Supply chain localisation: Why businesses everywhere are bringing production closer to home

Geopolitical, regulatory, and economic changes are driving organisations everywhere to localise and nearshore their supply chains. We explore why.

For a long time, millions of procurement and supply chain strategies were guided by a single, simple maxim: produce where the price is right, without incurring too much risk. For many organisations, that approach has resulted in highly cost-efficient but extremely distributed and complex supply chains.

But, amidst an unprecedented wave of geopolitical, regulatory, and economic changes, many procurement leaders are considering – or actively pursuing – supply chain localisation and nearshoring. 

According to Deloitte, 62% of manufacturers in the US have started nearshoring or reshoring their production already. Organisations right across the globe are increasingly following suit, with 60% of supply chain executives in Europe stating that they plan to return some of their Asia-based production to their home continent.

When they’re planned and executed well, localisation and nearshoring can deliver many benefits. But to fully understand them – and identify whether localisation is the right move for your business – we need to first understand the reasons why more and more organisations are bringing their supply chains closer to home today.

Shift #1: Geopolitical instability and conflict

The ongoing war between Russia and Ukraine has served as a sobering reminder that major geopolitical instability can strike anywhere, at any time. The disruption it triggered has been a significant driver of supply chain localisation – especially in Europe – as teams take steps to diversify their supplier portfolios and ensure that if a region is disrupted, they can still source essential goods from elsewhere.

Shift #2: New environmental regulations

As governments and regulators take bold moves to reduce carbon emissions, some – such as the European Union – are implementing new legislation that applies carbon levies to imported goods. These regulations will significantly shift the economics of importing, invalidating much of the advantage gained from offshored sourcing strategies.

Shift #3: Government programs and subsidies

In a bid to protect strategically critical industries against international competition and strengthen their capabilities within them, some governments are now offering major subsidies for businesses to produce goods within their countries.

The most notable example is the US government’s “Chips for America” legislation. It provides $52.7bn in subsidies for US semiconductor production, research, and workforce development – helping the country mitigate the impacts of the ongoing international semiconductor shortage.

Shift #4: Changes in the economics of trading with China

Driven by a legacy of reliably providing goods at scale and at a favourable cost, many organisations remain dependent on China as a key supply region. However, over the last decade, the economics of trading with China have shifted significantly – especially for businesses in the US that are now subject to steep tariffs when importing from China.

Today, there are many other countries and regions that offer alternative lower-cost sourcing options. Paired with increased restrictions on what can be imported from China for some countries, this is driving many teams to shift sourcing strategies closer to their base of operations.

Shift #5: Low appetite for risk

The global supply chain disruption experienced between 2019 and 2022 has left many teams with a very low appetite for supply chain risk. Teams are rebuilding and rebalancing their strategies to maximise business continuity and ensure the stable supply of goods if more disruptive crisis events take place. One of the best ways to achieve that is to add new local suppliers to your portfolio, blending offshore and nearshore supply strategies.

Today’s biggest localisation opportunities

The success of localisation and nearshoring strategies will depend on where your organisation is based, and what opportunities are available across the local sourcing landscape.

Here’s a quick snapshot of the broadest opportunities across three key regions today:

Organisations in Europe can avoid impending CBAM levies while still maintaining supply at the right cost by exploring opportunities in Eastern Europe. Growing economies in the region are creating new localised hubs for key industries. For example, Hungary now exports almost 30bn euros worth of electronic machinery every year, and Romania is rapidly becoming a major automotive manufacturing hub.

For those in Asia, China may no longer represent the most economical source of many goods. Growing economies such as Vietnam, India, and SEA nations offer very attractive supply opportunities for a wide range of commodities and raw materials, enabling the creation of highly diverse supply portfolios within a single region.

In North America, subsidies will help those in industries like semiconductors expand their footprint and increase production within the USA. However, for most other organisations, strong supply opportunities can be found in Mexico and LATAM – giving them a chance to bring supply chains for a huge range of categories closer to their home shores.

Three tips to make supply chain localisation work for your business

Plan and execute supply chain localisation well and you can reduce supply chain risks, gain value, and sidestep disruptive and costly change. But, nearshoring and localisation represent a costly change in themselves, so they need to be approached with care.

If you’re interested in exploring supply chain localisation or nearshoring, follow these tips to ensure any steps you take are the right ones:

1) Think long term

Localisation marks a long-term shift in how you procure the goods your organisation depends on. So, you can’t afford to only make decisions that deliver value today – you need to think about how your supply chain will evolve in the future.

Build for stability and predictability, rather than pure cost efficiency, and create a supply chain landscape that you can evolve and improve over time alongside your changing strategic goals.

2) Visualise your supply chain to better understand what you’re localising

Supply chain localisation is a complex undertaking. But if you can visualise your supply chain by creating a digital twin of it, the process becomes much easier.

Digital twins help you break down, experiment with, and rapidly remodel supply chain conditions, so you can detect potential issues early and create optimised local and global supply operations.

3) Leverage timely market and supply chain intelligence

Before you make any localisation decisions, you need a strong understanding of your local supply base, market dynamics, category landscapes, supply chain interdependencies, and a lot more.

Working with a proven market, category, and supply chain intelligence provider can help you gain the insights you need to make the right long-term localisation and nearshoring decisions, while also keeping costs under control in the short term.

Explore localisation and nearshoring opportunities with The Smart Cube

Want to learn more about the unique nearshoring and localisation opportunities available to your business? Talk to us today and discover how we can help you make low-risk, high-reward decisions as you bring your supply chains closer to home.

  • Anirudh Munder

    Anirudh is an Assistant Manager at The Smart Cube, specialising in chemical and industrial goods. Working in strategic consulting and market research for the world’s biggest industrial and chemical companies, Anirudh helps organisations with new market entry, procurement, and expansion strategy formulation. Anirudh holds a BSc from Delhi University and an MBA from IBS Hyderabad.

  • Anirudh Munder

    Anirudh is an Assistant Manager at The Smart Cube, specialising in chemical and industrial goods. Working in strategic consulting and market research for the world’s biggest industrial and chemical companies, Anirudh helps organisations with new market entry, procurement, and expansion strategy formulation. Anirudh holds a BSc from Delhi University and an MBA from IBS Hyderabad.