Understanding Offshoring, Onshoring, Nearshoring, and Rightshoring in Procurement
Explore the nuances between offshoring and other approaches to procurement and how each one can impact the bottom line, supply chain resilience and overall strategic objectives.
By Hugo Britt | October 12, 2023
If you’re new to the world of procurement, you may have come across various words ending in -shoring: onshoring, offshoring, nearshoring, and rightshoring.
The terms sound similar enough but understanding the nuances of each approach is crucial for any procurement professional. Depending on the situation, each concept could significantly impact a company’s bottom line, affect the supply chain’s resiliency, and influence overall strategic objectives.
Defining the terms
Onshoring, also known as reshoring, refers to the practice of bringing business operations or sourcing back to the home country. This strategy aims to leverage local resources, reduce supply chain risks, and stimulate the domestic economy. Onshoring can involve relocating manufacturing facilities or sourcing products and services locally to support domestic suppliers and Made in America policies.
Offshoring is the opposite of onshoring. It involves the outsourcing of business processes, manufacturing, or sourcing to foreign countries, often to take advantage of lower labor costs, access to specific skills, or other favorable economic factors. Companies may choose offshoring to enhance cost-efficiency or access global markets.
Nearshoring falls somewhere between onshoring and offshoring. It involves outsourcing to geographically proximate countries or regions, typically within the same continent or time zone. For the US, this means Mexico and Canada, both of which are a part of the United States-Mexico-Canada trade agreement (USMCA). The primary motivation for nearshoring is to benefit from cost savings while maintaining cultural and logistical proximity, which can reduce risks and enhance collaboration.
Rightshoring is a strategic approach that focuses on finding the optimal balance between onshoring, offshoring, and nearshoring. Avoiding a one-size-fits-all approach, it aims to identify the “right” location or mix of locations for sourcing based on factors like cost, quality, lead times, and risk mitigation. Rightshoring considers the specific needs and goals of the organization to create a tailored procurement strategy.
Understanding the difference between offshoring, onshoring, nearshoring, and rightshoring is crucual for any procurement professional looking to build a comprehensive sourcing strategy.
Why it's important to know the difference
Different options can have major impacts on cost, risk, compliance and strategic alignment. Here’s a summary of the most important impacts:
One of the key reasons to distinguish between onshoring, offshoring, nearshoring, and rightshoring is cost optimization. Each approach has different cost structures associated with factors such as labor, transportation, tariffs, and exchange rates.
The choice between strategies can significantly impact a company’s supply chain resilience. Procurement teams must evaluate and address potential risks such as geopolitical instability, transportation disruptions, or supply chain vulnerabilities.
Quality and Compliance
Different regions and suppliers may have varying standards of quality and regulatory compliance. Procurement professionals must ensure that the chosen sourcing strategy aligns with their organization’s quality requirements and regulatory obligations.
The choice of sourcing strategy should align with broader business objectives such as market expansion, innovation, sustainability, or brand.
The choice of where you source from can affect supplier relationships. While it’s possible to have a great relationship with an overseas supplier, things can become complicated by language or cultural barriers, time zones, or geopolitics.
Selecting the right approach
The best advice is to assess your unique circumstances and objectives to select the most appropriate approach for each sourcing situation. Here are some key factors to consider:
Product or Service Complexity
Highly specialized products or services may require onshoring or nearshoring to maintain quality and control. Conversely, standardized, low-complexity items may be suitable for offshoring to reduce costs.
Sometimes, there simply isn’t enough supply of a raw material or finished product in the U.S., meaning companies have to look overseas for suppliers (Taiwanese chips are a well-known example).
The target market’s size, location, and growth potential can influence the choice of sourcing strategy. Proximity to customers can be a key consideration, along with consumer willingness to pay more for Made-in-America products.
Supply Chain Resilience
Evaluating supply chain risks, including geopolitical factors, natural disasters, and transportation challenges, is vital in determining the best sourcing approach.
Labor Skills and Availability
Assess the availability of skilled labor in different regions and its impact on production or service quality.
Total Cost of Ownership (TCO):
Consider the complete cost picture, including transportation, inventory holding, and quality control, when comparing sourcing options.
Ultimately, each sourcing situation requires a thoughtful, case-by-case assessment to determine the most suitable approach, which is why “rightshoring” is gaining in popularity.
To develop a comprehensive procurement strategy, download our newest strategic sourcing playbook: