American businesses may have miscalculated costs and benefits when they joined the outsourcing bandwagon. With the tide rolling back, what direction should you take?
For many years, companies outsourced as a natural course of activity. Unfortunately, often times, they didn’t even perform an analysis of the total benefit; instead, everyone else was outsourcing and so CEOs, Board of Directors and the like expected it to occur. Now, I host executive discussions and the topic arises in reverse. Let’s bring back manufacturing to the U.S (insourcing/ reshoring) or if it has a high labor content that cannot be automated, consider near-sourcing / nearshoring (locating manufacturing close to the customer in a lower cost, friendly country such as Mexico). Even Walmart is promoting their investment into U.S. manufacturing….Of course, I advocate looking at the facts. It is not so easy to move factories, equipment and people all around. Take stock of what you are doing and consider the following factors:
- Customer requirements – Many of the reasons folks are considering in-sourcing or near-sourcing is because customer requirements were missed in the initial assessment. How quickly must you respond? With R&D? Customer deliveries? Answers? Is your process set up to succeed?
- Total cost – I doubt anyone who outsourced thought it would become a cost detriment to do so; however, in many cases, it has! Consider ALL costs – transportation, IP, inventory carrying cost, rising wages etc. We have gotten to the point where the total cost for value-add products is close to equal.
- Cost driver – Consider the costs that matter in your business. Don’t bother even thinking about in-sourcing if you produce a small, light-weight commodity product with a high labor component. Of course it will make sense to produce somewhere else. With that said, which country could change as labor and other costs change. On the other hand, if your product is value-add, bulky, heavy and has stringent customer expectations (across the world), I imagine you wonder why you outsourced in the first place.
- Strategic – What differentiates you from the competition? Your product? Your service? Your R&D? Keep what is strategic and core to your business within your control.
- Options – Go back to the beginning. Why are you even considering this topic? What do you want to accomplish? Reduce cost? Get rid of a non-core process? Are there other ways to achieve that same goal? Shouldn’t all options be considered?