Gary Castelle, president of specialized apparel company Magnum Plastics in Greenwood Lake, N.Y., used to buy shipping boxes from a major national supplier in Pennsylvania to ship his wares to customers, but he quickly became dissatisfied with the arrangement. The bulky cardboard boxes were pricey to ship and were sometimes damaged in transit. What's more, the supplier's customer service wasn't the greatest.
In late 2011, Castelle started searching for a better option closer to home, and sure enough he located a small vendor with a better price right in his own town. Now, instead of waiting for a delivery, he loads his dog into his truck and makes a 40-minute trip to Dauson Container in Franklin, N.J., which saves him about $100 on shipping costs each time. The switch has also resulted in more business.
"[Dauson] hooked me up with several new customers," Castelle says. "The national firm never sent a customer my way."
Switching to closer vendors from those located farther away is a business strategy known as near-sourcing, and it's a growing trend, says Harry Moser, president of the Reshoring Initiative in Killdeer, Ill., an organization that helps manufacturers find U.S. factories for their goods. While outsourcing to far-off countries with low-cost labor remains strong, some companies are rethinking their strategies due to global political unrest, rising fuel costs, growing demand for quick delivery times and wage inflation in many developing countries. For instance, Moser says the cost of manufacturing in China is expected to reach U.S. levels by 2015 due to that nation's wage growth and escalating fuel costs.
The tide may be beginning to turn toward local production, says Moser, which offers the added benefit of recapturing U.S. jobs. Many major corporations have already jumped on the near-sourcing bandwagon. Caterpillar, Apple, Ford and GM all recently announced they will make more goods in the U.S.
Near-sourcing expert David Pyke, dean of the School of Business Administration at the University of San Diego, recommends taking the following steps to determine if near-sourcing makes sense for your business:
1. Calculate the costs associated with switching.
Research the rates of your local vendors. If prices are higher, consider the other factors that may make it worth paying a bit more. Bringing goods from China or other far-off lands incurs a range of costs including fuel and shipping duties as goods cross borders. Keeping vendors in the U.S., or even in closer countries such as Mexico, can reap a substantial savings that may offset higher raw materials or goods prices. The Reshoring Initiative offers a cost estimator tool to help you make sense of it.
2. Analyze your delivery needs.
If customers need quick turnaround on product delivery, a closer vendor may be more efficient, translating into more satisfied customers and increased sales.
3. Factor in the potential risks of using overseas vendors.
If your product could be easily knocked off, keeping it close to home may be a wise move. China is notorious for lax copyright enforcement and intellectual-property theft.
4. Consider the pace of change at your company.
How often does your company redesign its products or introduce new ones? The cost of translating documents and working across long distances may be prohibitive if you have a lot of change on the horizon.
5. Study your competition.
If price competition is stiff and margins narrow, it may make sense to keep at least some production in overseas factories to maintain a price advantage.
Near-sourcing also offers environmental benefits, since using closer vendors cuts shipping distances. Interestingly, "green" motives are rarely the primary reason companies near-source, says Moser. A study conducted by his organization last year found that wage or currency changes, manufacturing quality, and delivery problems were the top reasons companies switched.
To find nearby vendors, online resources ThomasNet and Connectory provide a range of vendors and regions to choose from. Local government and business organizations may also be able to help. For instance, the San Diego East County Economic Development Council holds regular vendor-matchmaking sessions to help local businesses meet local vendors.
A simple Google search can work well, too. Josh Neblett, chief executive of online home-goods retailer GreenCupboards in Concord, Mass., recently conducted internet research to find a supplier closer to his customer base. He found one in Kentucky that fit the bill and switched from his previous supplier in California. The move saves him about $2 on shipping costs for every $20 twin pack of shampoo and conditioner he sends to customers.
"Ecommerce retail is not a sexy margin business," Neblett says. "Every single [percentage] point of margin really does count."
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.