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Companies seeking freight cost cuts via nearshoring

Aug. 24, 2015

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.
About the Author

Sean Kilcarr | Editor in Chief

Sean previously reported and commented on trends affecting the many different strata of the trucking industry. Also be sure to visit Sean's blog Trucks at Work where he offers analysis on a variety of different topics inside the trucking industry.

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