By Kevin Meyer
Well another of the big five (or is it four or three by now?) consultancies has figured out that offshore outsourcing doesn't work.
The strategy embraced over the past decade by U.S. manufacturing companies to shift production to countries with cheap labor may no longer be appropriate, according to a consulting firm that has been a big promoter of offshore outsourcing. "Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs," according to Accenture analysts John Ferreira and Mike Heilala, who head the company's North American Manufacturing practice.
Now correct me if I'm wrong, but I thought consultants were paid the big buckaroos to use their immense insight and experience to help guide companies into the future, not restate the obvious of what has already happened. What's next? A flash of brilliance that the housing market was overvalued a couple years ago?
Bill and I and a huge number of other lean consultants have been saying that offshore outsourcing, especially to chase cheap labor, was a ridiculous proposition for many years. I bet companies could have had us for a tiny fraction of what it cost to retain the likes of Accenture. You still can, by the way.
Just for giggles let's take a look at some of Accenture's insight:
Having surveyed 287 manufacturing companies, Accenture found that 61 percent are considering moving some of their manufacturing back to their home market. Ferreira and Heilala describe this as being a "secret shift" and a "quiet trend."
And a "trend" we have been reporting on for a couple years, but ok.
Many manufacturing companies that shifted production offshore "likely did so without a complete understanding of the 'total costs,' and thus, the total cost of offshoring was considerably higher than initially thought," write the two analysts. "Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise."
Brilliant, simply brilliant. Who would have thunk it?
Companies have found that managing their supply operations from afar has weakened their "overall operational planning, forecasting and general flexibility, while in some cases also driving up costs with the need for complex network management," according to Accenture. "In some cases, this situation has limited the companies' competitive advantage causing limitations on growth and revenue."
Almost half of the companies Accenture surveyed said they are facing issues regarding poor cycle and delivery times and product quality due to offshored manufacturing and supply operations. There have also been "dramatic" increases in many of the costs that first enticed them to move their production overseas.
Companies have not done a good job of determining the true cost of offshoring. They tend to look only at direct costs, such as logistics, product unit costs, supplier costs, manufacturing overhead, labor, material and packaging costs. But there are many other costs that have not been considered when shifting production to a foreign country, such as local taxes, regulations, customs duties, VAT taxes, the agility and speed of suppliers to respond to customer demand, poor quality inspection and validation, operational risks, inventory, safety stock, broker fees, infrastructure costs, tooling and mold costs, networks needed for plant material handing, training costs, organizational communications costs, local operations staffing, capital amortization, terms and exchange rage fluctuations.
"The overreliance on direct costs to the exclusion of other legitimate cost factors distorts the business case for offshoring and likely many decisions to offshore were incorrectly made," say Ferreira and Heilala.
Ok, sorry, I simply can't quote any more of the article without smacking my head into the wall. Go to Manufacturing News to read more. And think about whether you want a consultant that guides you into the future, or one that is exceptionally proficient at hindsight.
Maybe I'm being just a tad harsh. Even in hindsight Accenture still realized how misguided their previous prognostications were ahead of most other management consultants who still tell companies that chasing cheap labor is the magic pill.