How Procurement Teams are Handling Nearshoring Challenges
With tariffs, sustainability concerns, geopolitical challenges and lingering concerns from COVID-19, what are the challenges facing procurement and sourcing teams to adopt nearshoring strategies?
With more businesses around the world looking to bring production closer to home, there is a mood from many procurement teams to move things closer to their end consumers. This move is to try and reduce costs, improve sustainability reporting and reduce the risks involved in their supply chain.
Why are so many companies considering nearshoring strategies?
“The disruption caused by the pandemic led to a lot of businesses reviewing the structure and stability of their supply chains,” explains Saul Resnick, CEO of DHL Supply Chain UK & Ireland. “This highlighted the advantages of nearshoring, as well as multi-shoring and using different geographical sources, which allows for more flexibility and resilience through unexpected peaks and troughs.”
Dean Alms, CPO of Aravo, added: “The product shortages we experienced during the pandemic have forced business leaders to confront the fragility of global supply chains. The reliability of critical markets, such as China and Ukraine, and the availability of significant trade routes, namely the Red Sea, Suez Canal, and Panama Canal, have been seriously undermined over the last four years.
“Thus, we’re seeing more companies re-evaluate their supply-chain strategies, including bringing manufacturing and services closer to home to de-risk them. More companies are reassessing their supplier relationships, their own networks, and ways they can ensure they are working with friendly nations and businesses.”
How difficult is it to uncouple supply chains from regions like China?
“It’s extremely difficult to extricate Chinese manufactured parts from the supply chain of a significant proportion of goods in sectors including automotive, tech and manufacturing”, said Jenny Draper, Managing Director of Barkers Procurement Consulting. “The questions to ask are ‘why extricate and where is the realistic, stable alternative?
"If the concern about China is carbon reduction, there are leading experts who state that China will be carbon neutral before the USA. Indeed, China’s president Xi Jinping has pledged carbon neutrality by 2060. If any country has the product development mindset to make that happen, it’s China.
"If the concern is more about national and political security then stable alternatives are needed. Many are looking to South America for such alternatives, but it’s a work in progress to have stable and volume reassurance coming from that region.
"So, decoupling from China should be seen as a longer term project."
But, Jonathan O'Brien, CEO of Positive Purchasing, disagrees, saying, “It’s not that difficult, it just takes effort, focus and clarity regarding what we are setting out to achieve. China has enjoyed the success it has, because it has figured out how to get the Western Euro, Dollar or Pound. It has done this by making sourcing from China easy.
“This has driven a laziness within Western companies who have come to rely on Chinese supply chains. Changing this means going and doing the legwork to understand the new regions we can source from, and what measures and arrangements we need in place to do so.”
What are the key challenges an operation faces when following a nearshoring strategy?
Resnick believed that: “Inevitably introducing multiple sourcing locations, can result in increased inventory levels, and a resultant working capital challenge.
“Organisations need to be comfortable that they have supply chain partners they can trust, and who will prove reliable in the new chosen markets which they may not have had much experience in previously.”
While Draper held a different opinion, adding: “The main concerns for nearshoring are availability of consistent quality products and pricing. If near shore had always been an option, then availability of the product volumes would typically not be a significant issue as that supplier would be an established part of the supply chain in a given industry.
“Pricing is an age-old near shore challenge and increased pricing in the supply chain means higher sales prices, with the knock on effect of not being as competitive as your rivals.”
David Ziller, Vice President, Brookfield Properties believes: “In Europe, we’re already experiencing a shortage of warehousing space due to the increasing trend for nearshoring, as well as driven by the boom in e-commerce in markets such as France and the UK, and emerging sectors including battery manufacturing growing across continental Europe.
“There is no doubt mounting competition for warehousing space in Europe, despite the ongoing economic environment. This is why it is important for organisations to meticulously plan nearshoring strategies and partner with businesses that can support them in finding the right infrastructure for now and in the future.
“Laws and regulations can also be a challenge. As mentioned, when switching from a global supply chain companies will need to ensure their strategies comply with local legislation.”
How can those challenges be overcome?
Martin Hartley, Group Chief Commercial Officer of emagine Consulting, said: “Building strong relationships from the beginning of the nearshoring journey is paramount, I always encourage people to have their cameras on during calls for example. Organising meetings that work for both time zones is also crucial in maintaining regular communication and facilitating regular reporting on project updates. Having a team of consultants who speak a range of languages is also helpful in avoiding issues caused by language barriers.
Denis Royer is the EMEA Managing Director of WNS Procurement, says to overcome these challenges: “Organisations must have a long-term vision in mind. As nearshoring represents a significant change in how procurement teams source goods, they cannot afford to make decisions that only deliver immediate or short-term value – they need to consider how their supply chains will develop moving forwards.
“This necessitates creating a nearshoring plan which is predicated on stability and predictability, as opposed to pure cost efficiency. Procurement professionals also ought to build a supply chain environment for their business which grows and improves over time, in conjunction with the company’s evolving strategic aims.”
How can technology be used to aid success?
Resnick believed that: “Technology is key to implementing a nearshoring approach. Having a standardised global Warehouse Management System gives consistent and precise inventory levels, and provides the relevant information needed for accurate forecasts and delivery capability into different markets.
“The use of demand planning technology can also help enable better forecasting of supply requirements, matching to global trends and macroeconomic events.”
Ziller added: “Technology is increasingly used to streamline warehouse processes and the accessibility of quality warehousing for tenants. This will only increase in the future and organisations should plan for how technologies will impact the space required.
“Automation and machine learning can accelerate processes like order picking and climate control within warehouses, but also unlock the ability to process more data at speed, giving companies a world of data-driven decision-making at their fingertips. Companies can now gain an impressive oversight of factors affecting their supply chain, both inside the warehouse and beyond, including weather patterns, port congestion, manufacturing delays or component pricing.
“Further, AI is transforming warehouse procurement and asset management as it allows us to gain more data driven insights about an area so that we can find strategically advantageous locations we hadn’t previously considered for our tenants.”
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