Friendshoring: Definition, Benefits, and Key Characteristics

Sarah Edwards July 12, 2023

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For decades, global supply chains have been the backbone of key manufacturing processes for Western companies. Companies throughout Western Europe and the United States have kept production costs down, gained market advantages over their competitors, and maximized revenue as a result of globalization.

However, recent supply chain disruptions stemming from the global pandemic and Russia’s invasion of Ukraine have prompted many Western companies to reevaluate their supply chain management strategies.

Specifically, hundreds of businesses have adopted a new practice known as friendshoring, which involves bringing key manufacturing processes to nations perceived as economically and politically “low-risk.”

What Is Friendshoring?

In supply chain management, friendshoring is the process of moving supply chains away from nations considered economically volatile or politically unsafe to countries perceived as “low-risk.” By engaging in friendshoring, businesses can avoid falling prey to the export controls exercised by unfriendly countries.

For instance, a country and its allies may implement numerous sanctions against a nation that has invaded another country. As a result, it may rely on friendshoring to avoid being impacted by any retaliatory export controls.

Friendshoring promotes supply chain resilience, especially amid ongoing economic and political turmoil. However, many experts are concerned that this new practice will fuel the continued deglobalization and geopolitical fragmentation of the world’s economy.

Key Characteristics of Friendshoring

When engaging in friendshoring, manufacturers and suppliers move away from relying on global supply chains and instead focus on forming their own regional partnerships with entities that exhibit shared values.

Through friendshoring, global brands can still expand production facilities and source key raw materials. However, they mitigate the risk of a significant supply chain disruption by working with companies located in “friendly” nations.

Whereas traditional global partnerships focus solely on production costs and supply chain efficiency, friendshoring prioritizes long-term partnerships. To nurture these trust-based relationships, supply chain partners engage in collaborative decision-making and strive to provide mutual benefits to one another.

5 Benefits of Friendshoring

There are numerous benefits associated with friendshoring, including:

1. Enhanced Collaboration and Knowledge Sharing

Trust-based friendshoring relationships prioritize mutually beneficial agreements. When both parties proactively work to help their partner succeed, they are more likely to share information and collaborate.

2. Improved Communication and Responsiveness

Typically, friendshoring partners are geographically close to one another. As such, they do not contend with as many communication barriers, such as cultural differences or time zone disparities. The end result is improved communication and better responsiveness by both parties.

3. Cost Optimization Through Shared Resources

Friendsharing partners will often share or pool resources, such as transportation equipment, key raw materials, and more. This results in significant cost savings for both parties.

4. Increased Flexibility

Friendshoring reduces the risk of supply chain disruptions significantly due to economic or political turmoil. This new supply chain management strategy also promotes better logistical flexibility and agility.

5. The Potential for Innovation and Improvement

When two successful brands pool their resources and share information, there is a potential for innovation and process improvement. The two parties can leverage their combined expertise and resources to make meaningful advancements in efficiency, optimize products, and deliver a better experience for end users.

Building Trust and Relationships in Friendshoring

Ground Picture / Shutterstock.com

Friendshoring relationships cannot succeed unless both parties trust one another. In order to build trust with their new partners, businesses should prioritize the following:

Open Communication

Communicating openly and clearly will set the stage for a long-term, mutually beneficial relationship. From the outset, both parties must be clear about their goals, needs, expectations, and values. Only then will the businesses grow to trust one another.

Transparency

Additionally, each party must be transparent about what they can and cannot bring to the partnership. Setting reasonable expectations and conducting business with integrity will demonstrate that an organization is trustworthy and reliable.

Conflict Resolution

In any partnership, conflicts will inevitably arise, especially in the complex and high-stakes world of logistics. While friendshoring partners cannot prevent all conflicts, they can control how they respond to them. To nurture trust and build relationships, partners should strive to find a mutually beneficial solution to any conflict.

Implementing Friendshoring Strategies

When building a friendshoring strategy, organizations must:

Engage in strategic partner selection
Establish collaboration frameworks and joint planning processes
Define performance metrics and key performance indicators (KPIs).

Even with the right partners, processes, and KPIs in place, building a successful friendshoring relationship is a challenge. Therefore, both parties must be committed to continuous evaluation and improvement to optimize the partnership.

Case Studies: Successful Friendshoring Examples

While there are many industry-specific cases of successful friendshoring, perhaps the best example is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Under this pact, Australia, Brunei, Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam signed a free trade agreement. The expansive agreement establishes best practices covering virtually every sector and aspect of trade between member nations.

As part of the agreement, member nations committed to facilitating trade and reducing trade barriers between private businesses within each country. Simply put, they encouraged manufacturers, suppliers, and retailers to engage in friendshoring with member nations.

While the CPTPP was a huge win for friendshoring proponents, it is not without its drawbacks. Of the many lessons learned from the CPTPP, one of the most notable is that cultural differences between friendshoring nations have the potential to impede the growth of trade networks.

Challenges and Risks of Friendshoring

The World Trade Organization estimates that the widespread adoption of friendshoring, and the deglobalization that will ensue, will decrease global gross domestic product by around 5%. That is not the only concern associated with friendshoring. Other potential issues include:

Dependency Risks: When one entity becomes overly dependent upon a few key partners, its supply chain becomes less resilient.
Cultural Differences: Cultural differences can hinder the creation of friendshoring partnerships, especially when two groups lack shared values or beliefs.
Information Security: When friendshoring partners collaborate and share trade information, they expose one another and themselves to increased cybersecurity risks.

Despite these concerns, friendshoring will likely continue to become a mainstay of the modern global supply chain.

Friendshoring in the Future of Global Supply Chains

While friendshoring has its detractors, this new technique can also play a key role in cultivating resilience amid geopolitical turmoil and sustainability for supply chains, especially when it is paired with the latest technological advancements. Forward-thinking businesses can leverage innovative technologies and friendshoring principles to form collaborative networks and scale these partnerships across the global economy.