Nearshoring Is More Than Simply Finding Suppliers Closer to Home

Nearshoring is the newest trend in the industry. It  means relocating supply chains to diminish the risks from disruptions that are currently impacting the world. 

The risks are several and they affect different aspects of a business. They can relate to politics, costs, logistics, financial, currency exchange and many more. 

Nearshoring makes sense as the pandemic highlighted the weaknesses from the interconnection of and dependance on a fully globalized supply chain that this model presents. Regionalization is now the answer, and we are seeing the positive impact of that in the North American region.

While many companies are taking the step of relocating their assembly facilities, they are also resourcing their parts or components with suppliers that are in the region. Some suppliers are going even further and relocating their operations to be closer to their customers. At this point,  the relocation of the raw material supply chain is fundamental as several risks are involved in not doing so.

When talking about metallic raw materials for your products (carbon steel, stainless steel, aluminum, copper), depending on the specific line of products, there are many challenges that could differ from one to the other; nevertheless, there are several that are shared.

Here the main challenges that your company could face when bringing metals in from outside your region:

1.- Price fluctuation risks: 

Almost all metals are traded freely on several different markets, including LME, Comex and SMM. While these markets work to provide the price of a specific metal on a daily basis —and there are tools to help with exposure to price fluctuations, such as hedges, options and other more sophisticated g tools — they do not help you to align with the market when lead times for your raw materials are sitting on a boat for up to two months. The more time a metal is in transit and       on your floor, can mean a variation in the valuation of your inventory.

2.- Tariffs:

This is an ever-present risk when buying outside your region. Politics can swing in different directions, depending on economic factors associated with the raw material in question and its impact on the local economy. You can suddenly find that there is a tariff on your product, and this can have a big impact on your cost structure and company profits.

3.- Logistics: 

When moving products over long distances, there are always risks, including incurring delays, increasing costs, risk of an accident and even theft of your products, any of which can put you in a bad position with your customers.

4.- Credit risk: 

Metals are products that are capital intensive. The operation to complete a single acquisition of metals can mean several hundreds of thousands of dollars. While banks and other institutions can support with credit, these tools have a high cost due to the credit insurance required.

5.-Cash flow: 

Many of the operations that occur intercontinentally require payment in advance or having the merchandise paid for before it arrives at your facility, making for a very long cash cycle for your company. With interest rates going up all around the world, borrowing money  to support your cash flow needs for inventory can be expensive. In addition to this, given long lead times, inventory normally will have some coverage, increasing your need for it, meaning you will be putting your working capital toward inventory instead of investments.

6.- Secondary Costs: 

There are several hidden costs when companies are delivering your products   EXW or FOB at the port of destination. If for any reason there is a rejection, given the inconterm, the seller will only cover the costs of the products, but all the transportations, duties, rights, and other costs to have it entered in the country will be absorbed by the buyer.

There are, of course, several barriers to easily  changing your raw metal. These include matters of quality required either by your customer, a specific manufacturing process or simply by the fact that the product was designed outside the region where you are intending to sell your products. 

Normally when the designs are done outside the region, you will find differences in the norms of metals that will be used. When manufacturing metals in Asia, you could find standards such as JIS. In North America, it would be ASTM, and EN or DIN for Europe. While the alloys are similar, there are slight variations in chemical composition and definition of tempers in order to achieve specific mechanical properties.

This can normally be solved by metallurgical experts in the region and often,  the products can be replaced with  a slightly different alloy, so my suggestion is do not be discouraged and be open to trying the metals that are manufactured in the region that you are intending to serve.

In conclusion, nearshoring is not just about bringing the assembly closer to the final market where the product will be consumed. It requires a  change in the entire supply chain to guarantee the availability of products. 

This strategy will certainly benefit your company and your customers. Inthe last two years in the metal world, success has meant availability and reliability.