Helping Businesses Diversify Sourcing
Today’s logistics operators can help enable businesses to diversify sourcing and reduce reliance on a single country. With a vast network of suppliers and logistics partners in Latin America, a move to this region can offer firms access to products and services at competitive prices and much shorter transit time.
Though probably impossible to entirely separate, the growing tensions between the U.S. and China have begun a gradual decoupling process of the two economies. With some believing that tensions will boil in the future over issues like Taiwan and a rising China superpower, diversifying your supply chain into South America could be well worth it.
According to The Reshoring Initiative 2020 Data Report, 69% of companies cited supply chain disruptions as the primary reason for reshoring, with Covid-19 further highlighting the vulnerabilities of global supply chains. According to J.P. Morgan’s global 2023 outlook, while Latin America’s “economic growth is poised to slow considerably,” nearshoring and other valuations remain supportive.
Three Hurdles To Overcome
With the potential long-term benefits of nearshoring, the following are some hurdles and how I think businesses can respond to them.
The quality of products made in Latin America often do not always compare to those sourced from overseas. In my experience, the Latin American manufacturing market generally operates with different quality standards than the U.S. market, and China, through decades of servicing the U.S.-market and its increased scale of operations, tends to have a higher standard of consistent quality. When sourcing a nearshore facility, you will want to keep a close eye on the quality and consistency of the products.
The Asian manufacturing infrastructure has been designed and built over the span of decades to service markets outside of Asia, whereas the Latin American manufacturing infrastructure in many instances has only recently begun servicing clients outside of their own local markets. As such, there is more limited capacity available to export to the U.S., so importers must plan in advance to secure factory line time allocations.
Raw materials are the building blocks of manufacturing and, in the past, I have seen Latin American markets struggle to secure sufficient levels of materials to produce their goods. If raw materials need to be imported from the U.S. or Asia, this makes it more difficult to have competitive prices.
In the end, if you find a significant portion of your manufacturing process reliant on offshore, particularly the importation of raw materials, then it may be best to avoid the nearshore option for now as the benefits (security, lead time and price) will be mitigated or erased at the first sign of trouble in the supply chain.
Weighing Long-Term Benefits Versus Short-Term Gains
Here are some areas to weigh when it comes to the potential long-term benefits of nearshoring:
Companies should assess the availability and quality of talent in the target location, including factors such as language proficiency, technical skills and cultural fit.
Local Business Environment
Make sure to also consider the political, economic and regulatory environment of the country or region where you plan to nearshore. Evaluate the risks and opportunities associated with doing business in that particular market.
Most importantly, nearshoring should be part of a broader long-term strategy that takes into account factors such as market growth, competition and customer needs. Use predictive modeling and other tools to help ensure that nearshoring will be a sustainable and beneficial practice.
Encouraging Nearshoring As An Option
My advice as someone who lives and breathes supply chain is to encourage your suppliers and distributors to provide you with pricing and options for a nearshore option in Latin America.
While you may find that it does not make sense to switch right now, thanks to the advantages in price and efficiencies that China has established over the decades, there can be long-term benefits and values to having Latin American options ready if something in the supply chain breaks again or you need to cut out weeks of transit time.
After all, it’s always better to be prepared; if the last three years have taught us anything, it’s to expect the unexpected.