Companies have adopted different strategies for the manufacturing of their products with the aim of reducing costs and increasing efficiency.
Two of the most popular are nearshoring and offshoring, designed to optimize the supply chain by allowing companies to outsource their production to locations where costs are
lower.
Evolution of global production strategies
In the last decade, the business world has undergone a major transformation due to the introduction of new technologies and digital advances, as well as the transformation of consumer demands, which have led to a drastic increase in global production.
Choosing a strategy appropriate to your needs and objectives is essential to be competitive in the international market.
Nearshoring vs offshoring, what are they?
Nearshoring refers to the practice of outsourcing production to a company in a nearby country. In other words, let´s say you hire an organization located in a neighboring country to manufacture your products.
Mexico is one of the most popular destinations for nearshoring thanks to its strategic geographic location (close to the US and Latin America), as well as competitive labor costs, which make it an ideal manufacturing center for European and US companies.
In general, nearshoring is an ideal strategy if what you are looking for is:
- Reduce production costs without sacrificing quality or flexibility.
- Improve communication and collaboration with your suppliers.
- Take advantage of the advantages of geographical and cultural proximity.
For its part, offshoring is about moving part or all of production to a foreign country. In most cases, it is done to take advantage of lower labor costs and/or to access new markets.
China is one of the favorite offshoring destinations due to its large population and low labor costs. Many US technology and services companies outsource software design and development services to companies in India for the same reasons.
Differences and advantages between nearshoring and offshoring
Choosing between nearshoring and offshoring depends on a number of factors, such as the type of product you manufacture, your production needs, and your budget. Let´s see what each strategy offers.
Advantages of nearshoring as a production strategy
1.Geographic and cultural proximity
By working with companies located in nearby countries, there is greater ease of access to suppliers, shipping times are reduced, and it is possible to make regular visits to the facilities. In addition, proximity reduces language and cultural barriers.
Do you identify with the following situations? If so, nearshoring may be a good solution for you:
● A delay in the delivery of an order due to a communication problem with the service provider.
● An error in the manufacturing of a product due to a misinterpretation of the plans.
● A delay in resolving a technical problem due to the time difference between the two countries.
2. Effective communication and close collaboration
Think about what it would be like to have regular meetings with your suppliers to review project progress or make adjustments. This not only helps avoid misunderstandings or miscommunications, but also fosters a stronger, more trusting relationship, which can improve product quality and increase customer satisfaction. So you could:
●Visit the supplier´s facilities to supervise work in person.
● Meet with the responsible operators to discuss new projects.
● Collaborate with engineers to develop new products
3. Flexibility in project management
Nearshoring allows changes to be made to product design or specifications during different stages of the production process, without incurring high transportation costs or significant time losses. That is, you will be able to:
● Modify an order at the last minute.
● Request changes to the design of a product.
● Prioritize an order to meet a tight deadline.
Apple has outsourced the manufacturing of some of its products to service providers located in Mexico. The same goes for the large e-commerce company, Amazon, which has outsourced its production to Brazil, allowing them to reduce costs and improve the efficiency of their supply chains.
Advantages and challenges of choosing offshoring as a strategy
1. Lower labor costs. Wages in Asian countries are much lower, generating significant cost savings and making it easier to reduce sales prices, which can increase demand or generate higher profit margins.
2. Access to global markets. By having a presence in several countries, it is easier to access new markets and increase the reach of your company, driving growth and revenue diversification. It can also improve brand image and attract international customers.
3. Logistical and cultural challenges. Moving part or all of production to a foreign country can be a complicated and expensive process, as long shipping and/or customs times may be required. Likewise, there may be cultural and language barriers that make communication and collaboration difficult.
The German company Volkswagen has outsourced the manufacturing of some of its automotive components to suppliers located in China to reduce costs and improve the flexibility of its production. The same is true for Nike, the American corporation that has outsourced shoe manufacturing to Asia.
Nearshoring in Mexico: a strategic approach
Mexico is an attractive destination for nearshoring due to a series of advantages:
High level of specialization
In Mexico, the level of specialization of workers in the sector is outstanding. Professionals in design, molds and machinery operation have superior technical skills that ensure quality and precision in production.
Proximity to key markets
Mexico shares a border with the largest market in the world: the United States, a location that favors more agile and efficient logistics. Imagine being able to ship your finished products to customers located in the US with shorter delivery times and reduced shipping costs. Without a doubt, it is a competitive advantage that can make a difference in the success of your company.
Fiscal and logistical advantages
In Mexico, tax incentives are offered to companies that choose nearshoring, which can mean significant savings in taxes and operating costs.
Furthermore, well-developed logistics infrastructure such as seaports and efficient transportation networks facilitate the movement of materials and products domestically and internationally. Doesn´t having a favorable environment for the growth of your company sound attractive?
You may be interested in: How to successfully move your manufacturing to Mexico?
How to choose the best production strategy?
Below, I list some useful tips to make the best decision:
1.Evaluate the needs and capabilities of your company
- Availability of labor. If your company needs highly qualified and experienced equipment, nearby countries often have a good level of technical instruction, improving the quality of parts. On the other hand, offshoring may be more feasible
if you need a larger number of unqualified personnel. - Proximity to the target market. It is an important factor to consider when it comes to transportation logistics and total production costs. If you sell in a nearby market, nearshoring allows you to significantly reduce delivery time and operating costs. However, if your target is in distant regions, offshoring might be a better option.
- Tax and commercial policies. Investigate and evaluate the laws applicable to your activity and line of business, since they can increase production costs.
2. Analyzes the financial and operational impact of nearshoring vs offshoring
- Production and transportation costs. Includes expenses for materials, labor, rental of premises, services, etc. In some cases, nearshoring can be cheaper than offshoring for companies selling in nearby markets.
- Operation control. Nearshoring can minimize risks and facilitate access to personalized supervision and training. On the contrary of offshoring, where geographical distance can make control difficult.
- Relationships with suppliers. Nearshoring allows you to collaborate closely with local suppliers of materials, services and tools, improving flexibility and efficiency in production.
Tips for selecting the appropriate production strategy
Analyze trends in the industry. Is there anything new that requires being present in a particular market? Is there new legislation affecting your industry?
Analyze the available information to be able to make the right decisions.● Compare profitability options. Contrast the costs of production, transportation, labor, taxes and any other relevant expenses. Set expectations about your profit
margins and analyze which would be the best option.
● Value customer relationships. Will the strategy affect the quality of the product? What about delivery time? Make sure your customers don´t suffer any inconvenience.
Choosing between nearshoring and offshoring is not an easy task. Before making a decision, it is important to carefully evaluate your situation and conduct extensive research
on alternatives to outsourcing your production. Dare to explore new business opportunities in Mexico! Contact us for advice.
