Choosing the right supplier location strategy

In today’s connected global economy, businesses face numerous challenges in optimising their supply chains.

Suppliers are fundamental to success. If they can’t deliver the items you need when you need them, you risk losing business and your customers moving to competitors. Once they do this, they might not come back.

Overhead view of a cargo ship being loaded with shipping containers in a port.
As businesses enhance efficiency, reduce costs, and minimise supply chain disruption, choosing the right supplier location strategy is essential. Nearshoring, friendshoring, multishoring, and reshoring each offer distinct advantages and potential drawbacks.

As businesses continue trying to enhance efficiency, reduce costs, and minimise supply chain disruption, choosing the right supplier location strategy is essential. There are many supplier location options, including nearshoring, friendshoring, multishoring, and reshoring—each offering distinct advantages and potential drawbacks.

Understanding these options allows businesses to make informed decisions to thrive in fluctuating market conditions. This article examines the potential benefits and challenges to help you select the appropriate strategy for your business.

Understanding key supplier location strategies

Nearshoring

Nearshoring involves transferring business operations to a nearby country rather than outsourcing to distant locations. This proximity can offer numerous operational advantages, such as reduced transportation costs and shorter lead times. For businesses aiming to enhance supply chain efficiency, nearshoring presents a compelling alternative to traditional offshoring models. By choosing closer locations, companies can streamline logistics, potentially leading to faster turnaround times and improved customer satisfaction.

Nearshoring also allows companies to leverage regional trade agreements, potentially reducing tariffs and administrative burdens associated with cross-border trade. This can lead to more predictable costs and improved financial forecasting. Depending on their logistical and operational demands, some industries might see more advantages than others.

Nearshoring benefits

Reduced transportation costs: Shorter distances lead to lower shipping costs and faster delivery times. They can also directly impact the bottom line by minimising logistics expenses.
Cultural and time zone alignment: Closer suppliers can lead to fewer cultural barriers and more manageable time differences, improving communication and collaboration. This can lead to enhanced working relationships and a better understanding of market nuances.
Improved supply chain resilience and agility: More responsive supply chains can reduce the risk of disruptions. In times of crisis, having a nearby supplier base can offer a strategic advantage, ensuring continuity of supply. More agile supply chains can adapt swiftly to changes in demand, enhancing their competitive edge in dynamic markets.
Sustainability: Nearshoring can support sustainability efforts by reducing the carbon footprint associated with long-distance transportation.

Piles of different coins
Supplier location strategies
Reduced transport costs for nearshoring

Nearshoring challenges

Limited cost savings: Reduced transportation costs may be offset by potentially higher labour costs in nearby countries.
Capacity and expertise: Nearby countries may lack the capacity or expertise of more established manufacturing hubs. This could incur local training and development costs to achieve the desired quality and productivity levels.
Regulations: Nearshoring may involve different regulatory and compliance hurdles from those in traditional offshoring regions. Companies must weigh these factors carefully, balancing the potential efficiency gains with the associated risks and costs.

Nearshoring examples

Japanese automotive manufacturer Toyota has built manufacturing plants in Thailand, Indonesia, India and Venezuela. As well as manufacturing locations in key markets.
Clothing company Inditex (Zara, Pull and Bear) has moved its manufacturers close to their Spanish headquarters to countries including Portugal, Turkey and Morocco.
Mexico is becoming a key nearshoring location for the US. Ford, Whirlpool and Boeing are three examples.

Multishoring

Multishoring involves distributing supply chain operations across multiple countries. This approach aims to optimise costs, reduce risks, and increase flexibility by leveraging the strengths of different regions. By diversifying supply bases, companies can tap into various markets, benefiting from localised expertise and resources while spreading risk across multiple geographies.

The multishoring approach allows businesses to be more agile, adapting swiftly to changes in demand and market conditions. It can also help mitigate the impact of localised disruptions, ensuring continuity of supply in unpredictable environments. This strategy can be particularly advantageous for global companies seeking to balance cost efficiencies with operational resilience.

Multishoring benefits

Diversification: Spreading operations across various locations reduces the risk of disruptions caused by localised issues, offering a buffer against geopolitical or environmental challenges.
Cost optimisation: Businesses can take advantage of the unique cost benefits of different regions. For example, they can balance labour costs, taxes, and logistics to achieve optimal financial outcomes.
Scalability: Multishoring allows for the flexibility to scale operations quickly in response to market demands, enhancing competitiveness and customer satisfaction.
Larger talent pool: Multishoring can also provide access to a broader talent pool offering diverse skill sets and innovations. This can drive product development and process improvements, further enhancing competitiveness in the global marketplace.

Flags from different countries on flag poles blowing in the wind.
Multishoring can provide access to a broad talent pool offering diverse skills sets.

Multishoring challenges

Complexity: Managing supply chains across multiple countries can be challenging, requiring robust coordination and communication strategies to ensure seamless operations.
Regulatory compliance: Navigating different regulatory environments can be time-consuming and costly, with comprehensive compliance management needed to avoid legal pitfalls.

Technology costs: Implementing the necessary infrastructure and expertise to support a multishoring strategy, such as sophisticated logistics and technology systems, can increase overhead costs.

Multishoring examples

HP is shifting its laptop production to Thailand
Foxconn is moving a portion of its assembly capabilities from China to Vietnam.
Apple is shifting production from China to India and Vietnam.

Reshoring

Reshoring refers to bringing manufacturing and production back to a company’s home country. Reshoring supports local economies, reinforces national supply chains by reducing reliance on foreign suppliers, and improves supply chain resilience. By localising production, companies can enhance control over their operations and respond more swiftly to domestic market demands. They can also align with strategic sustainability and corporate responsibility goals as they seek to minimise their environmental impact and contribute to local communities.

Reshoring benefits

Support for local economies: Reshoring creates jobs and stimulates economic growth in the home country, contributing to community development and national prosperity.
Supply chain control: Companies have greater control over production processes, quality, and intellectual property, enhancing their ability to meet high standards and safeguard innovations.
Reduced supply chain risks: Shorter supply chains are less susceptible to global disruptions, providing stability and predictability.
Enhanced brand reputation: Reshoring can enhance brand image by demonstrating a commitment to domestic production and sustainability. This can resonate well with consumers prioritising local and ethical sourcing, potentially driving brand loyalty and market share.

Reshoring challenges

Higher labour costs: Labour costs in home countries are often higher than in traditional offshoring destinations, potentially impacting profitability and pricing strategies.
Infrastructure and capacity: The home country may lack the necessary infrastructure or capacity to support large-scale manufacturing. This will require investment in facilities and workforce development.
Supply chain network assessment: Companies might need to change their systems and structures to support reshoring. Any operational and financial implications must align with strategic goals and market positioning.

Blue lorry driving on a road at sunset
Reshoring reduces supply chain risks with shorter supply chains that are less susceptible to global disruptions providing stability and predictability.

Reshoring examples

British bus maker Alexander Dennis (ADL) moved manufacturing bus chassis from Hungary and China to the UK.
UK-based automotive manufacturer Albert Jagger reshored production of almost a quarter of a million fastening components from China.
Electric bike manufacturer Volt reshored production from Poland to Milton Keynes due to uncertainties around post-Brexit tariffs.
Apple is bringing some of its computer manufacturing back to the United States.
General Electric moved appliance manufacturing from China and Mexico to Louisville, Kentucky.

Friendshoring

Friendshoring involves relocating supply chain operations to countries with similar values or strong political and economic ties. This strategic choice often aims to mitigate risks associated with geopolitical tensions and trade barriers, providing a more stable environment for business operations.

By aligning supply chain activities with trusted partners, companies can enhance relationships to reduce supply chain disruption. Aligning with like-minded partners can also enhance operational efficiency and brand reputation. This alignment can create a sense of shared purpose and mutual benefit, strengthening the overall business ecosystem.

Friendshoring benefits

Political stability: Partnering with politically stable countries provides a reliable foundation for long-term planning. This can reduce the risk of supply chain disruptions.
Economic ties: Strong economic relationships can lead to favourable trade agreements and reduced tariffs, enhancing competitiveness and market access.
Value alignment: Businesses can align with countries with similar values, enhancing brand reputation and fostering consumer trust.
Easier compliance: Friendshoring can facilitate easier compliance with ethical and environmental standards to align with corporate social responsibility goals. This can be particularly beneficial for global companies positioning themselves as socially conscious and responsible.

Friendshoring challenges

Limited supplier base: Restricting supplier options to specific countries can limit choices and increase dependency on fewer suppliers, potentially impacting supply chain flexibility.
Higher cost potential: Friendshoring might not offer the same cost advantages as traditional offshoring. Ensure you carefully assess the trade-offs between cost and strategic alignment.
Needs quick scaling: A limited pool of suppliers might struggle to meet sudden increases in demand. This could lead to challenges in scaling operations quickly. This might not align with strategic objectives and risk management priorities.

Friendshoring examples

Apple is said to be friendshoring by increasingly moving production from China to India.

Choosing the right supplier location strategy

Selecting the optimal supplier location strategy depends on various factors, including business goals, industry, and market conditions. Ultimately, the decision should be informed by a comprehensive analysis of factors, aligning with the company’s overarching strategic objectives and market positioning.

Here are some considerations to help guide the decision-making process.

Cost factors: Evaluate the total cost of ownership, including labour, transportation, and tariffs, for each potential location. Each strategy’s long-term financial implications and potential savings should also be considered.
Risk management: Assess the geopolitical and economic stability of potential supplier countries. Include the likelihood of disruptions and the ability to mitigate risks through strategic partnerships and diversification.
Supply chain complexity: Consider the complexity of managing supply chains across different regions and the availability of infrastructure and expertise. Ensure the chosen strategy aligns with your operational capabilities and resource availability.
Market proximity: Consider the closeness of suppliers to key markets. What are the potential benefits of faster delivery and reduced logistics costs? Judge how this can enhance customer satisfaction and competitive positioning.
Sustainability goals: Align supplier strategies with sustainability goals, such as reducing carbon emissions and supporting local economies. Consider the broader impact of supply chain decisions on environmental and social outcomes.

In an ever-evolving global marketplace, selecting the right supplier location strategy is crucial for business success. Whether through nearshoring, friendshoring, multishoring, or reshoring, each approach offers unique benefits and challenges. By carefully considering these strategies, businesses can optimise their supply chains, reduce risks, and enhance overall efficiency.

Staying informed and adaptable will be key to maintaining a competitive edge in the market. As global dynamics continue to shift, businesses must remain vigilant and proactive. This will allow you to leverage the most suitable strategies to thrive in a complex and connected world.