For many ecommerce businesses, overseas production and distribution have been part and parcel of their supply chains for years. But following the disruption caused by the pandemic and other world events, many are now considering bringing their supply chains a little closer to home.
The thought rightly being that you’ll get more control, less risk and may even do less damage to the environment in the process.
Henry Guyver, an ecommerce founder, supply chain expert and member of the Juni Business Development team, cautions that “for established businesses that have had the same supply lines open for a while, even mixing up just a tiny piece of that is going to be an absolute shock to their margins.”
The payoff?
“Certainty. What’s more expensive, an expensive product or a product that never shows up?”
We’ll examine whether the payoff is worth it and offer expert advice on localising your supply chain.
Meet the expert
Henry has a long history working in supply chain management. As well as founding a number of ecommerce businesses, he spent three years working in China as a consultant and project manager for Chinese tech companies and factories, handling project lifecycles from concept design, sourcing and sampling, through to quality control, mass production, packaging and distribution.
There’s an understandable perception of risk with overseas suppliers, especially after recent years when the pandemic wreaked havoc up and down global supply chains. The shutdown of overseas factories and ports caused huge delays, backlogs and price surges in shipping and storage. At one point, the cost of shipping a container from China to the UK increased from $1,000 to $14,000. Although the worst of the pandemic has eased off, the world remains volatile. As a result, many ecommerce businesses remain suitably spooked and are considering working with domestic suppliers (known as localising or reshoring) – or even just those a bit closer (nearshoring) – to minimise the risk and give themselves greater visibility and control over their supply chains.
Strong supplier relationships are vital in today’s volatile world. Building those relationships in a recognisable regulatory environment with the potential for quick and straightforward site visits can be much easier. It also makes it easier to act fast if something goes wrong.
Transporting goods within the same country or closer to home is often much cheaper than shipping abroad, especially considering import taxes and fees. Having your goods close by can also make it easier and cheaper to deliver them rapidly in case of stockouts.
Moving your supply chains closer to you can significantly lessen your carbon footprint while also giving you better visibility of working conditions. These aren’t just ethical decisions but smart business ones too. Research from Shopify shows that 44% of customers globally are more likely to buy from a brand with a clear commitment to sustainability.
There’s no simple yes or no answer to this. New businesses that are still in the process of setting up their supply chain have the opportunity to consider these costs in their margins. However, for established businesses, the jump in cost of bringing your entire supply chain closer to home will be sizeable.
The 2023 economic environment may not be too hospitable to those looking to make the switch. High interest rates and inflation are going to drive the prices of production up – especially in the UK and EU. In contrast, overseas shipping and freight costs are returning to pre-pandemic levels, and air cargo prices have dropped significantly too. Pre-pandemic, the average price to move air cargo was about 13 to 15 times higher than sea, but now it’s only three to five times more. All of this drives the price of localising up while also handing a potential competitive advantage to those businesses that keep their supply chains overseas.
The shift is also time-consuming. You need to find suppliers, build relationships, source materials and facilities, and make sure the new products are up to scratch. This can take years.
But it’s not all doom and gloom, and the benefits are clear. One study of UK businesses found that 70% of supply chain managers who made the switch said that domestic suppliers are more reliable.
For established businesses, localisation or nearshoring can still play a vital role as a diversifier in a reworked post-pandemic supply chain. We also understand that localisation isn’t just a financial decision for many businesses. It’s a moral one. On that front, localisation can be a great tool to make your supply chains more sustainable (but there’s more to sustainable supply chains than just cutting out some travel – find out more in our sustainable supply chains blog).
If your decision to localise is about security and avoiding disruption, Henry suggests you “start by thinking about where your vulnerabilities are. Think security first and optimisation second.” If you just go straight for the closest, cheapest option, you risk a lot of expenditure for little gain in reliability. Before making a decision, ask yourself these questions.
Moving your entire supply chain just isn’t feasible for most businesses. Instead, Henry suggests to “start moving pieces over gradually, building relationships as you do, then as you get more confident, you can start moving more.” If your goal is mitigating risk, just try shifting a small section, 10% or so, of your production to a domestic supplier. This means you have a supplier nearby with considerably shorter lead times in case of an emergency.
You need to research and discover whether it’s actually possible to find local replacements for the areas you want to change. One study of UK businesses found that 21% who tried to switch to a domestic supplier could not find one. If that’s the case, you may have to make a compromise on location or adjust your criteria.
Once you’ve confirmed your location, you can start building relationships with local suppliers.
Contact local industry associations. They’ll be able to put you in touch with potential suppliers. Or if you don’t produce products yourself, most wholesale marketplaces, such as Shopify’s Handshake, can be filtered via location.
The costs of working domestically or closer to home may be a shock at first. But by building strong relationships and, suggests Henry, “offering factories a large lifetime value, you can reduce your cost base a lot.”
The last mile makes up around 41% of the whole supply chain’s costs. According to Shopify, many businesses are taking this step into their own hands –also known as micro-fulfilment– and handling fulfilment directly with supplies from a local warehouse. This can also provide potentially faster shipping times for local customers.
Localising supply chains may not be for every ecommerce business. However, in an increasingly volatile world where supply chain diversification is essential to mitigate risk, it can be an important part of that portfolio.
The key for any businesses looking to reshore or nearshore is to fully understand why you’re doing it, the costs involved and the potential benefits. Then it’s all about researching, building relationships and starting small.
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