Manufacturers must balance the potentially lower costs of offshoring against many other variables.
Outsourcing, as a topic, has in rapid succession given way to discussions on offshoring, insourcing, nearshoring, allshoring, onshoring and return sourcing, all bandied about in an attempt to describe trends that have seen companies shifting jobs to outside sources and then overseas, and now back to the United States. However, no matter what direction manufacturing takes, it will continue to be a contentious issue.
Yet it is difficult to argue that outsourcing, and the free-trade policies that make it possible, do not bring benefits. It provides us with a wider range of goods and services at lower costs, and even the most ardent opponent of outsourcing would have difficulty rationalizing the damage that would be done to our economy by eliminating it.
Nonetheless, it is heartening that jobs are returning to our communities. United Airlines recently announced that, in an effort to improve customer service, it will shift 165 jobs from India and Mexico back to the United States, with a majority based in Illinois. After shifting work to the Philippines, India and Mexico over the past two years, Sallie Mae recently returned 2,000 jobs to the U.S., even though it will add $35 million to the beleaguered lender’s costs.
The good news is not just limited to call centers. Daimler AG announced it will be moving some Mercedes production from Germany to Alabama in April. Moreover, there has been a lot of industry discussion on furniture manufacturing ramping up in the U.S. after years of losing jobs to low-cost producers.
Bryce Hayes, head of global sales for Hinduja Global Solutions, the parent company of local contact center provider, Affina, believes it is too soon to tell if these developments signal a larger, sustained trend.
According to Hayes, manufacturers must balance the lower costs of outsourcing jobs overseas, known as offshoring, against other variables. Among these variables are rising transportation costs, government restrictions, language barriers, extended learning curves, substantial time differences, and most importantly, consumer preferences.
“Decisions made on price alone are dangerous, and when it comes to offshoring, it is important that all risks are taken into account. Outsourcing, and subsequently offshoring, is not something to be done blindly,” states Hayes.
“There are certain myths associated with offshoring,” he explains. “There’s this belief that you can fill overseas call centers with college-educated employees who completely understand U.S. consumers and will work for pennies. The reality is much different. There is great talent overseas, but talent comes at a price.” He continues, “Businesses ultimately need to manage client and customer expectations to find the balance between cost and service. We refer to the resulting balance as ‘rightshoring.’”
And then there are some unexpected issues that manufacturers have been battling, such as the recent volatility in consumer demand, making it necessary for companies to carefully analyze how roads, ports, telecommunications, export rules and bureaucracy are going to impact their ability to cater to dips and spikes in consumption. These kinds of issues quickly eat into the cost advantage of using low-cost-country sourcing.
One strategy in dealing with this challenge has been nearshoring, or outsourcing to nearby countries, such as Mexico and Canada. Although these countries may not compete on cost with some far-shore suppliers, their proximity does allow more leeway in meeting American consumer demands. Nearshoring also becomes an option when quality and technology are more important than the lowest possible cost. Not surprisingly, these are the very pressures that are driving manufacturing back to our shores and ones that local companies would benefit from examining.
Jim Foley, director of the Illinois SBDC International Trade Center at Bradley University, believes the lessons to local industry are clear. “The benefits of nearshoring highlight strategies local companies may adopt to compete with overseas suppliers,” he said. “Not only is a local sourcing strategy justified when production runs are limited in terms of quantity, or where short delivery times are critical, but also when a close working relationship between the manufacturer and buyer is required.
“Strengthening this working relationship has been particularly important as buyers push more and more R&D onto their suppliers. And the outcome of the R&D might not just be product innovation, but further cost savings through product redesign. These situations are all drivers that can help keep manufacturing local.”
It is not just the relationship between manufacturer and buyer that benefits from jobs returning. The employment website, Monster.com, cited the need to interact more closely with their employees to benefit from their insight as an important reason for shutting down operations in Asia and returning 300 jobs to the U.S.
Clearly, more than just margins can be lost when offshoring jobs. It is difficult to develop the kind of collaborative relationship with foreign contract workers that employers can foster with a U.S. workforce that they can train, invest in and grow.
Suresh Sethuraghavan, vice president of global marketing management for CGN & Associates, a business performance consulting firm, thinks that the shift back to the U.S. is due to fundamental issues of business strategy. “When companies found that quality and delivery were falling short of expectations, they figured they were losing more than they were saving. Globalization implies that firms will continue to outsource; it could be to a vendor in the same city, across the street, or across the Atlantic, whoever meets the cost, quality and delivery standards,” he says.
However, Sethuraghavan believes that companies are going to be more strategic in the future. He explains, “Offshoring just to get the lowest price will not be good enough anymore. More and more, the solution is going to be a strategic mix of offshoring, nearshoring and insourcing to meet customer needs and be globally competitive.”
Jim Foley concludes, “Really, it is too soon to say what the future of outsourcing is and what form it’s going to take in this fluid environment. But, the Illinois SBDC International Trade Center has the resources to analyze product classifications, tariffs and transportation costs to assist local companies in leveraging the right balance of locations.” iBi
