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    Nearshoring and Friendshoring: What are the Risks and Benefits?

    January 2023

    Nearshoring and Friendshoring: What are the Risks and Benefits?

    Sourcing from neighboring and/or friendly countries can have upsides, but there are also significant risks to manage.

    Nearshoring and friendshoring are in the spotlight, making it onto the agenda of the US-Canada-Mexico North American Leaders’ Summit. They refer to adding strategic suppliers in nearby and/or politically friendly countries, reversing a long-standing supply chain trend of offshoring (sourcing from countries such as China, which after the upheaval of Covid-19 are now perceived to be risky options).

    All things equal, these sourcing ideas seem sensible. It is generally easier to manage suppliers in neighboring time zones, creating an expectation of a more reliable performance. However, things are – surprise, surprise – rarely equal. Developing and qualifying a new strategic supplier entails high costs. The other major concern is less obvious, but no less impactful: increased supply chain risk.

    A new strategic supplier always comes with quality, reliability, and overall performance risk. They have not yet climbed the experience curve. It does not mean they will not be a success, but it does mean a bumpy transition period, requiring active management to avoid a hit to your company’s revenues and reputation.

    During this (likely lengthy) transition period, the old supplier will be indispensable. However, it is a tough job managing a long-time sourcing partner who sees the end of the road, even if they are not being completely replaced, but only downgraded to a second source.

    The outgoing supplier also presents a strategic risk to your company. Will one of your competitors get an important boost by starting a new sourcing relationship with them?

    Finally, a lot of supply chain risk resides in lower tiers – raw material providers, wholesalers, parts brokers, and other types of suppliers to your suppliers. Just because you are switching supplier, you do not become free of your current lower-tier risk. In fact, you are likely to remain dependent on many of the same links of your industry’s value chain. For example, 70% of the world’s cobalt, a key ingredient for lithium-ion batteries, is mined in the Democratic Republic of the Congo (the target of “conflict minerals” efforts). Your new battery provider, just like your old one, is likely to have some Congolese cobalt in their supply chain.

    But these are not meant as arguments against nearshoring. These are imperatives for managing thoughtfully a changing supply chain risk landscape. Not only should you thoroughly understand new suppliers under consideration, but it is also crucial to re-assess threatened existing suppliers. At Moody’s Analytics, we help you with supplier analysis and risk prioritization, but we also – importantly – offer ideas for managing and mitigating your top risks.

    To find out more, get in touch with one of our supply chain experts.