By Kevin Meyer
Over the past few months we've told you many stories of companies returning to North America as they realize that the reality of offshore manufacturing doesn't exactly jive with what traditional financial statements predicted. There's more to manufacturing than so-called "cheap" labor.
Well now we have a similar phenomenon happening as companies, often those that also recently re-shored some operations, are recognizing the value of a bit more vertical integration.
In a shift, more companies deciding to make, not buy. Many manufacturers are reversing the decades-old outsourcing trend, preferring to build more parts in-house.
Arctic Cat joins a growing number of manufacturers — from General Motors to
Oracle — rediscovering the advantages of vertical integration,
controlling more steps in the process of sourcing, making and
distributing their products. It's a shift away from the outsourcing
trend that took off in the 1980s. In 2008, more than half of U.S.
companies had a strategy that included outsourcing functions overseas,
according to Duke University's Offshoring Research Network, which began
studying offshoring trends in 2004.
There is a place for some outsourcing, but in the frenzy of the past
decade many companies have gone a bit far and outsourced key processes –
thereby losing some control over knowledge and the value-creation
No one can say now exactly how much vertical integration currently is
going on. "I hear a lot about it," said Myles Shaver, a professor of
strategic management at the University of Minnesota. "The pendulum swung
too far [toward outsourcing], and now it's swinging back."
"It was a goofy, sophomoric idea," said Fred Zimmerman, a retired
business professor from the University of St. Thomas, of the wholesale
move by companies to outsource functions. "It was based on the principle
that it was always cheaper to do things overseas. But the ease of
outsourcing — both internationally and domestically — was
So what's triggering the change?
Rising transportation costs are motivating many companies to bring
more work in-house. But some have other reasons, including greater
flexibility over production as well as concern about the health of their
suppliers. Technology companies, which in the past outsourced many functions in
order to specialize in a narrow competitive niche, are among the most
active in bringing more work in-house.
Some other examples besides Arctic Cat.
In January, Oracle Corp. acquired Sun Microsystems in a deal valued
at more than $7 billion as part of a strategy to transform
California-based Oracle from a database and business-software company
giant into one that also offers hardware. In April, Apple Inc. bought a
small Texas computer chip maker — its second such acquisition in two
years — in order to secure a proprietary supply of fast-working chips
for mobile devices.
Last fall, General
Motors acquired the steering business and four plants of its largest
parts supplier, which it had spun off in 1999.
Insourcing doesn't just go backwards to suppliers.
Last February PepsiCo Inc. acquired two of its largest bottlers,
including Minneapolis-based PepsiAmericas, to gain more control over
distribution and get new beverages out into the market faster. Rival
Coca-Cola Co. quickly followed suit, buying the North American
operations of its largest bottler.
More companies are realizing the value, both to them and their customer, of controlling knowledge, quality, and flexibility.