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Companies seeking freight cost cuts via nearshoring

Companies seeking freight cost cuts via nearshoring

A new survey of manufacturing and distribution company executives by global consulting firm AlixPartners finds that cutting freight costs is one of the main reasons they are contemplating “nearshoring” or “re-shoring” their enterprises closer to home.

“Especially in the wake of China’s recent devaluation of the yuan, companies need to be more strategic than ever in their manufacturing-sourcing decision-making,” noted Foster Finley, managing director at AlixPartners, in a statement.

“The world of manufacturing and supply chains is world of constant flux, and that in such a world there’s no substitute for deep, strategic, case-by-case analysis and tight project management,” he added

Andrew Csicsila and Phil Jones – AlixPartner directors based in Chicago and London, respectively – provided more details from the company’s recent survey of 248 senior-level executives in North America and Western Europe across 15 broad industry groups during a conference call hosted by Wall Street investment firm Stifel, Nicolaus & Co. on Friday.

A total of 32% of the executives in North America (the U.S. and Canada) and Western Europe say their companies have recently nearshored manufacturing production or are in the process of doing so, with 40% of North American business leaders saying so.

Meanwhile, among North American respondents to AlixPartner’s survey, 55% cited the U.S. as the most attractive nearshoring destination, up from 42% in last year’s survey, when the U.S. placed No. 1 for the first time. 

Mexico – long the nearshoring favorite in the firm’s annual poll – came in second, at 31%, up as well from last year’s survey (28%), but down dramatically from 49% just three years ago.

One potential reason for the fluctuation in the outlook toward Mexico could be a lack of certainty regarding safety and security issues, noted Csicsila and Jones. According to the survey, only 42% of North American respondents expect improvement in those areas in Mexico, down from 55% in last year’s survey.

Other nearshoring insights gleaned from AlixPartner’s poll include:

  • Some 55% of firms in North American and Europe tout lower freight costs as the biggest benefit they expect to gain from nearshoring.
  • The average estimated savings from nearshoring cited by all respondents was 8.5%, with 13% saying they expect to save 20% or more.  Among North American respondents, the average estimated savings was 8.3%, up from 6.4% in last year’s survey.
  • The biggest challenges with nearshoring operations appear to be the availability of skilled labor (48%) and consistent quality (42%)
  • In the U.S., tax reform (54%) and reducing the regulatory burden (46%) are most often cited as ways government could influence decisions to nearshore, followed by lower healthcare costs (35%).
  • For non-U.S. and Canada companies in the poll, rising costs (63%) and increasing supply chain risk (58%) most influence the importance of nearshoring decisions, followed by “customer preference” for domestic manufacturing (53%).

Csicsila and Jones and provided several tips for firms contemplating nearshoring from their survey:

  • Myriad details – such as shipping and packaging requirements, quality approvals, and workforce training – require careful planning and execution. To complicate things even further, most often those tasks are layered on top of key managers’ existing responsibilities.
  • As the economics of outsourcing, nearshoring, and re-shoring evolve, companies have more options than ever regarding where to base their manufacturing operations.
  • Companies can “de-risk” their projects, thereby helping to ensure that they can continue to serve customers while locking in projected gains, by following several fundamental tenets when considering a nearshoring initiative.
  • Review the business case: There are many hidden or uncertain costs in an outsourcing project.
  • Be practical: Start with the biggest opportunity, and give priority to the moves that make the greatest business impact
  • Establish the right legal entity: Local corporate and tax structures can significantly affect the financial performance of outsourced operations
  • Consider inventory: Be aware that inventory equates to time and customer service.
  • Be flexible: Plans need to be flexible. The entire project needs thoughtful planning, but those plans should have the flexibility to cope with inherent uncertainties in demand and supply.
  • Be mindful of risk because risks are everywhere. Manage the critical ones and realize that though every nearshoring project is unique, all of them have common risks.
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