6 tips to maximize near-shoring value

April 24, 2014
Is Mexico the new China?

There’s no replacing China in today’s global supply chain, but there are new markets and trends emerging.

On the heels of the release of the February China Manufacturing Purchasing Managers’ Index from HSBC, some have speculated as to the market stability of China as a popular outsourcing destination. The index detailed factory losses slipping to a seven-month low in February, the second straight month of manufacturing decline.

Traditionally, companies have sourced the production of goods in low-cost countries such as China and India. However, the tide is shifting toward new emerging markets as both countries experience a rising middle class, as the Indian rupee depreciates, and as China’s factory activity loses ground.

Emerging hot spots

New outsourcing markets such as Burma, Haiti, and sub-Saharan Africa are emerging as the destinations for manufacturing due to lower costs of scale, proximity to target consumers, and less competition for factory space.

Latin America, particularly Mexico, is emerging in the global outsourcing market. The close proximity to the U.S. border has always been a draw, but recent developments have shifted the global trade landscape in favor of the western hemisphere. While it might still be too premature to think near-sourcing can replace production in Asia, trading partners in the Americas should be an essential component to an organization’s supply chain strategy.

3 reasons for the change

Latin America has been discussed for years, so why is it suddenly resurfacing as a go-to destination for business? Here are three main reasons.

1. Historically, costs in Mexico have always been higher than emerging markets such as China, Vietnam, Pakistan, or Bangladesh. But this has changed recently. Factory workers in China today have greater access to technology and, with it, access to knowledge regarding higher factory wages paid in other regions. This has escalated calls for higher wages in China and made Latin America more competitive again.

2. At the same time, a shift of power has also occurred, particularly in the consumer goods space. Consumers literally hold more power in their hands as they walk store aisles and showrooms and have new options with retailers and consumer goods companies, which have adopted different business models built around customer engagement and an optimal shopping experience. Companies are pressured more than ever to generate and deliver products faster to respond to a different set of consumer demands. This pressure has played well into the near-shoring argument. Shaving weeks off of cycle times makes a huge difference in today’s fast and furious supply-chain world.

3. The third major factor is the movement toward responsible production. Companies such as Patagonia are championing true sustainable business practices. Some of these practices include closely examining suppliers’ and factories’ safety standards and finding partners who have higher standards. Identifying sourcing locales that are closer to home can make this easier to manage, while reducing carbon footprint.

6 points to address when considering near-shoring

Shifting production closer to home may seem like a straightforward decision, but hurdles and traps exist. Companies should keep the following six points in mind when considering near-shoring

  • Complexity of product and labor: Are you manufacturing T-shirts and jeans or mobile phones and high-tech gadgets? Quality still trumps cost. Make sure the necessary skill set and resources are available.
  • Infrastructure: Is there infrastructure in place to meet your production demands? Inspect the access to roads, ports, and third parties.
  • Capital and rates: Do local suppliers have access to capital to fill orders? And what are the local rates being paid on capital? Often, areas of low-cost labor face higher capital costs.
  • Political and social unrest: Volatility in society or laws can have a direct impact on production and costs.
  • Local laws and customs: Every country or region has its set of local twists. Are there local laws to abide by before transacting there? For example, is it considered mandatory practice to use a letter of credit to place an order with a local factory?
  • Technology and standards: Is there access to technology to produce goods, and are the tools and standards in place to ensure transparency during the production lifecycle? Are local workplace standards in-line with your company’s standards?

The future for connecting new markets

Bryan Nella is director of corporate communications at GT Nexus. Contact him at [email protected].

Significant challenges still remain as manufacturing continuously migrates toward new hot spots. In the future, it’s important to have a well-thought-out production strategy to orchestrate the global supply chain. Production in new locales may turn out to be less of a one-stop-shop, but more of a node in a tightly orchestrated network. Mexico doesn’t have the robust resources of China at its fingertips, so it’s up to the manufacturer to string together and coordinate multiple parties in different time zones to produce timely goods.

More companies across manufacturing, high-tech, apparel, and retail are applying a network approach to production as they add new sourcing locales to their supply chain portfolio. One strategy that they have in common is they’re using cloud technology to connect all of their trading partners in one place. This approach changes the nature of the supply chain from uncertainty to clarity. As more production moves out of China into new areas, using cloud to operate a single supply network that smoothly orchestrates the movement of goods in the supply chain is ever more important.

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