Why Outsourcing is Bad for Business
| OnlineMBA.com Staff
Rising salaries, the cost of transporting goods to the US Market, and concerns regarding the distribution of Intellectual property have made many US companies rethink their outsourcing strategy. As countries like China and India become leaders in manufacturing the costs of their expertise rises diminishing their advantage against US counterparts. Adversely, convoluted and increasingly risky supply chains dependent on inexperienced vendors have turned once stable brands like Boeing, into the perfect “reshoring” (outsourcing) case study. Finally, companies are recognizing that their most important asset is their intellectual property. By shifting their supply chain to countries with little regard for US patent and copyright protections, they've inadvertently opened themselves up to a new threat: turning their vendors into competitors. Watch the video to learn more about why the best companies are ditching outsourcing and instead using an insourcing strategy to their advantage.
More companies are hanging this bright yellow tag on outsourcing and offshoring: "They seemed like good ideas at the time."
According to The Economist, this trend, which began in the 1980s, may finally be winding down. The main reason is that the savings once realized by outsourcing (hiring domestic or foreign contractors) and offshoring (moving work overseas) aren't what they used to be.
China and India were once prime targets for US, European, and multinational corporations looking to save a buck. Both were valued for their low-cost pools of highly skilled workers. The skilled workers are still there but so is intense competition for their services. And as these workers begin to realize their value, they have also become more demanding. The Economist noted, "Wages in India and China have been going up by 10-20% a year for the past decade." And compensation for senior Chinese managers "now either matches or exceeds pay in America and Europe."
Rising salaries plus the cost of transporting goods to the US market have pushed some companies to "reshore" some of their production in America. That includes GE, which last year moved the production of washing machines and other appliances from China to a plant in Kentucky.
Besides higher overseas costs, other factors bolster the argument that the grass isn't always greener in India, China, or Malaysia. A case in point is Apple's relationship with China-based Foxconn. Foxconn's enormous capacity to mass produce the iPhone and other Apple products was an advantage.
But a series of widely publicized reports - most of which focused on Foxconn's abysmal treatment of its workers - outraged many Americans, embarrassed Apple officials, and damaged the company's brand. Chief executive Tim Cook ordered an investigation.
In December Cook announced that Apple would move the production of some Mac computers from China to America. Although Cook declared that the main goal was to create American jobs - it can also be seen as a gesture to placate critics of the Apple-Foxconn relationship.
Then there's Boeing, the poster company for outsourcing gone bad. The aerospace giant's saga of flawed batteries has grounded its 787 Dreamliner fleet until a fix can be found. According to The Seattle Times, the likely culprit is the hands-off structure of this round of outsourcing, where the company contracted with about 50 top-tier suppliers and essentially "outsourced" responsibility.
Boeing is no stranger to outsourcing. On earlier jets, the company outsourced work on landing gear, batteries, and engines for the 777 and 737. Both planes are "renowned for their reliability." But according to The Times, the company gave too much autonomy to their major suppliers and surrendered oversight of subcontractors to the contractors themselves. The result is that there were too many players working on too many pieces with no centralized system of quality control. Quality - and Boeing's reputation - inevitably suffered.
Finally, there's the story of Samsung. For US companies, the rise of the South Korean electronics giant should be a cautionary tale. According to The Economist, South Korean business leaders rarely outsource production and believe "that American and European companies are making a mistake in outsourcing as much manufacturing as they do, because this allows other firms a great deal of insight into their processes."
They should know. It's the blueprint Samsung followed when it was an outsourcing partner for Japanese firms.
The loss of intellectual property that ends up strengthening competition - it's an irony and one more factor for American corporations to consider when deciding whether it's time to bring foreign production home.