Reshoring Versus Nearshoring: Strategies for Bringing Manufacturing Closer

For decades, offshoring has been a mainstay for organisations aiming to cut costs and boost profitability. This approach often involved relocating operations to far-flung destinations known for inexpensive labour and materials. However, the quest for lower costs has led to a series of unintended repercussions, including compromised human rights and increased environmental degradation.

More recently, the supply chain shocks witnessed during the pandemic have prompted a rethinking among procurement   professionals, many of whom are contemplating reshoring or nearshoring in order to recalibrate and consolidate their supply networks. After all, adopting such sourcing strategies contributes to a more resilient operational ecosystem.

Through risk dispersion and diversification, these approaches protect operations against disruptions from natural disasters and geopolitical instability, providing a much-needed buffer against crises..

If you’re considering bringing sourcing and manufacturing closer to home, then reshoring and nearshoring could be viable strategies. Let’s break down what each strategy is, how they compare to one another and the pros and cons of each.

What is reshoring?

Reshoring involves relocating manufacturing and production processes back to your own shores. This approach introduces speed and flexibility by reducing lead times and ensuring compliance with local regulations, it also can potentially offer domestic incentive benefits and lower an organisation’s carbon footprint.

In other words, reshoring aims to bring operations into your own backyard, giving you greater control and, arguably, reductions in cost and greater supply chain efficiencies. Global research commissioned by IFS  found that 72% of decision makers have increased their usage of domestic suppliers, indicating a groundswell of support for reshoring in some capacity,

What is nearshoring?

Nearshoring takes a slightly different approach. Instead of relocating to your home country, nearshoring involves moving manufacturing to a nearby or adjacent country. This strategy often provides a blend of cost-effectiveness and operational ease.

You can take advantage of lower costs in neighbouring nations while still keeping your supply chain relatively compact. It’s fast gaining relevance as ‘de-globalisation’ finds its footing, a 2021 McKinsey study revealed that 71% of surveyed Chief Procurement Officers aim to boost their nearshoring by 2025.

The main differences between reshoring and nearshoring

The most obvious difference lies in geography. Reshoring brings operations back to your home turf, whereas nearshoring relocates them to a nearby country. Domestic wage rates and other overheads often mean that reshoring comes with higher operational costs while nearshoring sits in the middle, balancing cost-effectiveness with proximity.

When it comes to compliance, reshoring only subjects a company to domestic laws and standards, which are generally easier to navigate. Nearshoring, however, could introduce a new set of regulations, but these are often less complex than those encountered in locations further afield. Finally, reshoring can simplify your supply chain whereas nearshoring adds a little more complexity but provides compensation through potential cost savings and specialisations that might not be available domestically.

Now that you have a solid overview, it’s time to look at the pros and cons of each strategy.  Because like any business move, it comes with its own set of advantages and pitfalls, and the challenges do require careful consideration. 

The advantages of reshoring

Reduced lead times | Bringing manufacturing closer to home shortens the supply chain, accelerating product-to-market speed.

Quality control | Easier and more frequent inspections are possible, ensuring the quality of your products meets your standards.

Regulatory compliance | Operating in your home country will mean you’re well-versed in local regulations, making compliance that little bit easier to manage.

Consumer appeal: Domestic manufacturing can be a strong selling point for consumers who value locally-made products.

Operational synergy | Centralising operations can facilitate better communication and process optimisation between different departments.

The disadvantages of reshoring

Higher operational costs |Domestic wages and overheads often exceed those in offshore locations, eating in to profit margins.

Resource limitations | Certain raw materials or skilled labour may not be readily on hand, meaning imports could offset some of the benefits of reshoring.

Initial transition costs | The process of moving operations can incur significant initial expenses and should be included in any cost-benefit analysis. Yes, these upfront costs often create hurdles but can be mitigated if planned for carefully.

The advantages of nearshoring

Reduced shipping costs and times | Geographical proximity translates to faster and less expensive transportation of goods, and also makes coordination and communication more efficient thanks to more aligned time zones (when compared to offshoring).

Specialised labour | Some neighbouring countries may offer highly skilled labour in specific industries at a more competitive rate.

Supply chain resilience | A shorter supply chain allows disruptions to be managed more effectively, making your operations more resilient.

Lower compliance risks | Although there are still international regulations to consider, you’re often dealing with countries that have trade agreements or similar standards, reducing compliance risks.

The disadvantages of nearshoring

Partial cost savings | While less expensive than reshoring in terms of wages, nearshoring may still have higher costs than offshoring, especially if the nearby country has a higher cost of living or operational expenses.

Limited scale | Some nearby countries may not have the capacity to scale operations as quickly as larger, more established offshoring destinations. As nearshoring gains traction, this may become less of an issue.

Transition costs | Similar to reshoring, shifting operations closer to home incurs upfront expenses. These include site selection, legal fees, and training new staff. 

Though offshoring will continue, both reshoring and nearshoring have their merits. The right choice largely depends on individual business needs, though it is far more likely companies will adopt an ‘all shores’ approach that factors in cost, risk tolerance, and market responsiveness to create a suitable mix of offshoring, nearshoring and reshoring.