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MapThe methods and supply chains for manufacturing have undergone so many and such tremendous changes in recent years that it can seem hard to even keep up with the state of the art. The latest prediction suggests that rather than locating their facilities in the places that offer the lowest labor costs or greatest land availability, manufacturers need to start thinking in terms of proximity to innovation and demand.

According to the newly introduced concept of next-shoring, rather than moving their manufacturing plants to emerging economies with cheap labor, companies should look for sites where innovation is thriving. As new technologies arise and emerge with increasing speeds, close proximity to their birthplaces can lead to a competitive advantage. For example, as the capacity and effectiveness of robotics continue to increase, predictions indicate that more companies will use them in production lines. For a manufacturing firm to take advantage of such offerings, it likely will need to locate close to advanced robotics suppliers, wherever in the world they might be.

Furthermore, using innovative technologies requires access to a qualified, educated labor pool that understands and can apply the advances. At General Electric, employees use iPads to keep a battery factory running, without ever stepping onto the shop floor. Although 3D printers offer great promise for creating innovative and customized products, companies that offer these services need plenty of staffers who know how to run the complex machines and keep them operational.

The need for close proximity to demand stems from several related concepts. Even as manufacturing gets more technologically sophisticated, the end product still must be delivered to buyers. The challenges of rising energy costs and their related logistics mean that factories closer to their buyers can enjoy a price advantage. It costs less to ship a car within the same country than across an ocean, for example. The growth of consumer demand in emerging markets also has encouraged manufacturers to locate closer to these buyers, to make sure they can get the desired offerings to them, without excessive delays.

Thus, according to the experts from McKinsey & Co., the global consulting firm, “In the world we’re entering, the question won’t be whether to produce in one market for another but how to tailor product strategies for each and how to match local needs with the latest veins of manufacturing know-how and digital expertise.”

Source: Katy George, Sree Ramaswamy, and Lou Rassey, “Next-Shoring: A CEO’s Guide,” McKinsey Quarterly, January 2014, http://www.mckinsey.com/insights