Is the Reshoring/Nearshoring Tide Turning?

Redefining the Value Proposition

Even as some regions recover from the pandemic, fashion and consumer goods companies continue to face a perfect storm of challenges that have rocketed the supply chain to the top of the agenda for executives around the globe. Kept awake at night by issues like shipping disruption, demand volatility, tight raw material supply and rising costs for virtually all inputs, American retailers, brands and manufacturers are finally getting serious about bringing some operations closer to home. Their primary targets include nearshoring to Central America and Mexico, as well as reshoring some production to the U.S.

That said, the majority of brands still rely on Asia for manufacturing at this point. According to the most recent Kearney’s Reshoring Index, which tracks trends in manufacturing returning from 14 low-cost countries and regions in Asia, U.S. companies relied more on manufacturing operations in these countries in 2021 than they did in 2020. This negative reshoring result is a continuation of a two-year trend (paralleling the pandemic) that reversed the increases in reshoring in 2018 and 2019.

Reshoring and nearshoring are obviously not happening at anywhere near the pace of the rush to offshoring that saw the U.S. lose most of its manufacturing jobs over the past three decades.

So, why are so many industry leaders optimistic that the tide is turning? Despite the continuing drop in reshoring, the same Kearney survey revealed a growing positive sentiment for reshoring among CEOs and other executives compared with last year. Indeed, 92 percent of respondents in Kearney’s latest study said they currently feel positive about reshoring.

This change in mindset is further displayed in the sixth edition of McKinsey’s Apparel Chief Purchasing Officer (CPO) Survey. Through this survey, 38 responding CPOs from large and SME international apparel and sportswear brands and retailers paint a picture of significant transformation across their operations, sources and overall way of working.
 

Why Reshore?

When it comes to reasons for considering reshoring/nearshoring, the benefits most cited are:

• Delivery Lead Times – shorten time to market
• Logistics Costs – reduce shipping time and costs
• Supply Chain Simplicity – decrease size and scope of global operations, increase stability
• Closer Relationships – develop better quality, more strategic relationships
• Sustainability – reduce carbon footprint, improve ESG commitment scores
• Intellectual Property Protection – secure the supply chain

The big news here isn’t just that companies are looking for alternative sources. We are seeing a fundamental shift toward sourcing models that are fast, sustainable, digitally connected and resilient.

China’s portion of imports continues to decline, with Bangladesh and Vietnam picking up much of the loss in the past couple of years. But with massive supply chain disruptions coming at a time of strong consumer demand, country stability and flexibility are taking on added importance in the sourcing decision. Factor in a changing cost-margin equation, and we can see why companies that have been contemplating nearshoring for years are now actively looking for options closer to home. The sweeping changes of the past few years are redefining the value proposition for bringing work to the Western Hemisphere.
 

Transformational Journey

Events of recent years have forever changed the trajectory of the fashion and consumer goods industries. Supply chains must morph to become more demand-driven to meet today’s ‘new normal’ requirements. Strategic and collaborative partnerships must replace historically transactional business relationships.

Opportunities for business improvement extend well outside the sourcing footprint. The product development process, for example, offers significant opportunities to simplify assortments by leveraging advanced analytics, increase adoption rates using 3D design technology and better manage raw materials with PLM software.

Of course, productivity and supply chain transparency remain critical supply chain issues. Smooth communications and interactions with suppliers require digital platforms. Manual means of tracking and communicating (spreadsheets and emails) are no longer viable options. The mutually beneficial visibility and control from real-time Shop Floor Control (SFC) solutions streamline production and supply chain management, while fostering improved partner relationships. Suppliers with multi-product flexibility and small batch capacity are also in great demand. The bottom line is, suppliers that are digitized, more agile and more efficient are now winning the day.

Forging strategic partnerships with supply chain partners requires a step change in these industries. The historical practice of focusing exclusively on sourcing at the ‘lowest’ cost is beginning to give way to achieving the ‘best’ cost, shifting the buying priority from ‘cost per unit’ to ‘best net margin’. Selling more products at full price delivers massive improvement to the bottom line. When this is considered, the value of reshoring/nearshoring is redefined.

Building a network of trusted suppliers requires more thoughtful supplier consolidation and selection. Manufacturers that continue to rely on old ways of working are less attractive in this environment. Today’s brands and retailers focus more on, and often actively participate in, their suppliers’ adoption of technology and upskilling of their workforces.
 

More Change Needed

It is abundantly clear that digital supply chains yield speed, flexibility and transparency—and digitization has already come a long way since the onset of the pandemic. But significant obstacles remain. Lack of local raw material availability, production capacity and labor supply are substantial roadblocks to reshoring. But improvements in these and other issues are coming more rapidly than in the past, thanks to increased strategic investments, manufacturer/supplier partnerships, government relations and other industry initiatives.

Of course, such a transformation is not easy and requires bold actions. It’s a race that more closely resembles a marathon than a sprint. But 50 percent of companies surveyed by McKinsey said they have already started their journey to shorten lead times and create more demand-driven supply chains. Many of these decisions were jump-started by the pandemic. Regardless of the catalyst, sourcing processes are clearly going to look significantly different going forward.

Reshoring/nearshoring is just one trend in apparel and consumer goods manufacturing. Looking for additional insights and advice on how brands are updating their supply chain investments and processes? Download your copy of our annual trends report, 2022: Fortune Favors the Bold.