The sting of offshore outsourcing’s hidden costs
posted in Outsourcing News and Top Outsourcing deals |Source:www.ottawabusinessjournal.com
It’s no longer a shock when a Canadian firm chooses to outsource part or all of its operations to another country.
But “giant, non-tariff trade barriers” may be reversing the trend, at least somewhat, for companies who rely on being first on the market.
According to one consulting firm, backlogs at seaports and rail lines, particularly on North America’s west coast, are leading at least some companies to reconsider their Chinese and Indian manufacturing operations.
Port bottlenecks are forcing firms to consider manufacturing their goods back home to remain competitive locally, experts at the Boston Consulting Group, a multinational business consultant said recently.
“With no solution in sight,” said George Stalk Jr., a BCG senior partner in its Toronto office, “many U.S. companies may be better off manufacturing in Mexico or at home, though labour and other costs are significantly higher than in China.”
In the past, company researchers did the market research, discovered cost savings were attainable by having their goods made in the developing world and shipped here, then proceeded to move their factories elsewhere, often with resultant layoffs in Canada.
The trend started in earnest with the Free Trade Agreement in the 1980s, and continues even today, with Hershey’s decision to close its Smiths Falls chocolate plant a recent example.
However, outsourcing a firm’s manufacturing to take advantage of cheaper Asian labour might not always be the cheaper model, especially if timing is critical.
“In their rush to source from (overseas), many companies are blindly walking into a strategic trap,” Mr. Stalk wrote in a BCG report titled Surviving the China riptide: How to profit from the supply chain bottleneck.
“The trap is thinking that sourcing from China will result in lower product costs, when in reality the supply chain dynamics will, in many cases, drive up overall costs and reduce profitability,” the report read.
Delays in transportation, in particular, are at the root of the disadvantage, it said, especially with ports in Los Angeles, Oakland, Seattle and Tacoma set to experience “virtual gridlock” within two years.
Roy Sunstrum, a vice-president with Ottawa firm DNA Genotek, a company which makes saliva-based DNA testing kits for the home market, said the numbers did not add up for his firm to go overseas with its manufacturing needs.
“We had a specific example from two years ago, where we had a particular plastic (part) produced in Ottawa,” said Mr. Sunstrum, who is also a member of the Ottawa Manufacturers’ Network advisory board. “We discovered that they were sourcing the same product in China, and the pricing was a bit lower. But when I took a look at the warehousing costs . . . it was slightly cheaper to do it in Ottawa.”
The minimum six-week travel time, Mr. Sunstrum added, was also a concern.
Prof. Andy Hira teaches political science at Simon Fraser University in Vancouver and co-wrote Outsourcing America in 2005. He said North American headaches caused by Asian outsourcing are nothing new, but added that the reported bottlenecks at west coast ports were “a new wrinkle.”
“Perhaps (BCG) is trying to get something different from the vast array of consultants out there,” he said, adding, however, that complaints about poor service from Indian call centres and poor quality of manufactured goods from China have been coming in for a long time. In fact, the price of goods and services are going up in those countries, he said, with skills shortages starting to appear in both.
“Those questions have been there the whole time,” he said.
Mr. Hira said that despite pledges made by Stephen Harper on the Pacific Gateway initiative, which promised to expand port capabilities in Prince Rupert to help get resources in Alberta and British Columbia to Asia quicker, governments are under pressure from the private sector not to interfere with outsourcing efforts by private companies.
“You get bits and pieces of stories, but there’s no effort by the Canadian government to track (foreign outsourcing numbers),” he said. “There’s a disjuncture between the interests of management-level types and actual workers. Management will argue the profit level will go up (with) labour going down. They think it will be more profitable. (Companies) actually put negative pressure on the government to look into this more . . . and that’s why you don’t hear about it in any systematic way.”
The greatest cost for companies – “unrealized” profits companies lose when they can’t meet their customers’ needs – remained hidden, the BCG report maintained.
“That’s the side of China sourcing that global companies are just now starting to face,” it read.
The consultant provided a number of other recommendations to companies experiencing the problem besides manufacturing at home. These included expanding ports, finding more efficiencies in overseas factories, flying goods to North America, and diversifying manufacturing locales.
“Even without the specific constraints of port capacity, a lot of these (firms) missed the broader implications as they make their broader decisions,” said Mr. Sunstrum.
“They’ve been attracted by the low price, and did not totally respect other total cost implications, such as the time dimension of transportation.
“Every decision has its own proper way of being made, but some of those offshore decisions have not been holistic enough. Some have taken price as too much as a factor,” he added.
