Outsourcing still viable as a business strategy
posted in Outsourcing News and Top Outsourcing deals |Source:www.thepbj.com
In certain circles, outsourcing has become somewhat of a dirty word.
Some say that great sucking sound we hear is all the good jobs leaving American soil and being replaced by low wage service jobs. But, in fact, outsourcing remains a very important part of the overall business picture today.
Often it is perceived to be the only option for many companies. However, like most things in life, outsourcing is not a silver bullet. Middle market companies that are considering outsourcing all or part of their business need to enter the process prepared, and with their eyes wide open.
In his recent book, “The World is Flat,” Thomas Friedman says that companies today are looking at all phases of business and at all parts of the world to determine where the work can be done best.
Low level vs. value added
Many are choosing to move the low-level work overseas and are keeping the “value added” work in house. For example, Reuters now outsources elements of its news supply chain. The news organization off-loads its commoditized reporting to India and uses its experienced in-house reporters for the value added, higher-level reporting which includes news analysis.
Similar processes are taking place in the accounting field.
Technology has made it possible for mid-sized accounting firms to blindly send their tax preparation work overseas, freeing up their CPAs to spend their time working with clients on more strategic activities. In addition, restaurant owners are looking for ways to outsource the reservation process and U.S. MRI’s are now being read by radiologists across the globe.
Timing right?
The question for many businesses is not if, but when and how to outsource.
Brian Wilkerson, talent management practice director at Watson Wyatt in Denver, has helped clients for several years wade through the question of outsourcing. He said that the outsourcing model has changed and evolved.
“Early on, outbound manufacturing took a throw-it-over-the-wall approach for both onshore and offshore contract manufacturers,” he said. “Now there is a much tighter integration between the company and the outsourced manufacturer.”
Another change Wilkerson sees is less reliance on a single supplier. Microsoft and Cisco learned this lesson early. Smart companies contract the same product to multiple providers to ensure consistent delivery.
Companies who have been outsourcing for several years have learned that savings come at a cost.
“People don’t always look at the total cost for outsourcing their products,” Wilkerson said. “They focus only on the cost to produce the product.”
It is important to consider all the added time it takes to coordinate overseas. There is ramp up time for the manufacturers, transportation time (and cost) and turnaround time to switch the manufacturing line from one product to another.
And, time is really a factor in the design process. If the manufacturer is involved, it takes longer to go back and forth when the two parties are separated by an ocean.
Other factors
Wilkerson said that while cost savings might be the primary consideration when outsourcing, there are other factors to consider. The dynamics change depending on how you are outsourcing — full product outsourcing vs. component outsourcing.
Outsourcing components of your product and then assembling the finished goods in-house is a good strategy when the manufacturing of the product components is not part of the differentiation. Outsourcing is appropriate when extended lead times are not an issue and you are manufacturing large lot sizes.
When you are outsourcing the entire product, long lead times and large lot sizes are still a fact of life, but integration between design and manufacturing will increase the overall cost of the product. In addition, products that are outsourced should not be highly proprietary because intellectual property laws and enforcement overseas are not the same as they are in the United States.
“When done right, cost savings can be a big benefit of outsourcing, but the real gain is in flexibility,” Wilkerson said. “The flexibility gained by shifting fixed manufacturing costs to variable costs is significant and often missed.”
Another key benefit is the ability to build specific service level goals, with penalties, into the contract. When standards are not met you can get some money back.
Biggest challenge
Coordination is the biggest challenge in outsourcing, and it is vital to have someone who can set realistic goals based on detailed cost and time analysis, and who understands the business continuity issues.
“Experienced resources on staff are critical when managing outsourced relationships,” Wilkerson said. “You need to understand the infrastructure of your provider and how reliable they are. For example, China still looses power regularly, so you need to know what the backup plan is.”
One key way to avoid problems with overseas facilities is to have a representative or someone on staff regularly visit the offshore plant. This has become an industry best practice at companies such as Nike and Cisco, and is a key to making offshore manufacturing work.
