By Grainger Editorial Staff 4/24/23
Since 2020 the COVID-19 crisis, the war in Ukraine and other international tensions have conspired to drastically exacerbate supply-chain weaknesses. Supply chain leaders are exploring several options to build more resilient supply chains, including a newer one that's emerged in response to these challenges.
According to a 2022 report by the Capgemini Research Institute, 89% of the executives surveyed reported supply chain disruption as the greatest short-term risk to their organization. Companies are adjusting and overhauling their supply chains to help mitigate this risk, including sourcing, manufacturing, packaging, storage, transportation, technology investments and more. The report notes several key actions organizations are undertaking to help diversify their supply chain networks, including:
Offshoring, nearshoring, reshoring, and friendshoring are all terms used to describe different ways of sourcing goods and services for a supply chain. The main difference among them is the location of the supplier. Here is a comparison of these four tactics:
Moving business operations to another country is commonly known as offshoring. It’s important to note that offshoring is different from outsourcing, where work is contracted out to an external organization. This practice accelerated in the 1970s in U.S. manufacturing as companies sought to reduce costs. Offshoring certain business processes can help reduce labor costs and ensure access to certain skills. It can also mean closer proximity to certain raw materials. However, current globalization policies are making offshoring much less attractive to businesses. While offshoring can offer significant cost savings, it can also come with risks, such as quality control issues, communication challenges and supply chain disruptions. As the Guardian notes, many Western companies that participated in offshoring to lower costs by shifting manufacturing to countries with more affordable labor have been encouraged by tariffs and pandemic supply chain disruptions to start reshoring or bring production back to their home country.
Nearshoring is when a company relocates business operations to a nearby country, often with a shared border, where labor is more affordable and the shipping and communication channels are strong. Nearshoring offers a middle ground between offshoring and reshoring, helping businesses reduce costs without sacrificing quality or control. With nearshoring, a company partners with suppliers, manufacturers and other necessary parts of a supply chain located in a nearby country. For example, a U.S. company might start nearshoring by working with a supplier in Mexico instead of one in China. According to Supply Chain Brain, as global supply chains continue to face trade challenges, especially when importing goods from Asia, many companies are adopting nearshoring, investing millions of dollars to locate plants and production facilities near their target markets.
Reshoring is bringing manufacturing and production services back to the country or region in which the company operates. The opposite of offshoring, also known as inshoring or onshoring, reshoring is when a business transfers its processes back to its home country due to the fragility of global supply chains or more favorable trade policies. For example, a company centered in North Carolina might practice reshoring by working with in-state manufacturers, or those in a nearby state. The main goal of reshoring is to help companies regain control over the end-to-end supply chain by taking back some outsourced production processes to lower the risks that are outside their control. According to Manufacturing.net, reshoring can be attractive for companies whose supply chains have been disrupted by geo-political events. By using more domestic-based suppliers, companies can choose more selective partnerships and suppliers to help reduce their exposure to outside risk.
Friendshoring is a new term for rerouting supply chains to, or sourcing goods or services with, business in countries that are politically and economically aligned with a company’s home country. Also known as allyshoring, friendshoring is when companies rely on countries with shared values for raw materials or manufacturing bases. According to Supply and Demand Chain Executive, friendshoring involves sourcing from long-term, trusted suppliers regardless of location. The benefits of this approach include improved quality, reliability and partnership, while some challenges include a decreased ability to respond quickly to demand fluctuations and potentially higher costs compared to sourcing from other low-cost countries.
Ultimately, the best supply chain model for a company depends on several factors, including the type of goods or services being sourced, the budget and the company’s overall risk tolerance. According to Deloitte, organizations can take three key actions to help create more resilient supply chains, including:
The information contained in this article is intended for general information purposes only and is based on information available as of the initial date of publication. No representation is made that the information or references are complete or remain current. This article is not a substitute for review of current applicable government regulations, industry standards, or other standards specific to your business and/or activities and should not be construed as legal advice or opinion. Readers with specific questions should refer to the applicable standards or consult with an attorney.