Are reshoring and friend-shoring the solution?
Businesses and nations are looking for ways to become more resilient and secure their supply chains. The global disruptions of the past 2 years shows the fragility of offshoring. From semiconductors, to farming materials and food supplies, shortages affected all industries. In an attempt to prioritize supply chain resilience over costs, many corporations are looking into reshoring: nearshoring and friend-shoring. What do these terms imply, and will these fix the weaknesses in the supply chains?
It all started with offshoring in the 1960s by which companies started to transfer the operating activities (mainly manufacturing) to other countries or overseas. With this business operations model, corporations moved partly or completely their operations abroad in order to reduce costs and increase profit margins. The reason to offshore was mainly because of lower labor costs (access to larger workforce), closer proximity to raw materials and more favorable government and regulatory policies. This was the start of economic globalization in which businesses produced and bought products where costs were low. And in a world where goods can be moved faster and cheaper. Will the opposite now be set in motion due to the numerous supply chain disruptions that occurred in the past 2,5 years?
The mentioned disruptions have shown the disadvantages of offshoring – with long and complex supply chains. In order to overcome these vulnerabilities, many businesses as well as governments are trying to regain resilience via policies, incentives and by reviewing current processes. According to an article by Deloitte many businesses are looking into reshoring their critical supply chains.
What is Reshoring?
Reshoring is also known as nearshoring, inshoring and backshoring. It is the opposite of offshoring. Reshoring emerged as an alternative strategy for companies by bringing operations back or close to the core country – shortening their supply chain and mitigating risks. Shorter supply chains are easier to manage and more durable. Bringing at least part of the manufacturing back home or changing to local suppliers provides more flexibility and control. Companies are eager to increase their resilience, even if it lowers efficiency.
But not all supply chains can be reshored. For example, critical scarce resources that can only be sourced at a few locations in the world, such as lithium for batteries of electric vehicles. Or specialized knowledge and equipment for manufacturing semiconductors. And some industries are just too complex to replicate locally, such as electronics.
It is important to mitigate risks of supply chain cuts from single source countries and rebuild strategic relationships. Therefore nations seek to establish a network of trusted suppliers from friendly and stable countries (with similarity in strategic and geopolitical interests) called “friend-shoring”. By completing national supply chains with a diverse set of trusted international suppliers, nations can improve their resilience. According to an article of the Wall Street Journal countries around the world are looking for friendly supply routes. It is described as “a new kind of global trade, one that confines commerce to a circle of trusted nations”.
Are reshoring and friend-shoring the solution?
In general, changes in supply chains happen continuously. According to an article of ING, the past global events show a trend towards more self-sufficiency. Also the recent regulations, such as the Supply chain due diligence act prepared by the EU, seems to favor the concept of friend-shoring.
However, in general there seems to be a shift towards supply diversification. It has become more important to extend the amount of suppliers in different countries for security reasons. Even if it implies more costs and losing competitive advantage.
According to the ING, there will be more self-sufficiency initiatives taken in Europe and the US for risk reduction and diversification, mainly in strategic sectors. Supply shifts from China to other Asian countries are occurring, as well as more inventory building strategies relating to the “just-in-case-model”.
What can companies do next to diversifying their suppliers?
Companies and governments can take the following steps to build resilience:
- Collect supply chain data: gather and monitor data of your supply chain from beginning to the end to improve visibility. Evaluate the suppliers from the sourcing of raw materials until the end product or service. This overview will help you to expose where possible weak spots lie and makes it easier to take precautionary actions.
- Make use of multiple transport suppliers to spread the risk and secure flexibility. Cover both your regular transport needs as well as your time-sensitive shipments. Make use of specialized time-critical transport services.
- Embrace digital platforms: to assist in digital and real-time monitoring and transparency. Digital platforms enable you to search and compare the available transport solutions in real-time. At the same time, you can collect relevant data on your past shipments creating transparency and full visibility.
- Just-in-case inventory management: build up precautionary stocks or diversify suppliers to be prepared for times of scarcity and disruptions.
If you are looking for an easy to use digital platform that allows you to find, compare and track transport suppliers, please check out the services of our Shipper Portal. The platform provides visibility and flexibility for your supply chain, regardless of changing strategies or global developments.