To outsource or not outsource…that is the question

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There is an interesting article in Supply Chain Digest about bringing back offshore work.  Some companies are rethinking their global product strategies. The article mentions the rising costs in China, the threat to intellectual property and the need for more flexibility. In my experience working with US companies, this is not yet a trend. Companies outsource for a number of reasons. For some,

manufacturing is not their core competency. They want to focus on product development, sales and marketing and not manufacturing. Others certainly outsource to reduce cost.  Unless their workforce is willing to take a pay decrease,  like GE employees did in Louisville, KY, companies have more of an advantage by outsourcing. The savings allows U.S. companies to stay afloat and expand in a highly competitive global market. There are many debates about outsourcing currently due to the high unemployment rates in the US. Some will argue that steps need to be put in place to incent companies to keep jobs in the US while many economists argue that outsourcing increases wealth in the economy and more measures need to be put into place to educate and insure unemployed workers when looking for new employment. Outsourcing does become a commitment. There will always be times when the outsourcing company wants to bring work back from their partner. This is especially true when there is still some level of manufacturing within the outsourcing company. They are sensitive to capacity utilization and capital  investment and it is natural to want to maintain a steady rate within their own facility. This however does not represent the mature outsourcing model. Companies that have been outsourcing for years have a valued partnership with their contract manufacturer. (By the way, I hear so many terms for this! Contract Manufacturer, CM, EMS, TPM, CMO !! It would be nice to standardize! ). These companies provide their partner with a steady flow of work, keeping costs down for their CM. Key to the relationship between the outsourcing company (let’s call them the OEM) and the CM is the ‘open book’. This means sharing information with the end goal being a win/win relationship. Information used to be very protected years ago. Now, there is an emergence of trust. I think this is largely due to technology and the software available now to easily share data and collaborate between systems. The high tech OEMs have been outsourcing for a number of years and with good success. The life sciences OEMs are entering this business model a little later but at increasing levels. There is a significant amount of complexity in the life sciences industry with regulatory adherence and inventory expiry but with the right processes and software they can also be very successful. In the end, outsourcing becomes a corporate decision. I don’t believe there is a right or wrong answer as long as the company remains globally competitive.

Discussions

Ron Freiberg
- September 01, 2010 at 10:35am
In the end your conclusion is valid; the OEM must remain globally competitive in everything they do including manufacturing, materials procurement, product design, sales/marketing and logistics. Companies out source either on or off shore for multitudes of reasons some of which are cost but others include core competency, quality, government policies, import/export duties, tariffs, taxes, and subsidies etc. As we have seen, many developing countries are rather dangerous places to conduct business, again for a multitude of reasons but mostly political and economic stability. As these developing countries become more stable, costs rise rather dramatically and in the case of China, total costs are following the trends set by Japan, Taiwan, and South Korea i.e. as they become easier and more stable to do business with costs rise to the point that they are competitive with more developed countries in Europe and North America. To that end the decision needs to be made, do we on shore or find another developing country, albeit keeping risk in mind, with which to off shore. If the risk appears too high with other countries we end up on shoring to keep costs and competition in check.
Lorcan Sheehan
- September 02, 2010 at 5:48am
Hi Carol

You raise a good point in relation to the trust and transparency required in outsource relationships. I would draw the distinction though between off-shoring and outsourcing. While both terms are frequently used the drivers behind these strategies are often very different.

At ModusLink we, like many outsource providers in the value chain, work with our clients to deliver business value through improved design and execution of processes across the value chain. We do this on a global basis and in many cases the outsource proposition involves building a greater understanding of what functions to take back from low cost manufacturing locations to driver greater value (and sometimes lower cost) for our enterprise clients.

Supply chains will continue to evolve as the various input costs - materials, labor, logistics and inventory costs - change and as demand and regulatory environments change. The current increases in labor costs in China referened in the Supply Chain Digest article are combining with a capacity crunch on ex Asia shipping lanes and undertainty around the demand environment in key markets. These factors are unlikely to trigger a move of manufacturing back to the US in the short term but they do support the case to move final configuration closer to end markets. This is critical in the on-shore, off shore and even near shore debate regardless of whether it is done through an outsource fashion or through in house resources.

The outsource community have not helped in creating this distinction. For many years the primary value of many outsource providers was to simply enable a low cost off shore alternative to domestic resources. The challenge for the industry is to move beyond this to the smarter supply chains that industry so desperately needs.

Thanks for raising the issue and i wish you continued success with your blog. Lorcan
Carol McIntosh
- September 02, 2010 at 10:49am
Excellent comments Ron and Lorcan. Lorcan, you make a good point about off-shoring and outsourcing. With the increased focus on postponement strategies, we are also seeing the need for the final configuration to be close to the end market with companies we work with. And to your point, this can still be an outsourced activity. It does introduce a level of complexity that has to be properly managed but I agree; there are opportunities for smarter supply chain design alternatives.

Thanks for your inputs.
Carol

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