Introduction:
Since the inception of USMCA/NAFTA, Mexico has long been a prominent powerhouse hub of the Automotive components manufacturing industry. Nearly every automotive manufacturer in the world has an operation there, mostly to support the North American market segment. With its strategic location, low labor costs, and established supply chain, Mexico is the logical choice for automotive component manufacturers to establish nearshoring operations focused on supplying the North American market.
Geographical Advantage:
When it comes to supplying the US and Canadian markets, Mexico has a distinct geographical advantage compared to overseas supply centers like China, Thailand, and India. Supply chain disruptions to the just-in-time delivery model are largely mitigated due to logistic shipping over land by freight rather than sea container. Shorter transportation lead-times for faster product delivery and quicker response time are clear advantages in nearshoring your manufacturing operations.
Onshoring (Reshoring): The Shift from Offshoring:
Historically, many manufacturing companies opted for offshoring – moving production to countries with lower labor costs to save on operational expenses. Offshoring became a popular strategy, allowing companies to increase their profit margins and remain competitive in the global market.
However, over time, the benefits of offshoring have diminished. Rising labor costs in traditionally low-cost countries, coupled with increased logistics and transport expenses, have reduced the cost-saving advantages of offshoring. Moreover, offshoring often results in longer lead times and reduced control over the production process, leading to potential quality issues and delivery delays.
These challenges have prompted many companies to reassess their manufacturing strategies, leading to a rise in onshoring, reshoring, and nearshoring – strategies that bring manufacturing closer to home.
The Shift Toward Onshoring:
In today’s globally interconnected manufacturing landscape, onshoring has emerged as a strategic approach for businesses to optimize their operations. Onshoring, in the context of manufacturing, refers to the process of transferring a business’s production or services from an overseas location back to the company’s home region. This is a strategic decision often made to mitigate risks, reduce costs, or improve production efficiencies associated with offshoring or foreign production.
Manufacturing onshoring, specifically, involves bringing back manufacturing processes and operations to the home region. This can include aspects like assembly, production, quality control, and more. The primary objective of onshoring is often to regain control over production, improve product quality, reduce lead times, and foster innovation.
Onshoring Trend:
In recent years, there has been a noticeable shift towards onshoring in the manufacturing sector. This trend is driven by multiple factors, including rising labor costs in traditionally low-cost countries, growing concerns about supply chain risks, and increased emphasis on product quality and manufacturing innovation.
Many companies are reevaluating their global manufacturing strategies, considering the total cost of ownership rather than just labor costs. When factors like shipping costs, inventory carrying costs, and the risk of supply chain disruption are accounted for, onshoring can often emerge as a cost-effective alternative.
Additionally, the desire to shorten supply chains and improve responsiveness to customer demands is encouraging more businesses to explore onshoring. With onshoring, companies can better align their manufacturing operations with their market needs, leading to improved customer satisfaction and competitive advantage.
The shift towards onshoring is not just a temporary trend but rather a strategic reorientation of global manufacturing practices.
Advantages of Onshoring:
Manufacturing onshoring presents several compelling advantages. Here are the key benefits:
- Improved Quality Control: Onshoring allows for closer oversight of manufacturing processes, enhancing the ability to maintain high quality standards.
- Shorter Supply Chains: By reducing the geographical distance between production and consumption points, onshoring can lead to shorter supply chains, faster delivery times, and lower transportation costs.
- Better Communication: Onshoring can eliminate language barriers and time zone differences that may affect communication with foreign manufacturers.
- Positive Public Perception: Consumers often view onshoring positively, associating it with job creation and domestic economic growth.
- Greater Intellectual Property Protection: Onshoring can provide better protection for a company’s intellectual property rights, a significant concern when manufacturing overseas.
Nearshoring:
Ongoing geopolitical volatility, record-high shipping costs, lead-times, and growing economic incentives all have helped nearshoring explode in popularity in recent years, notably for automotive manufacturers in Mexico. And the trend doesn’t appear to be slowing in 2024. The National Association of Auto Transport in Mexico expects to grow 20% in the next four years because of nearshoring efforts, altering global supply chains for years to come.
Consider the following key factors as part of a strategy that will help you successfully adjust your shipping as you nearshore.
- Understand your inputs: The cost of inbound freight after nearshoring can vary significantly, based on factors such as transportation mode and the characteristics of the items being transported. If auto parts that are now coming from Mexico instead of Asia involve large, bulky items, this could increase costs. Based on inputs, you may qualify for tax and duty incentives to nearshore. An expert analysis of your supply chain can help determine which incentives fit, to help make nearshoring more beneficial.
- Find your ideal location(s): Determining the optimal location is crucial to making the most from your investment in nearshoring. But it can also be one of the most complicated aspects of developing a cross-border strategy, especially as auto manufacturers depend on just-in-time inventory models. If a company is nearshoring in Mexico, it will need to determine which of the country’s 26 ports of entry into the U.S. best serve your needs. Each crossing will vary in how busy it is, and the types of materials it allows through. Find an area with a strong pool of labor.
- Build flexibility into your cross-border shipping strategy: The turbulence of the last several years has shown how important it is to maintain an adaptable supply chain. Diversifying your supply chain is a key benefit of nearshoring, but it only works if you maintain flexibility in your shipping strategy. A company should be able to vary its mode of transportation in case of congestion, natural disaster or any other event that can impact transit times. Partnering with a logistics provider that has connections and infrastructure on both sides of the border can help to achieve this much-needed adaptability.
Outlook:
Nearshoring/Onshoring is going to alter global supply chains for years to come. It is a plausible strategy that can have a transformative impact on a company’s operational efficiency and bottom line. By considering the right factors upfront, you can avoid unexpected costs and complications, and create a more resilient and reliable supply chain for the future.
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