The Great Supply Chain Shift: From Globalization to Localization

As customer preferences, innovation, and market dynamics transform, the supply chain constantly evolves as well. What worked yesterday to get products to consumers won’t necessarily garner the same results today or tomorrow.

After decades of acceleration toward globalization to lower production and labor costs, many large enterprises are now considering the opposite approach: de-globalization, or localization, of production and operations.

There are many drivers behind this 180-degree shift from globalization and toward nearshoring or reshoring. For example, in a global supply chain ecosystem: 

• Bottlenecks and restrictions in one part of the world, such as carrier disruptions, natural disasters, or geopolitical crises, can cause disruptions throughout the entire supply chain.
• Labor costs may be higher from one location to another. This variation can make it more expensive to hire workers in a global supply chain.
• Transportation costs are rising, which can negatively impact pricing and profitability in a global market where goods must travel far.
• U.S. tariffs are often making offshoring a more expensive option.  

Recent U.S. policies and incentives, such as Made in America commitments, Executive Order 14017, and the Inflation Reduction Act, also favor domestic manufacturing, which makes it more attractive. 

Let’s analyze localization, including nearshoring and reshoring, and its advantages, risks, and potential impact. 

Nearshoring vs. Reshoring: Understanding the Differences 

Although they’re different concepts, nearshoring and reshoring both have the same overarching goal: to bring production closer to a company's domestic market. 

Nearshoring is the act of moving production and manufacturing operations to a nearby country that's closer to the manufacturer. 

2024 may be the first time ocean container volume is impacted by nearshoring efforts as more companies bring equipment and materials to new locations. Growth is especially prevalent in North America, says logistics company DHL’s 2024 Global Connectedness Report.

Meanwhile, reshoring is the act of moving production and manufacturing operations back to a manufacturer’s home country or headquarters.

For example, if a large enterprise is headquartered in California and runs production out of China, then reshoring would mean bringing its manufacturing and production efforts out of Asia and back to the United States.

As a sign of reshoring growth, the Reshoring Initiative reported in 2023 that reshoring continues to outperform FDI (foreign direct investment) in terms of jobs announced, with reshoring making up 59% of total jobs announced vs. FDI making up only 41%.

Weighing Benefits and Challenges of Localization

Transitioning from globalization to localization through nearshoring or reshoring can bring its own sets of business advantages and challenges to the table. Here are some important factors to consider.

Benefit: Enhanced Resiliency

Major events like trade or travel restrictions, geopolitical tension, and economic shutdowns may have less of an impact on a localized supply chain. For example, if your company operates in the United States and has production sites in Mexico, then events in places like China or India may not impact you.

When fewer miles exist between a load and its final destination, the opportunity for delays or disruptions goes down. The result can be a more resilient supply chain that can offer shorter lead times and respond faster to market and consumer demands.

Benefit: Reduced Operating Costs

When loads don’t have as far to go, shipping and transportation expenses naturally decrease. Travel distances are shorter, fuel costs are reduced, and fewer drivers are needed. Shorter trips may also allow large companies to take advantage of more cost-effective modes of transportation (ground shipping vs. air freight, for example).

Benefit: Better Business Processes

Because operations all fall within a similar time zone, better collaboration and real-time communication can be easier and faster with localization. This can help facilitate responsiveness and minimize errors due to misunderstandings or missed connections with time-zone differences.

Challenge: Managing High Upfront Expenses

Transitioning from a global to localized supply chain requires time, effort, and resources, including substantial financial investments. These investments may include new property, new equipment and infrastructure, and staff relocation or hiring.

In addition, labor costs may be higher in some countries vs. others. Depending on what a large enterprise pays for labor in a globalized market, those expenses could shrink or grow as production returns closer to home.

Challenge: Finding Qualified Workers

Workforce competition may differ from one country to the next, which means that the skilled workers you require may not be as readily available in a new location. To get new workers up to speed and build a pipeline of capable employees, training investments may be necessary. Long-term labor rates may also be higher depending on where you relocate.

Challenge: Battling Regulations

Certain industries, such as those that involve highly pollutant chemicals in production processes, can make nearshoring or reshoring difficult. Some countries have strict environmental regulations that prohibit certain processes or chemicals from being used. For example, bringing production closer to North America can be challenging due to stringent environmental regulations.

Challenge: Communicating Effectively

Bringing production processes closer to your customers and your company doesn’t always mean neighboring countries will use the same language you do. This can create a communication barrier. For example, nearshoring to Mexico and partnering with people who communicate in a different language can hinder innovation and cooperation.

The Takeaway

Taking a balanced approach that integrates global reach and economies of scale with local resilience can offer large enterprises the best of both worlds. Today, many large companies are doing just that, bringing some (but not all) of their manufacturing back to the United States. To optimize supply chains and manage risks, there’s no single solution for all large enterprises to implement. Finding the right mix can depend on your company, your production efforts, and your business goals.