Best Practices from Kurt Salmon

Near-sourcing, or producing products closer to where they are ultimately sold, is growing in popularity. As more companies bring production closer to home, they’re putting a new twist on globalization, or in some cases, reversing it altogether. Kurt Salmon retail strategist Vinod Rangarajan discusses this increasingly popular trend and how retailers can make the most of it.

Q: What’s driving the increase in near-sourcing?

A: Several factors, the first being supply chain inflation. The cost of producing products in China has been steadily rising as labor rates increase. So the response of many retailers was to move to other Asian and Southeast Asian nations, like Bangladesh and Thailand. But transportation costs are also rising, spurred by higher oil prices. This drove some U.S.-based retailers to look for locations closer to home, like Central and South America.

Q: But there’s also a customer experience element to near-sourcing, right?

A: Absolutely. That’s the second factor. Near-sourcing (also sometimes called near-shoring) allows a retailer to decrease cycle times, making it easier to constantly refresh merchandise. This keeps customers coming back into the store more often because they’re afraid of missing out on a new product. For example, Zara has had a lot of success using near-sourcing in Europe to supply its stores there, and the constant stream of new products means that consumers visit Zara more than four times as often as other retailers. But Zara is far from the only example anymore. Retailers from Target to The Children’s Place are near-sourcing as well.

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In today’s retail environment, consumers want new products all the time, and retailers have to keep up or risk losing share. Never before has a well-run supply chain been so integral to delivering on the brand promise. And near-shoring also enables retailers to keep less inventory on hand because it can be delivered from the factory more quickly than before. This is a good way to hedge your bets against cautious consumers and economic uncertainty.

Q: So what’s the best way to go about developing a near-sourced supply chain?

A: For most retailers, an entirely near-sourced supply chain is not going to be a reality—yet. Many of the technical capabilities still lie mainly in China and bringing them into Central or South America would not be cost-effective. For now, start with the basics: Near-shore low-complexity items to save money, but keep high-complexity items in China so the quality doesn’t suffer. For example, let’s say I’m a sportswear retailer. I’d near-shore a pair of running shorts, but not a winter jacket.

Q: Is there any chance production will come even closer to home, say, the United States?

A: Although some industries are bringing production stateside, for the most part, what’s left of the retail manufacturing infrastructure here hasn’t been updated since the 1950s or ’60s, so it’s not cost-effective to do so. But it’s not entirely out of the question. Boutique brands have launched with local production, and under the right circumstances, one can imagine a scenario in which that would create significant competitive advantage.