Offshoring, Nearshoring, Onshoring & Outsourcing
Characteristics and Differences
Near – Off – Out – On, first of all we need to keep track. Four terms whose meanings are similar, but explain different situations. Offshoring, Nearshoring, Onshoring and Outsourcing all point to the internal activities of a company and whether or not they will be performed internally, externally or both.
With Offshoring the operating activities are relocated to another country and the geographical location is irrelevant. Offshoring can be divided into two subdivisions, namely Nearshoring (closer countries like Eastern European countries) and Farshoring (distant countries like e.g. countries in Eastern Asia).
Offshoring is often employed to reduce the personnel costs of a company. 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. If IT companies are linguistically and technically focused on highly qualified employees abroad, they usually choose Nearshoring as an alternative .
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. Therefore, it is the opposite of Farshoring and can be seen as a special form of Offshoring. 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.
Outsourcing involves the transfer of operational activities of the value-based suppliers. The aim is to shorten the supply chain and a reduction in services supplied internally within the company can be achieved.
Outsourcing is usually operated with the aim of saving costs. Especially development, production and fixed costs can be significantly reduced. The Company itself is more focused in strengthening its creativity, this will allow the business to minimise additional costs and to reinvest its savings. 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 utilise another company’s instead. This method is also often employed in the service sector.
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.