by Keith Carruthers MBA, SCMP

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Saturday, January 10, 2009

The "Nearshoring" New Years Resolution

Happy New Year to all, and I hope you are as excited about the possibilities for success that await us all in 2009 as I am. Best of luck with your New Year's resolutions.

Over the past several months, the term "nearshoring" has been getting a lot of attention in the media. The panic ensued by rising gas prices has launched this terminology into the "buzzword stratosphere" which if history is any indication, should make us all a little nervous.

So what's the big deal about nearshoring?

Well, here is North America, we tend to have a predisposition about products and services that are not "from here". I have commented on this predisposition in previous postings. This predisposition results in us looking at everything to do with imports and offshoring through a flawed lens, looking for facts to support our predispositions that imports are bad, that they don't make sense, that when you look at things "holistically" we are better off with sources of supply within our own communities, countries, or continent.

Although as I have previously stated, doing business offshore in "far away lands" is not the magic pill that resolves all of our business issues in all situations. It definately can play a critical role in an organization's success, but in some cases, it is contrary to what we are trying to accomplish from a strategic point of view in our businesses.

So what's all the hoopla about nearshoring? The argument goes that there are many reasons that doing business close to home makes more sense from a total business perspective. Whether the argument is to reduce our carbon footprint, to bolster our local economy, or most recently to find a way to deal with escalating fuel and freight costs, nearshoring is a solution that is being escalated to an elite status....the "be all and end all" of great solutions to an ever-increasing cost escalation problem.

Although I agree that in some cases, the fuel crisis has indeed eroded the cost savings with moving sources of supply offshore, this is not the case in most situations. Why? Well, there are a few reasons.

For starters, when companies make the decision to move sources of supply offshore, it is a decision that is most often very carefully thought out as there are not only cost and other benefits, but inherent risks involved in doing so. These risks range from longer lead times, higher inventory carrying costs, and other such factors that are often a natural consequence of moving your source of supply farther from your market.

As a result of these inherent risks, most organizations are very hesitant to make such a move unless the potential gains (such as cost reductions) are substantial. In other words, we do not make these decisions to save one or two percent on our spend.... we make them to save twenty or thirty percent. As a result, it would take an absolutely huge shift in transportation costs to errode these gains.

Well, what we experienced over the last several months can undoubtedly be argued as a substantial shift in the cost of fuel, right? Well, yes it can, although it is doubtful that this could continue for any prolonged length of time, and we are already seeing evidence that it can't. But lets assume for a minute that increased fuel costs are substantial and are sustained for some longer period of time. There are still other factors that we need to consider.

One of these "other factors" that limits the negative effect that this situation can have on offshore opportunities is the fact that most of the goods and supplies sourced offshore are minimally freight sensitive. In other words, the items that are impacted greatly by freight costs (light, bulky, low cost goods) are rarely the goods we tend to source offshore. As a result, the impact of freight increases on offshore products (as a percentage of purchased cost) tends to be significantly less than the impact found on the goods we tend to source closer to home, even though the total cost to move a "unit of freight" is less domestically than internationally. When you also throw in the economics of supply and demand, and the tendency for prices to subside offshore to help prevent demand from sliding too far due to increased transporting cost, or for freight margins to go down due to excess carrier capacity, in many cases doing business offshore continues to provide us with reduced costs and increased competitive advantage.

In summary, we need to be careful not to take an "all or nothing" point of view when considering the decisions we make on a day-to-day basis in our businesses. Most often, the truth lies between the two extremes, and we need to remain aware of this and to not over emphasize the impact of changing trends in the global marketplace. A combination of offshoring, nearshoring, and domestic in-house production in most cases offers our organizations with a balanced solution resulting in mitigated risk and a much less volatile enviroment as we move into the future.

All the best for a great start to 2009!

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