Flexe Institute Market Watch: Organizations Nearshore to Reduce Costs and Risk

Since the first mass stockouts, businesses have discussed nearshoring. It shortens supply lines and brings the supply chain closer to demand.

Nearshored supply chains face fewer disruptions due to shortened transits and businesses can exert greater control over production. While nearshoring is a part of many’s future strategies, few have completed the process.

However, in 2023 that will change that as shippers make reshoring a reality. Due to pandemics, increased global tensions, technological capabilities and concerns over sustainability, businesses have a renewed nearshoring interest.

Why nearshore now? #

On average, supply chain shocks that last for a month or more occur every 3.7 years. Due to the global nature of today's supply chains, these shocks are now more painful than ever.

According to Deloitte, 62% of manufacturers started reshoring or near-shoring their production capacities. American firms reshored 350,000 jobs in 2022—an increase of 25% from 260,000 in 2021.

Geopolitical factors #

Currently, half of all global manufacturing is located in Asia. Factory shutdowns and logistics delays continue to demonstrate global supply chain risks. The shift to nearshoring could reduce the share of Asia-originating shipments to the US by 20% in 2025 and 40% by 2030.

Approximately 40% of companies are reviewing their supplier bases to be closer to main markets, which is often North America. Additionally, 80% of shippers will rebalance production locations to move toward more regional or domestic product networks.

Labor and technological factors #

The US labor pool drastically shrunk when the pandemic first hit. The Labor Force Participation Rate dropped from 63.4% to 60.2% in 2020 and has not returned to pre-pandemic levels. Over 7M people left the workforce permanently.

That led to significant worker shortages in many sectors. To bridge the divide between supply and demand, many firms looked to technological solutions, which drive nearshoring.

According to a McKinsey report, “the long-term implications of a high reliance on labor are clear: Automation in warehousing is no longer just nice to have but an imperative for sustainable growth.”

Automated solutions accelerate nearshoring efforts by reducing labor barriers to domestic investment and subsequently boost supply chain resilience.

The government will bolster reindustrialization through infrastructure improvement projects and the CHIPS Act.

Environmental factors
#

Environmental and sustainability concerns also drive nearshoring. Reducing supply chain length eliminates transportation mileage.

Transportation and energy account for 75% of greenhouse-gas emissions related to international trade, and long-distance imports can generate 10x more emissions than domestically produced goods.

Nearshoring in low-cost locations in Central and South America allows businesses to find cost-effective solutions that don’t require water or air transportation.

Companies invest in nearshoring #

Intel’s US facility investment and Ford’s manufacturing relocation are a few prominent examples of the trend.

But other companies like SanMar send raw material from the US to Honduras where it is turned into apparel.

The near­shoring strategy has delivered significant time-in-transit reductions, lower transportation costs and reduced apparel tariffs.

Supply chain modes and nodes update #

The most impactful supply chain data points from the past month.

Ocean freight #

• Cargo volumes dropped by 11%

• Rates from China to the West Coast are down 90%

• Xeneta data indicates that 85% of shippers plan to decrease ocean freight spending in 2023

• Only 42% say their volumes will stay “stable/consistent” with 2022

US Ports #

• Shippers shifted imports from the West Coast to the East Coast

• This movement thrusted East Coast ports ahead of the West Coast

• Increased reliance on domestic sourcing and manufacturing will result in lower port volumes, especially on Asia-import heavy West coast ports like LA/LB, Oakland and Seattle

Intermodal
#

• Demand remained strong in 2022 but fell as the year closed

• With US import declines, intermodal demand and pricing is likely to soften in 2023

Freight #

• Volumes dried up significantly even during peak season

• However, rates haven’t fallen to pre-pandemic levels yet

• Large LTL providers announced a general rate increase of nearly 5% to start 2023

Warehousing #

• Demand for warehousing services remains high nationally, but there are significant markets that loosened throughout 2022 and will continue to do so

• Currently, the national industrial vacancy rate sits at 2.9%

Parcel #

• UPS, FedEx and the Postal Service increased their parcel rates to start 2023

Market watch: The logistics industry month-over-month #

Logistics Managers’ Index (LMI) #

Last month, the index ticked up as the warehousing utilization rate grew significantly along with inventory levels. This suggests inventories weren’t fully cleared during the holidays and warehousing capacity shrunk as a result.

Disposable Income vs. Durable Goods Spend #

Durable goods consumption and disposable income are intertwined. This month’s data shows that personal consumption rose, while disposable income fell. Continued consumption predicts the need for logistics services. But continued disposable income decreases will lead to less consumption.

Industrial Real Estate Vacancy Rate #

The lower the rate, the more difficult it is to find warehousing, distribution and fulfillment space. The market currently operates at an all-time low of 2.9%.

US Manufacturing Purchasing Managers’ Index #

The index captures industrial output in the country during a given period. Like durable goods consumption, it provides context for demand forces: The higher the manufacturing index, the more volume enters logistics networks.This month, the index fell. This indicates potential for economic contraction.