As Offshore Costs Exact Their Toll, Is "Nearshoring" a Better Way?

In the pursuit of better margins, many retailers have long sourced merchandise from offshore vendors in the traditionally low-cost countries of Asia-Pacific and, increasingly, Eastern Europe.

But direct costs like product design, development, manufacturing, and transportation are on the rise in these regions. Yet there are also numerous indirect costs when dealing with a distant vendor base -- longer lead times, more constrictive demand planning horizons, higher inventory stocking requirements, and excessive air shipment expediting costs.

Although these costs are often an afterthought, they can significantly erode a company's margins and put profits at risk. For retailers of merchandise that requires low costs and a flexible supply chain, "nearshoring" is a critical -- yet often overlooked -- way to improve margins.
Changes in the global landscape are calling retailers' traditional sourcing strategies into question. For certain types of merchandise -- especially categories requiring relatively low manufacturing labor skills and primary raw materials that can be sourced locally at similar costs -- a nearshore vendor network is a fundamental component of a flexible and cost-effective supply chain.

Shorter merchandising lead times

By dramatically reducing the lead time from a factory to a store -- in a category like fashion apparel, for example -- the decision to lock in the final production quantity of a particular assortment by style, color, and size can be postponed by several weeks. The ability to postpone that decision is especially valuable in highly seasonal, short-run assortments where the merchant only gets one chance to place the order and cannot rely on a replenishment order to balance out any initial misallocations. It also allows the merchant to get last-minute reads of the latest fashion trends before locking in the final order.

Faster inventory replenishment

A nearshore strategy also allows companies to quickly replenish their inventory in response to unexpected surges in consumer demand. This advantage is particularly important when considering new merchandise that is set up on basic replenishment over a longer selling period but does not have a reliable sales history or good future demand indicators. The ability to recover from a stock-out situation more rapidly helps recapture the demand curve peaks and leads to increased revenues, as a result. In addition, more frequent replenishment cycles with shorter lead times enable more effective store allocations, generate higher inventory turns, and reduce markdowns that can take a toll on margins.

Lower expedite costs

Whether freight must be expedited because of a delayed product launch or a sudden stock-out, being closer to vendors helps reduce expediting costs. In an era of rising air freight rates, the ability to expedite for less can provide greater flexibility -- critical for merchants who find themselves in a reactive mode midway through an assortment run or during a delayed re-set.

Stronger vendor relationships

No less important, nearshoring allows retailers to send their personnel out to meet with vendors more often and more cost effectively. The result: better oversight of and better relationships with key suppliers -- especially important during the design, material selection, and early manufacturing run stages.To determine the best merchandise sourcing strategy, retailers should weigh the costs and benefits of both near and offshore sources and maintain a mix of merchandise that captures the advantages of each. That mix should clearly include products sourced at the lowest cost possible. But it should also include products sourced for the sake of greater flexibility and control.

A nearshore merchandise sourcing strategy will become increasingly important for retailers, as the economics of product development, raw material sourcing, and labor continue to shift and as more regions in the Western Hemisphere become competitive. When executed properly, this strategy can provide a competitive advantage in the form of inventory optimization, stronger sales, and, most importantly, improved profitability.

Dan Stolarski ([email protected]) is principal at PRTM Management Consultants. 
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