By Kevin Meyer
What could have happened if our friend Santa Claus had succumbed to the call of the outsourcing lemmings?
Another Christmas, another triumph for the world's foremost exponent of vertical integration.
Imagine if Santa Claus outsourced instead. Pinkerton might be hired
to keep tabs on how well children behaved. Toys would no doubt be
churned out in Chinese factories rather than Polar workshops. Santa
could stay home and brainstorm with his elves on brand management,
while UPS did the sleighing.
A decade ago, when champions of disintegrated supply chains like Dell were riding high, Santa may have felt under pressure to fit in with the
zeitgeist. Consultants had spent years persuading clients to focus on
"core competencies" and to outsource everything else.
Santa held firm. Fortunately several organizations have also woken up to the reality of outsourcing's hidden costs.
But vertical integration can sometimes make sense, and it has
demonstrated something of a comeback. Luxury watch-maker Rolex, for
example, operates its own foundry for precious metals, helping it
refine alloys. Apple has bought into several chip-makers. This year, Boeing bought a parts supplier to help get a grip on its Dreamliner project, itself a grand experiment in outsourced production. And PepsiCo is buying its two biggest bottlers to increase control over its soft-drink business and increase efficiency.
Unfortunately it's after that valid point where the WSJ takes a detour back into the lemming-land.
Yet these are discrete re-linkages, fulfilling specific needs or
fixing specific problems. None represents a return to vertical
integration à la Henry Ford, whose Ford Motor owned iron-ore mines
outright to ensure metal supplies for making cars. Unfortunately,
however, that old-school sort of vertical integration has also made a
comeback this decade. China, for example, is buying up mineral rights
globally, reflecting both fears of supply shortages and a perception
industry consolidation has created oligopolies for some raw materials.
Steelmaker ArceloMittal has also been buying up mines.
Overall, outsourcing is more than a management fad. It fosters
rational allocation of capital and growing global trade. That is
certainly preferable to vertical integration driven by fear of supply
shortages. This not only feeds on itself, as more supplies get "locked
up," but leads to inefficiencies as the competitive dynamic is removed
from the supplier-customer relationship.
A "rational allocation of capital"? How's that? Perhaps to build more container ships… consuming more resources when business is good and sitting idle when business is bad? Instead of simply adjusting the entire vertical enterprise to match demand? I would also argue that the "competitive dynamic" is far more present in a well-managed vertically-integrated enterprise than in remote disconnected segments of a global supply chain.
Offshoring and even outsourcing do have their place, such as trying to get physically closer to a customer on the other side of the globe, but chasing low labor costs is not a reason.