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Nearshoring’s effect on trucking

Nearshoring is shortening the supply chain.
/ Industry News & Trends /

By: Phil Sneed

In recent years, there has been chatter on both sides of the political aisle to bring jobs back to the United States.

Over the years, the idea of offshoring has lost its appeal among some companies. In its place has emerged what is known as nearshoring, which has an impact on the transportation industry and its future prospects.

What is nearshoring?

Nearshoring is, essentially, the opposite of offshoring. Instead of shipping jobs overseas, companies bring them back to the U.S. or relatively close. Companies in all industries typically move jobs to other countries for a variety of reasons, such as cutting costs or finding cheaper labor.

But the moves do not always work as intended. Not only do companies that offshore thousands of jobs face public scrutiny, there are complications that may arise from having operations on a far away continent. For instance, corporations may face difficulties complying with another country's employment laws, or in other cases, there simply may be miscommunication. Shipping and supply costs also pay a role here.

"Offshoring has not aged well."

While the decision to move jobs overseas made sense at one time in the past, offshoring, according to EBN contributor Mike Maris, has not aged all that well. In a late 2015 column for the service, Maris stated that oil markets and fluctuations in global currencies have increased production costs for many firms, while the global supply chain has often been interrupted because of political unrest or environmental disasters.

Companies are also increasingly worried about the security of their intellectual property, that, when combined with a growing list of concerns, has caused U.S. organizations to consider moving jobs back to North America. It must be noted that the jobs don't specifically have to come back to the U.S. in order for it to be considered nearshoring.

Currently, Mexico has emerged as a preferred option for nearshoring operations. According to Maris, products manufactured in Mexico can reach the U.S. in about a week or less typically. If the same product was manufactured in China, it would take nearly one month for a shipment to arrive from the country.

Faster shipping time is not only the reason why Mexico has become an attractive option to many organizations for nearshoring. A large, skilled labor force can be hired to manufacture goods, and companies also find the wage scale favorable.

The North American Free Trade Agreement, originally signed in 1994, introduced trade policies that make this arrangement favorable and not as expensive.

Transportation and nearshoring

With nearshoring, the supply chain is immensely shortened. Now, trucks can make much shorter trips to and from Mexico. Inventory management is another area affected by the switch to nearshoring because now, companies will be able to avoid having too much inventory lying around.

But perhaps one of the biggest factors companies consider nearshoring is to lower transportation costs. Fleet Owner, citing a survey from Alixpartners in August 2015, stated that around 40 percent of North American business executives have given the go-ahead to move manufacturing operations closer.

"With nearshoring, the supply chain is immensely shortened."

The survey found the U.S. as the most popular destination for nearshoring, with Mexico as the second favorite option. Even though certain conditions in Mexico are favorable for nearshoring activities, company executives said they were worried about the unpredictably of security and safety issues in the country.

Overall, about 55 percent of respondents to Alix Partners' study said a decrease in transportation costs is the biggest benefit of nearshoring.

What to expect

While nearshoring does provide a host of key benefits, there are also potential issues facing corporations and trucking companies when going down this route. The biggest concern, especially when drivers have to cross borders, is dealing with customs regulations, the integrity of loads and more. These inspections, which are needed, and other duties by customs could add valuable time to a delivery schedule.

However, Maris did note that border agencies do understand some of the concerns and want to help speed up the process without sacrificing the thoroughness of safety inspections.

If nearshoring was to continue growing, so too would the demand for trucking. According to Fleet Owner, John Larkin, head of transportation capital markets research and managing director at Stifel Capital Markets, told reporters in a conference call that products manufactured in the U.S. could result in eight to 12 freight touches on average, and possibly much more than if freight is delivered to a port.

As more companies look to bring manufacturing and jobs back to the U.S. and other parts of North America, motor carriers can also benefit by being able to shrink the transportation network, which in turn could help improve the work-life balance of drivers.

Nearshoring is slowly becoming a viable option for companies wishing to cut costs. One of the biggest benefits of this move will be the transportation industry.