Logistics sourcing explained

31 January 2024

With trends and new terminology continuously changing the logistics and supply chain management industries, it can be hard to stay informed. Read on to learn about different modes of sourcing, production, and operations; and explore some of the positives and negatives implications that each decision can have on your supply chain.

What is outsourcing?

Outsourcing is a common business practice that came to the fore in the 1980s, when companies found they could maximise profits by eliminating certain functions from their own company. When companies outsource, they hire outside providers to perform services or create goods that traditionally were handled in-house by the company's own employees. Often in the realms of information technology, production, or logistics; outsourcing can allow the parent company to invest energy, funds, and company talent in the places where they are most effective, such as strategy and growth. Outsourcing on its own does not refer to any geographical or cultural contextual changes, but rather just the reallocation of business functions.

Pros and cons to outsourcing

Admirers of outsourcing have cited several benefits for the practice, including lower labour costs, improved focus on core business activities, and increased efficiency; all of which have the possibility of leading to higher profits for the company. In terms of outsourcing logistics, warehousing, and transportation: companies can partner with providers that have greater expertise so that they can focus instead on core business functions. On the other hand, critics have warned of a lack of control and oversight, security and confidentiality risks, and decreased opportunities for local job growth.

What is offshoring?

Not to be confused with outsourcing, offshoring refers primarily to the practice of moving business activities from one country to another. Offshoring can be combined with outsourcing, meaning that a company has relocated a practice to a different company in a different country, but the terms are not mutually inclusive. Thus, companies may choose to offshore business practices, but retain such operations within the company itself, having the function completed by their own employees and within a new, offshore branch of the company. Offshoring can be divided into traditionally two, now three, different subdivisions: nearshoring; farshoring; and friendshoring. More on those later.

Pros and cons to offshoring

Some of the benefits of offshoring overlap those of outsourcing, such as lower costs for labour and cost savings in operations. Additionally, offshoring allows companies to draw from a larger labour pool and can provide service around the clock, as operations can now take place in multiple time zones. Some of the drawbacks of offshoring though can be greater complexity with internal communications, with new time zones and languages in the mix, as well as differing social and cultural norms. Additionally, quality control can be a potential hurdle for companies offshoring a portion of their business.

What is onshoring?

More recently companies have chosen to engage in onshoring. This is the practice of bringing a business function from a different country, back to the home country of the company in question. A product of recent years, onshoring has gained traction as a way of taking back control over all or more aspects of a company’s supply chain, as our globalised economy has become more turbulent.

Pros and cons to onshoring

Onshoring allows companies to have greater oversight and control over the quality of their products and services. Additionally, socially-minded companies have opted for onshoring in recent years in order to bring more jobs to their local communities and to ensure oversight over compliant environmental and workplace protections for their employees. Some of the downsides of onshoring is that it tends to be more costly than offshoring: as the price of labour, raw materials, and real estate can be more expensive in the business’ home country than comparable options overseas.

What is farshoring?

Although they can exist independently of one another, arshoring and outsourcing often go hand in hand. Farshoring is the act of bringing a company function (or multiple) to a country that is geographically and culturally distant from the company's host country. For example, a company bringing their information technology services from Greece to India, or from Canada to Chile, would be farshoring. Additionally, the procurement of raw materials for manufacturing would be referred to as farsourcing.

Pros and cons to farshoring

As a subsection of offshoring, many of the pros and cons of farshoring remain the same. However, issues such as differences in communication, language, and cultural norms can be even more pronounced for companies participating in farshoring. Additionally, when it comes to farshoring production or the farsourcing of materials, there is a far greater possibility of supply chain disruption as there is a greater distance for these goods to have to travel. Unfortunately, this means that delays are more likely as unpredictable weather, social or political upheavals at the location of the raw materials; or even port, rail, or road congestion could mean that the very genesis of a supply chain could create a bottleneck in production.

What is nearshoring?

Companies that are looking to offshore manufacturing or business functions, but are concerned about the negative aspects of farshoring, might be interested in exploring nearshoring. Nearshoring is the practice of bringing company functions to a different country than the company's home country, but to a country that is geographically proximal. Thus, bringing production from the United States to Mexico, or from Germany to Spain would be an example of nearshoring. Sometimes nearshoring is referred to as nearsourcing, especially in reference to the procurement of raw materials.

Pros and cons of nearshoring

Nearshoring has been continuously cited as a standout option for increased resiliency in an increasingly unstable world. While farshoring and farsourcing are more vulnerable to delays and disruptions, having raw materials or business functions nearby allows companies to have greater control over their goods and services. Put simply, with less geographical distance to cover, there is greater opportunity for supply chain resilience. Additionally, some of the communications issues faced when farshoring are eased with a nearshoring model. For example, with nearshoring, companies are often in the same time zones and share similar cultural norms as their providers. Conversely, costs of labour, materials, and real estate can be higher in nearshoring contexts.

What is friendshoring?

A new subcategory of offshoring is friendshoring, which is about political proximity and allyship, rather than geography. The formal concept of friendshoring emerged in 2022 from frustrations in supply chain delays and a desire for greater resilience in an unstable globalised economy. Friendshoring has been introduced as an opportunity to continue to engage in offshoring while avoiding potential geopolitical controversy, diversifying supply chains, and reducing reliance on non-allied countries.

Pros and cons to friendshoring

While it is likely that a complete picture of the positives and negatives of friendshoring will only come to light in the coming years, it is possible to make several assumptions at the outset.

Positively, friendshoring aims to be less affected by geopolitical upheavals and social controversies. At its best, countries participating in friendshoring will be able to 'put their money where their mouth is', and partner with like-minded countries to adhere to the same environmental, political, and social regulations for continued mutual growth.

Conversely, while friendshoring is positioned as a two-fold success, partnering with allied countries does further politically, socially, and economically alienate non-allied countries. Though this approach is strategic, critics say that this growing gulf can lead to more outright hostilities as tensions increase under financial isolation. Additionally, some critics of friendshoring posit that while economic entanglement with non-allied countries can be messy, they also help to keep peace as cooperation is vital to mutual economic viability.

Lastly, critics of friendshoring are quick to bring up the potential for rising costs in the short term and decreased growth in the long term. Though these claims are not yet possible to prove or disprove, moving production sites does tend to create immediate supply chain disruptions, which will hopefully dissipate quickly and ultimately result in greater resiliency.

Supply chain management for resilience

Each of the methods described above will vary in success depending on numerous factors, such as the industry of the company, the countries involved, organisational hierarchy, functions off- or on-shored, languages of operation, financial viability of operations, etc. It is interesting to note however, that counter to the enthusiastic globalisation of decades past, the more recent trends of onshoring, nearshoring, and friendshoring aim to find supply chain solutions in one's own geographical or political backyard.

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