved Responsiveness: Proximity to the market allows for faster response times to changes in demand, opening teams up to just-in-time production and offering a level of agility.

Cost Efficiency: While labour costs may be higher than in traditional offshore locations, savings on transportation, tariffs, avoiding lengthy holding periods in customs and possible VAT benefits may offset these costs.

Compliance and Quality Control: Being closer to production sites enhances the ability to monitor and enforce compliance with quality and regulatory standards. For example, nearshoring may reduce the risk of modern slavery breaches.

Sustainability: Nearshoring can reduce the carbon footprint associated with long-distance shipping, supporting corporate sustainability goals.

While there may be many reasons companies may drift towards nearshoring, there are negatives associated with the move:

Higher Labour Costs: Compared to traditional offshoring destinations, labour costs in nearshore locations can be higher.

Reduced Talent Pool: The availability of skilled labour may be more limited in nearby countries compared to larger offshoring hubs.

Initial Transition Costs: Shifting operations from distant locations to nearer ones can involve significant initial costs and logistical challenges.

Team Pressure: Any transformation in operations can put additional pressure on a team increasing workload and, potentially, impacting morale.

Procurement teams in 2024 face a multifaceted and challenging landscape. Global supply chains find themselves under constant pressure from geopolitical tensions, economic volatility and environmental concerns. There is also the rise of protectionism, trade wars and regulatory changes to consider, all of which necessitate a proactive and strategic approach to procurement. Additionally, the growing pressure on businesses to function in a more sustainable way is a key focus for organisations everywhere.

There are certain actions procurement teams must take to set themselves up for success when implementing a nearshoring strategy:

Conduct Comprehensive Market Analysis: Understanding the local market dynamics, cost structures and supplier capabilities is critical to establishing a regional strategy.

Develop Strategic Partnerships: Building, investing and maintaining strong relationships with local suppliers can enhance collaboration and innovation, particularly if nearshoring is planned as a long term approach. 

Action Procurement Software: Using the right procurement software for supply chain visibility, risk management and efficiency can empower teams to spot risks and opportunities in advance as well as invest in key supplier relationships.

Procurement software plays a crucial role in:

Risk Management: Offering tools for real-time risk assessment and mitigation, enabling procurement teams to anticipate and respond to disruptions.

Supplier Relationship Management: Providing platforms for supplier onboarding and performance tracking to ensure reliable and high-quality supplier relationships and networks. 

Data Analytics: Getting your data working for you as a true asset and relying on analytics to forecast demand, optimise inventory and make informed strategic procurement decisions.

Automation: Streamlining procurement processes through automation, reducing manual workload and improving accuracy and wellbeing within your team. 

Nearshoring, as is the case with many strategic approaches, presents both opportunities and challenges for companies looking to enhance their supply chain resilience.

Procurement teams must navigate this complex landscape with strategic planning, robust risk management and the support of advanced procurement software solutions. The right tools and approaches can empower teams to build more agile, responsive and sustainable supply chains.