Nearshoring's shifting tides

Professor Garland Chow offers insights into the pros and cons of sourcing abroad

June 10, 2011
by Michael Power

WHISTER: After nearly a decade of looking to low-cost countries for sourcing opportunities, attitudes may be changing somewhat as organizations realize the disadvantages of looking too far abroad, said University of British Columbia professor Garland Chow.

During a presentation to PMAC national conference delegates, Chow noted organizations are seeing late deliveries, intellectual property loss, poor quality and other challenges that offset the advantage of lower labour costs abroad. Those at the C-level are re-sourcing manufacturing from off shore, he noted, citing a survey that said 61 percent are considering looking closer to home. As well, more than half of shippers and logistics service providers surveyed are planning for an increase in near shoring, or bringing back some sourcing to the US, Mexico and Canada.

Chow noted several reasons for the shift. For example, labour costs in China have risen 19 percent since 2003, and studies suggest the labour cost advantage in that country will continue to erode into the foreseeable future. China’s labour force continues to become better educated, GCP there is growing and pushing up wages and unions are gaining strength. China’s one-child policy is also contributing to a shrinking labour force, Chow said. The US cost of labour is growing slower, which has decreased the disadvantage. At the same, transportation costs from Asia have increased.

There is absolutely no question the cost of fuel is going to be going up in the long run, he said.

Exchange rates also play a role in driving up the costs of sourcing in China, Chow noted. The US dollar could be worth 40-percent less if the Yuan was allowed to float with the market. The Chinese government is allowing that currency to gain value, which means an increase in the cost of offshoring.

Meanwhile, the relative cost of nearshoring from Mexico is declining, Chow said. The country offered advantages such as cost of labour, quick response time and a similar time zone. Disadvantages do exist to nearshoring from Mexico, he noted, such as the potential for border delays.

Chow recommended organizations perform exercises such as a total landed cost analysis to help prevent problems from occurring, rather than doing things like carrying additional inventory. He plans do a web-based survey to evaluate the total landed costs practices in Canada, as well as develop a total landed cost template.

More on low-cost country sourcing.