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OM in the News: Outsourcing Offshore No Longer an Advantage?

May 6, 2011

The strategy embraced over the past decade by US manufacturers to shift production to countries with cheap labor may longer be appropriate, according to the outsourcing consulting company Accenture. In Manufacturing & Technology News (April 29,2011), Accenture reports that 61% of US firms are considering shifting manufacturing back home. Why the change? It turns out that most companies that shifted to offshore “likely did so without a complete understanding of the total costs. Those seemingly initial cost savings are no longer so big”, says  Accenture. As transportation, commodity, exchange rates, and in-country labor rates all  rise, companies are finding that managing their supply operations from afar weakens their overall planning, forecasting, and flexibility.

By coincidence, yesterday’s  Wall Street Journal (May 5,2011) drives home the same point. “A combination of forces”, says the WSJ, “are changing some of the calculations by which companies decide to move production abroad”. With annual wage increases over 15% in China, for example, the “low wage advantage will disappear over the next 5 years. Supply chains are already being disrupted”.

US states meanwhile, panicked by loss of jobs and worsening budgets, are hanging out “Open for Business” shingles. The Boston Consulting Group adds, “China has been the default for production. Sometime around 2015 it will make more sense to put the incremental plant in the US as opposed to China”.

Why not just shift production to Vietnam or India? It turns out that few other locations have the supply base, shipping infrastructure, and skilled labor to pull off what China does. The conclusion of both articles: Manufacturing will see a renaissance in the next 5 years as production returns home.

Discussion questions:

1. What factors are involved in the return to on shore production?

2.  Why was outsourcing viewed as a panacea 10 years ago (see Supp. 11)?

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