Proximity Becomes Paramount

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Proximity Becomes Paramount

In the first decade of this century, changes in the global economic landscape made off-shoring irresistible to many senior managers.  Labor costs in the U.S. were soaring, while millions of Chinese laborers with adequate skills were ready to work — at bargain rates — soon after China joined the World Trade Organization in 2001.  Oil was relatively cheap, so transportation costs were easily offset by the savings in labor costs. Consumers in the developed world were becoming conditioned by Walmart to expect low prices.  All of these factors combined to make off-shoring a smart strategic decision.

By 2008, more than half of U.S. companies were off-shoring some or all of their manufacturing, an increase of 100 percent in just three years.1  Moreover, 60 percent of those firms were planning to move even more production off-shore.

But now, just a few years later, those factors have changed dramatically.

The bottom line is that, aside from low-cost commodity products, off-shoring is no longer the best option for manufacturing many goods today.  Instead, next-shoring (also known as near-shoring) is increasingly the way to win in the 21st century.

Before we get into the specifics, let's take a moment to define what we mean by next-shoring, and distinguish it from related terms:

  • Off-shoring is the outsourcing of production to a foreign country.  The consumers of the goods produced can be located anywhere in the world.  For example, a U.S. company might off-shore the production of flat-screen TVs to China, and then ship the TVs for sale in the U.S. or in its various markets around the globe.
  • Re-shoring is the return of off-shored production back to the company's home country.  Again, the consumers could be located throughout the world.  In our example, the U.S. company could end its agreement with factories in China and build a factory in the U.S. to make TVs, which could then be sold domestically and/or overseas.
  • Next-shoring, by contrast, is the location of the means of production in close proximity to the consumers of the product.  An American TV manufacturer could locate factories in the U.S. to serve its domestic market.  But it could also serve the Chinese market by manufacturing TVs for Chinese consumers in China...

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