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Why to consider Nearshoring (4 steps)

Supply Chain risk in the form of uncertainty from political decisions combined with fears of additional widespread diseases similar to COVID-19 has fueled the discussions about nearshoring. Factors such as supply and demand risk, total cost today and expected future cost levels will have to be evaluated. The big questions seem to be: “What are we giving up by nearshoring?”

What is nearshoring? Nearshoring is the outsourcing of a business operation or process to companies in nearby countries that are less expensive and geographically close. The higher degree of company control within your supply chain the lower the risk, at the same time outsourcing non-strategic parts of your value chain still makes sense to ensure that your focus stays on areas that helps drive revenue. This is not a question of insourcing but nearshoring, shorten the lead time in all areas of your supply chain will reduce risk.

We have defined 4 steps to help you determine the best possible solution

  1. Supply Chain Mapping
  2. Evaluate risk in the supply chain and risk in the demand chain
  3. Define alternative supply chain solutions
  4. Understand your cost pattern today and in the future

 

  1. Supply Chain Mapping

Map out the supply chain with various tiers, not just your direct suppliers, sub-suppliers at lower tiers must be included. You need to understand how you business is impacted by any disruption in the supply chain, thus you will need to understand the value of spend, share of parts from each vendor and the impact of your business at a potential halt in the supply chain. There are several examples of small suppliers causing much higher risk to your supply chain than anticipated as the focus tends to be on the highest spend suppliers.

  1. Evaluate risk in the supply and demand chain

Based on your supply chain mapping you can evaluate the risk for each process or each vendor/supplier in the supply chain. You may have supply situations currently with multiple sources hence the risk in those situations may become lower than your single source suppliers, depending on geographical distance (supply chain lead time), delivery accuracy, quality etc. Based on your risk evaluation you will need to attach a risk-value to each of the processes or suppliers to determine the business impact of interruptions. Include inventory levels in the supply chain as well, as inventories functions as a short-term insurance policy to cover a gap in the supply chain caused by interruption.

Demand risk should be mapped as well, what is the worst-case scenario? How would you be able to mitigate that scenario and keep fulfilling the demand?

  1. Define alternative supply chain solutions

Prioritize. In order to prioritize where to start, focus on the supply and demand risks defined in step 2 with the highest risk. Based on that, define alternative scenarios to your supply chain with reduced lead time at lowest possible cost at similar or better quality. When defining alternatives, you will most likely have to accept an increased cost to mitigate or reduce a risk. When various alternatives are defined to mitigate the risk in your entire supply chain it is time to put numbers on the map!

  1. Understand your cost pattern today and in the future

To reach a conclusion and define your actions going forward you will need to understand cost of each of your processes as well as determining the cost/value of each of the risk elements defined. Calculating total cost of your supply chain will help you understand the difference between a multi continent supply chain and a single continent supply chain. Purpose of this process step is to understand how cost of bringing a product from a supplier through your production or assembly process correlates with the risk from that specific tier 1 supplier. Understanding the future cost has to be part of this exercise, you are making long term decisions and if cost of labor increases by 15% annually in Asia compared with 2% locally  then your conclusion may change if you have a longer term perspective.

Based on the 4 steps described you will be able to start implementing alternative solutions for your supply chain, what products do you move from overseas suppliers first, and what parameters needs to be fulfilled to make this transition successful.

 

MVP Logistics is here to answer all your questions about your supply chain and what steps we are taking to plan for and address the outbreak. For a breakdown of your supply chain, contact us virtually.

MVP Logistics is your logistics partner for supply chain project management, logistics, warehousing and fulfillment, LTL and other supply chain needs. Both our Minneapolis and Houston warehouses provides local, national and international shipping services. Find your solution today.