Onshoring, Offshoring and Nearshoring all are different forms of outsourcing. Outsourcing refers to a company contracting a part of its work to an external company.
Characteristics and Differences of Offshoring, Nearshoring, Onshoring and Outsourcing.
Near – Off – Out – On, first of all we need to keep track. Four terms whose meanings are similar, but explain different situations.
Offshoring is outsourcing work to a far-away foreign country. The operating activities are relocated to another country and the geographical location is irrelevant. The two divisions of Offshoring are Nearshoring((closer countries like Eastern European countries) and Farshoring (distant countries like e.g. countries in Eastern Asia).
However, its success is subject to several requirements – one of which regards communication. Strong internet connections are also particularly important for all peripheral devices in order to allow for effective communication.
Nearshoring is the outsourcing of business processes, especially information technology processes, to companies in a nearby country, often sharing a border with the target country. For a company based in Germany, typical Nearshoring locations include Poland or the Czech Republic. For example, this can affect the time shift, cultural differences and the reachability. In most cases, the main purpose is to reduce personnel costs.
Nearshoring does tend to be more expensive than offshoring and it takes time to find a nearshoring partner that is reliable and understands the specifics of your business processes. These challenges can be overcome by working with a knowledgeable logistics partner. And although there will be fewer language barriers there can still be cultural differences that need to be considered such as the length of work days and holidays.
Outsourcing involves the transfer of operational activities of the value-based suppliers. As a consequence, the company can improve its market position, on both strategic and functional levels.
A business removing a manufacturing department, could move its factory elsewhere or utilize another company’s instead.
Onshoring is the exact opposite of Offshoring, it refers to the relocation of business processes to a lower-cost location inside the national borders. Functions and processes are often located near the customers, this is often the case with big clients, as close proximity may a condition of the working agreement. A typical example could be suppliers of the automotive industry. Working in close proximity (often directly next to the factory premises of their customers) allows a business to provide the quickest possible service, one that is tailored to suit their market needs and therefore supply customers based on the just-in-time principle.
Onshoring improves the cost structure considerably and allows great flexibility within organisations. Furthermore, the coordination and the communication of production are more effective and efficient.