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High-Tech Firms Take a Closer Look at Nearshoring

March 3, 2014
More high-tech companies look beyond low-cost sourcing strategies to improve customer service, product quality and IP security.

When Chinese computer maker Lenovo opened its first U.S. plant in June 2013, company executives lauded the move as an important step toward serving its North American customers.  

“With the PC manufacturing facility in the U.S., we are able to provide an enhanced customer experience by offering specialized services that our North America customers value,” said Gerry Smith, president of Lenovo Americas, when the company announced the move.

Lenovo is following a trend in which more high-tech firms see value in locating their operations closer to their customer base, says Ken Rankin, director of high-tech marketing for UPS.

“The set-it-and-forget-it mentality of simply chasing the lowest cost labor that we saw in the 1990s and early 2000s is beginning to shift,” Rankin says. “High-tech supply chain managers are taking a broader look at their network design and factoring other critical elements like lead times, intellectual property and product quality into the total supply chain equation.”

The ability to improve service levels is the top reason executives at high-tech firms plan to “nearshore” production, according to the fourth-annual “UPS Change in the (Supply) Chain” survey. Nearshoring refers to the trend of sourcing closer to the point of consumption. For instance, in the U.S. nearshoring may include sourcing domestically or across the border in Mexico.

The survey, conducted by IDC Manufacturing Insights between June and August 2013, revealed that 27% of executives are actively considering nearshoring, a 170% increase from 2010.

Committed to Customer Service

Lenovo’s presence in the U.S. will help the company meet customers' needs by producing special configurations of its computers much quicker and more efficiently than shipping them from overseas, the Wall Street Journal reports.[1] In the IDC survey, 77% of high-tech logistics executives cited improved service levels as the top reason for considering nearshoring.

The trend correlates with a desire for more customer-centric supply chains. These high-tech firms want to differentiate themselves from competitors with a sharper focus on customer service. They see an advantage in responding faster to customer issues, such as warranty claims. The focus on service excellence builds customer loyalty and drives improved sales and profit.

“Moving production and assembly closer to the final demand clearly enables high-tech companies to get products into the hands of their customers more quickly, preventing stock outs and potential lost sales,” Rankin says.

In addition, nearshoring helps high-tech firms align their production facilities with R&D centers and reduce shipping lead times to speed time to market. The high-tech market is fiercely competitive with manufacturers racing to introduce innovative products. Companies that are first to the marketplace gain an advantage over their competitors by immediately satisfying local customer demand.

Nearshoring also reduces exposure to supply chain disruptions that can impact on-time delivery to customers. Earthquakes, floods, tsunamis and other natural disasters have wreaked havoc on supply chains in recent years, particularly those in the technology sector. High-tech executives should evaluate the ability of their suppliers to meet their delivery obligations during a disruptive event. If the risk of an interruption is high, bringing suppliers closer to demand may significantly reduce costly disruptions.

Quality Control and Beyond

Other major benefits of nearshoring include improved control over quality and intellectual property. Fifty-five percent of IDC survey respondents cited quality and IP protection as reasons to nearshore. High-tech firms need close oversight of their operations to ensure they’re meeting quality standards. That becomes more challenging with far-flung supply networks. A more localized supply base means managers can perform more frequent site visits so they can monitor quality and keep tabs on proprietary information.

Nearshoring may also reduce costs for many firms as wages and other business costs increase in traditional low-cost sourcing destinations, such as China. Some of the obvious savings come from lower shipping costs and reduced inventory levels with smaller, more frequent deliveries.

But nearshoring isn’t a panacea for supply chain challenges. In the IDC survey, 73% of high-tech executives said the benefits of low-cost country sourcing still outweigh the risks. These companies are still reaping the cost benefits of producing in China and also see a growing consumer market in the region. That doesn’t mean their supply networks are static. They must still evaluate their supply chains and may need to move closer to demand as costs, infrastructure and suppliers evolve. 

High-tech firms should continually re-examine the total cost of their supply network at least semi-annually. Logistics providers can provide insight into logistics design, re-engineering and supply chain management to help companies evaluate their sourcing options.

[1] Wall Street Journal, “Lenovo Aims Higher in U.S.,” Jan. 10, 2013 (online.wsj.com/news/articles/SB10001424127887324081704578232461464582912)

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