The pandemic caused huge disruption to supply chains around the world, and it has been closely followed by other economic shocks. Uncertainty still hangs over supply chains, driven by rising fuel prices, soaring shipping costs and rolling COVID-19 lockdowns globally. In response, more and more companies are embracing ‘nearshoring’, which involves producing items closer to home, and is a reversal of the decades-long trend of ‘offshoring’ manufacturing, often halfway across the world. This also links to ‘reshoring,’ where companies relocate production to their own nation.
Moving from ‘just in time’ to a ‘just in case’ model
The timing of these trends coincides with new pressures that businesses face. This has been accompanied by a shift away from ‘just in time’ supply chains, which were stretched and broken during the chaos of the pandemic. The business model relies on keeping inventories of stock extremely small and ordering when demand is high, via short-term contracts, to cut costs. For many years, it was the status quo of supply-side work.
Yet in 2022, amid continuing disruptions prompted by the pandemic, companies are shifting towards a ‘just in case’ approach with production located nearer to home, and companies holding more stock in case of further disruption. It marks a reversal of a long-standing trend where companies focused on cutting costs and reducing friction at the expense of flexibility. In this way, businesses are focusing on building resilience and responsiveness in the supply chain.
Faced with these pressures, British companies are becoming increasingly selective about suppliers, and opting for ones closer to home rather than ‘nearshoring’ everything in one go. The move permeated across the UK economy; three-quarters of British manufacturers increased the number of British suppliers they use between 2020 and 2022.
Cutting shipping costs
For manufacturers beset by delays in components and materials caused by the pandemic, and the economic shocks which have followed it, this trend is not going away. ‘Nearshoring’ also offers companies a chance to rely less on shipping goods by sea. The cost of shipping a 40-foot container to Europe from China has swung widely, leaping from around US$1,500 in 2021 to up to US$15,000 in January, according to Xeneta. Estimates show by 2025, between 16 and 26% of global production will move geographies thanks to reshoring or nearshoring.
How British companies are responding
Supply chain management firm TwoEightOne offers a good example. Its Chief Executive Bharat Ahir has seen the supply chain disruption leading to ‘exponential growth’ in products being produced in Turkey for the pan-European market. The benefits of ‘nearshoring’ are also being realised in the reduction of fuel consumption and carbon emissions—with far less shipping involved—when goods can reach markets faster and often by railroad.
The future of nearshoring
Going forward, companies are likely to increase their use of both ‘nearshoring’ and ‘reshoring’. The trend for ‘just in time’ supply chains and a constant focus on costs is altering in favour of a more holistic view which values resilience. If shipping and diesel prices rise further, reshoring may become even more attractive to British companies. In the coming months and years, we’ll see companies become more adept at both ‘nearshoring’ and ‘reshoring’ – producing more shock-proof supply chains around the world.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Bart Coppelmans is Director Industry Solutions, Global Head of Supply Chain and Logistics at HERE Technologies
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