AlixPartners study finds 40% of companies pondering nearshoring

AlixPartners Managing Director Foster Finley told American Shipper that nearshoring decisions are not made in a “knee-jerk” fashion and are dependent on a number of drivers.    The business advisory firm AlixPartners has found that 40 percent of companies in North America and Western Europe see nearshoring production as an opportunity to meet domestic demand requirements.
   The finding is part of the firm’s annual examination of sentiment and econometrics around nearshoring. The study was based on a survey of nearly 250 senior-level executives in North America and Western Europe from manufacturing and distribution companies across 15 broad industry groups
   Other findings from the survey included:

• 32 percent of manufacturing and distribution executives in North America and Western Europe say their companies have recently “nearshored” production or are in the process of doing so.
• Among North American respondents, the U.S. remains the most-attractive nearshoring destination, with 55 percent saying so, up from 42 percent in the 2014 survey. Mexico was second, at 31 percent, up from 28 percent in 2014, but down dramatically from 49 percent in the 2012’s survey.
• The average estimated savings from nearshoring among respondents was 8.5 percent, with 13 percent saying they expect to save 20 percent or more. Among North American respondents, the average estimated savings was 8.3 percent, up from 6.4 percent in 2014.

   “Few companies do anything on a knee-jerk basis,” AlixPartners Managing Director Foster Finley told American Shipper in a conversation about how companies should think about nearshoring. “It’s only when it’s seen as a systemic change that they have to do anything on a long-term basis.”
   AlixPartners has traditionally advocated that companies measure seven levers to inform their decision on whether to shift production closer to demand locations. Those levers include raw material costs, labor costs, exchange rates, overhead, transportation rates, capital costs associated with logistics, and duties and tariffs.
   “Depending on the product category, there are different sensitivities across those factors,” said Finley, who heads AlixPartners’ operations practice. “Each one doesn’t equal one-seventh. We usually find one or two that are disproportionate drivers.”
   Finley gave the example of a manufacturer of fractional horsepower motors – the type that go into household appliances, for example – where the company might be more apt to flex between sourcing locations based on those factors because there are producers of those motors on literally every continent. But a highly specialized manufacturer that has invested millions in an aluminum cast in one location might find it more difficult to switch to a producer in a region closer to home.
   Much of the ability to migrate production closer to home depends on whether the company has established relationships with suppliers in those nearer regions. It also depends on a host of other dynamics that all go into a landed cost calculation. The pure supply chain quantifications shouldn’t be used as the sole basis for a decision to reshore or nearshore, just as the decision shouldn’t be made based on a relationship with a supplier alone, according to Finley.
   Finley painted a picture of a small business in the United States with on major production facility and a reliance on outside suppliers in different nations. The likelihood is that there will be only a few suppliers, perhaps only one. Compare that to a large multinational corporation with plants in many countries, some of which are owned and some of which are subcontracted.
   “The companies on the (MNC) end of that continuum are in a decidedly better position (when it comes to the ability to shift production),” Finley said.
   That’s because they have established suppliers, and the associated logistics and compliance ecosystems, that let them respond to short-term events that may impact the decision on where to source. Companies that don’t have those established positions can’t possibly set up those networks quickly enough to, say, take advantage of China’s recent decision to devalue its currency.
   As an example, Finley pointed to an AlixPartners client’s recent experience. This North American producer of perishable goods had production facilities in the United States and Canada, and had seen the impact of a strong U.S. dollar far in advance of China’s currency devaluation decision, and so long ago had shifted production to Canada, where the exchange rate was more favorable.
   “The preferred capability is someone that continually looking at that (total landed costs),” he said. “But the real challenge is having the supply base in place to take advantage of what the analytics say. Do we have a viable source, do we have a relationship, does the prospective supplier have the capacity? We helped them simplify or streamline the speed with which they could quantify raw material cost, currency impacts, and logistics costs.”
   Companies intent on nearshoring should be fostering relationships with potential new suppliers, but also examining their current supplier networks and grouping them into tiers of importance.
   “Do I have suppliers that make one product for me or multiple pieces?” he said. “You have to ask the question, is the only thing we buy is a fractional horsepower motor? If so, probably makes sense to keep minimal production. If this supplier is a producer of other products we’ve got – you may decide to take away that order.”
   More broadly, Finley said these strategic decisions on nearshoring are emblematic of companies prioritizing supply chain decision-making more than ever before.
   “As businesses develop the need and desire to move production, it puts a premium on the caliber of the supply chain management function within the organization,” he said. “I’ve always alleged that supply chain is the only function that impacts, revenue, costs, balance sheet, customer service and compliance.”