20 December 2022
Nearshoring is moving faster than expected among small businesses
Capterra found that 88% of SMBs are shifting supply chains closer to home.
Photo by Paul Teysen on Unsplash
Capterra found that 88% of SMBs are shifting supply chains closer to home.
After two years of supply chain chaos, small and medium-sized businesses are signaling that they want to keep their suppliers closer. It’s a shift that is happening more quickly than experts expected.
According to new research from software review platform Capterra, 88% of 300 supply chain professionals at small and medium-sized businesses surveyed said they plan to or currently are switching at least some of their suppliers closer to the US in 2023.
This gives credence to the talked-about trend of nearshoring, in which companies move their networks geographically closer. Capterra indicated that the shift was expected to happen over the course of five or more years, but the survey results indicate that it is being sped up.
“The biggest surprise in the research is that nearshoring is happening much faster than predicted at small businesses,” said Olivia Montgomery, associate principal supply chain analyst at Capterra, in a statement.
This comes as companies recalibrate following the supply chain bullwhip of the pandemic that left goods sitting on ships in 2021, only to see multiple seasons arrive at once and cause an inventory glut in 2022.
The bottlenecks have mostly eased, as the latest reports have indicated imports into the US are now falling. The famous line of ships off the major West Coast ports in Los Angeles is also gone, as carriers are now sending more cargo to the East Coast.
But complications remain. Extended COVID lockdowns in China have continued, while trade and political relations with the country at the center of global manufacturing remain tenuous. Meanwhile, the war in Ukraine showed the vulnerability of the global economy to sudden shocks, and inflation this year has driven up transportation costs. Climate change looms over all operations requiring significant energy spend, and that’s especially true of an area that requires long distance travel.
It all points to a shift in how the systems that bring goods to shelves are built.
“The ‘just-in-time’ supply chain worked perfectly and brought about unprecedented global prosperity in the late 20th and early 21st century,” Marne Martin, president of service management for EAM & Global Industries at enterprise software solution provider IFS, told The Current earlier this year. “But now these weak links are exposed and highlighted by geopolitical tensions, climate change, and lingering ripple effects from the pandemic, creating a domino effect that will wreak havoc to the stretched supply chain network.”
To be sure, making a change is a different prospect for small businesses than it is for global corporations. But Capterra’s research points to a number of reasons why nearshoring can be worth it. Proximity and time zone syncing make it easier to manage critical situations, while cultural disparities are likely to be fewer. At the same time, there are financial incentives and trade agreements in place to help businesses, both in bordering countries like Mexico and Canada and 11 other countries that are not as close, such as Australia.
“Macro factors, such as war and climate change, will continue to change the supply chain landscape,” Capterra writes in an anaylst’s note. “But as more and more manufacturing plants open in North and South America, it’s a safe bet to move your supply chain network closer to home sooner rather than later. Map out your current supply chain as far up the chain as possible and then research potential replacement suppliers that are closer to home.”
The opening of a new Market Fulfillment Center highlights Walmart's plan to build a local, automated logistics network.
Walmart may never build a fulfillment operation with a footprint that rivals the sprawling network of Amazon, but it is still in position to build a similar engine of business growth from the bowels of the supply chain. That’s because the world’s largest retailer has a head start in one key area that the ecommerce leader currently lacks.
As executives at Walmart are known to repeat often, 90% of the U.S. population lives within 10 miles of a Walmart store. These brick-and-mortar behemoths provide built-in proximity that can not only provide convenience for consumers who are looking to easily shop in person, but also to the retailer as it seeks to ship digital orders out.
As Walmart emerges from two years of building ecommerce capabilities during the pandemic, it is now taking steps to make its digital business a cornerstone of future growth, and profitability.
Those plans include building new facilities throughout the supply chain, but the retailer is continuing to keep the store at the center of ecommerce.
The latest example arrived this week. Walmart said it is opening a new store-based fulfillment center in its hometown of Bentonville, Arkansas.
From Walmart’s news release:
The Market Fulfillment Center (MFC) is built within the store and is powered by a proprietary storage and retrieval system – named Alphabot. Walmart believes fulfillment through digitization and connecting its store and supply chain assets end to end will transform fulfillment. And along with it, customer satisfaction and associate opportunity.
While this is only Walmart’s second MFC, it points at the logistics model that the retailer is building. Rather than massive standalone fulfillment centers in each locality, Walmart is creating a network that includes stores, distribution centers and a fewer number of strategically located (and increasingly automated) fulfillment centers.
Walmart already has big box stores that resemble large warehouse facilities. Now, it is putting them to work as supply chain nodes. This makes sense, since Walmart’s sizable ecommerce growth is being driven by pickup and delivery. Those two fulfillment options are largely local, and originate at stores. So it's a massive strategic advantage to be located with 10 miles of the bulk of the U.S. population. Additionally, Walmart has a sizable grocery business, so it benefits from being able to colocate items within a store, rather than splitting inventory between in-store and ecommerce.
While combining a store and fulfillment center is a matter of space and real estate, Walmart said that technology is critical to making it all work. The Alphabot system detailed above is a key part of the retailer’s recently-revealed plans to have 65% of stores serviced by automation by 2026.
Alphabot is key to automating fulfillment. (Courtesy photo)
The shift to in-store fulfillment is designed to increase efficiency and help Walmart better serve customers. The company said that MFCs will help Walmart deliver more orders in a day, and increase accuracy. In the end, it will also increase delivery speed. As it continues to add fulfillment centers, the retailer has said that it can reach 95% of the U.S. population with next- or two-day shipping. By adding stores into the mix, it can offer same-day delivery to 80% of the U.S. population.
But for Walmart, the investment in automation is also an opportunity to draw on a new engine of growth. The retailer has said that unit cost averages could improve by 20% as a result of the automation initiatives it is implementing, and store-based fulfillment model.
While the upfront investment is likely significant, it is making use of existing assets. In the end, building now can help improve margins going forward. On the company’s recent earnings call, CFO John David Rainey outlined the company’s thinking on the ability of supply chain to increase returns for investors:
The third building block of the model includes improving returns by scaling proven high-return investments in our supply chain that drive operating leverage and improve incremental margins. We're investing capital to optimize our distribution and fulfillment nodes with automation that we expect will drive a significant improvement in unit economics in the coming years. Our capital structure and cash flow generation are an advantage, and we're allocating capital responsibly with a bias towards increasing returns.
While Walmart’s fulfillment operation may look different than Amazon’s, the retailer appears to have learned the lesson that an investment in infrastructure can transform the supply chain from a cost center into a profit driver.