In June 2021, the United States’ White House released Building resilient supply chains, a report which made mention of a relatively new trend in logistics: friendshoring.

The report explains that "tools including ally and friend-shoring, and stockpiling, along with investments in sustainable domestic production and processing will all be necessary to strengthen resilience". Described as such, friendshoring seems to be an important development for strengthening supply chain resilience, something that is urgently needed in our unstable world.

But what exactly is friendshoring? How is it different from existing models, and why is everyone talking about it? With trends and new terminology continuously changing the logistics industry, it can be hard to stay informed. Moreover, in order to understand friendshoring, it is important to understand all the other models of manufacturing and operations that came before. So, here is an easy rundown.

Decision Making

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 transportation; 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.

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. On the other hand, critics have warned of a lack of control and oversight, security and confidentiality risks, and less opportunities for local job growth.

Offshoring

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.

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.

Dispute Management

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 supply chains 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 compliant environmental and workplace protections for their employees. Onshoring though tends to be more costly than offshoring, as the price of labour, raw materials, and real estate can be more expensive than comparable options overseas.

Right

What is farshoring?

Though they can exist independent of one another, farshoring and outsourcing often go hand in hand. Farshoring is the act of bringing a company function (or multiple) to a country that is far from the companies' 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, 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 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. This means that delays are much 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 will create a bottleneck in production.

Left

What is nearshoring?

As an option for companies looking to offshore, nearshoring is exactly what it sounds like: the opposite of farshoring. Nearshoring is the practice of bringing company functions to a different country than the companies' 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 and real estate can be higher in nearshoring contexts.

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What is friendshoring?

A new subcategory of offshoring is friendshoring. Friendshoring, as opposed to nearshoring and onshoring's focus on geography, is instead primarily defined by political proximity and allyship. Indeed, framed as a new alternative to onshoring, earlier this year the Biden administration explained, “The United States cannot make, mine, or manufacture everything ourselves. We must cooperate with our allies and partners to foster and promote collective supply chain resilience.”

As mentioned earlier, the term friendshoring came to the fore in mid-2021, in a report by the United States White House on supply chain resiliency and was cited later that same month in a speech by American Treasury Secretary, Janet Yellen. The concept however, emerged at the beginning of the COVID-19 outbreak by Bonnie Glick, Deputy Administrator of the United States Agency for International Development, as 'allied-shoring' as a potential solution to the fragility of global supply chains she faced in procuring medications and vaccines.

It is no surprise that the friendshoring concept emerged from frustrations in supply chain delays and a desire for greater resiliency in an unstable globalised economy. In response to disruptions such as the war in Ukraine and growing tensions between the USA and China, Treasury Secretary Janet Yellen hopes that friendshoring will allow the country to grow financially while simultaneously strengthening existing political ties. Yellen explains, "For too long, countries around the world have been overly dependent on risky countries or a single source for critical inputs. Our strategy will also create redundancies in our supply chain to mitigate over-concentration risks. And we are also addressing our reliance on manufacturers whose approaches clash with our human rights values."

Thus, 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. For example, the effects of Russia's geopolitical weaponisation of trade can easily be seen throughout Europe in the availability of gas as a cold winter stretches ahead. Yellen posits that with greater friendshoring such issues will be kept to a minimum, as goods and services will largely be procured from friendly nations aiming to work towards supply chain solutions.

Pros and cons to friendshoring

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

As already illustrated, friendshoring aims to be less affected by geopolitical upheavals and social controversies. At its best, countries 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. Ideally, these partnerships would allow companies to optimise their talent pools in each location; while upskilling the workforce in production-oriented contexts.

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 intentional and strategic, critics say that this growing gulf can lead to more outright hostilities as tensions can grow under increased 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 their economic viability as well.

Additionally, 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

As with all modes of production, each method will vary in success depending on innumerable factors, including but not limited to: the industry, countries involved, organisational hierarchy, functions off- or onshored, languages of operation, and financial viability of operations. That said, it is easy to see the appeal of friendshoring in such a politically tumultuous time, as national economies are struggling to stay afloat with growing inflation rates.

Indeed, it is human nature to turn to those you trust in times of hardship; it is just a relatively new phenomenon to see it taking place in the name of supply chain resiliency. 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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