Disadvantages of Outsourcing overseas - What are the Alternatives to offshoring your Manufacturing business
Offshoring or Outsourcing Overseas
Are there disadvantages to outsourcing overseas and what are the alternatives to offshoring your manufacturing business? Offshoring is the process of outsourcing your business processes to companies overseas in countries such as China. Many companies especially manufacturing companies have gone through a process of offshoring their products to gain cost savings from these lower cost economies thus increasing their profits.
These companies gain the savings associated with not just the lower wages but various other savings, they no longer require to keep and maintain premises and equipment, they have lower regulatory costs and headaches! These savings of outsourcing overseas are almost irresistible to these companies that are driven to provide higher and higher profits and dividends to their owners and shareholders.
Outsourcing Overseas disadvantages
The following sections will discuss some of the disadvantages of outsourcing overseas.
Production Outsourcing Overseas
Outsourcing Overseas delivery Problems
The first problem encountered by most companies is that of delivery reliability, they find that the deliveries that are often spending weeks on the sea start to become unreliable due to a number of reasons. Everything from manufacturing delays and material shortages, the weather and backlogs in customs! This often results not just in the upset customers but in the company having to invest in additional stock to try to cushion these effects, extra stock that will impact on the savings that had been seen.
More importantly than the costs associated with poor delivery performance you need to look at the impact you could have on your customers. How many of your customers are going to just sit back and accept poor delivery performance from you and accept your excuses of blaming it on your supplier? How long will it be before they turn around and look for a better performing supplier that can deliver product when they need it reliably?
Outsourcing Overseas quality Issues
The initial samples that most people receive and initial production runs are usually of OK quality, however this is often seen to suffer as they move less experienced operators onto the work. In addition to this you are often dealing with an unmotivated poorly paid workforce, one that will not be conducive to producing the best quality work.
Normal practice is to request samples from your suppliers, but I have found that this is completely pointless. The supplier will carefully select perfect parts for your samples so that you will receive exactly what you ordered. However this often bares no relation at all to the actual production delivery that you receive.
I have worked with a number of UK engineering companies that were going out of business due to their customers offshoring their manufacturing. However they are now doing even better business than before providing rework services correcting parts that have been shipped from China that are desperately required but incorrect. They are now making bigger profits operating in their new niche while their customers are suffering the burden or poor quality and delays caused by their suppliers overseas.
Outsourcing Overseas Video
Eroding Cost Savings
As time passes the initial savings begin to erode, in some cases to the point where the saving has become an additional cost! The delivery and quality issues add to your costs as well as a number of other factors. The wage costs will invariably start to rise in any country as the demand for labor increases and the labors demand for consumer items rises also. We even see workers in places like China striking for more money.
In addition to these costs there are the costs of bringing your products to the US or Europe, these costs are rising all the time, fuel costs going up, taxes to combat global warming and so on also adding to the problems.
With the economy being in such bad shape we could also see the government adding additional import taxes on a number of products to try to stimulate the home industries by making the foreign bought products more expensive.
The company that I am currently working with has been ordering components from China as the cheapest supplier since they started operations. However they are now finding it cheaper to order parts from suppliers in the US.
Outsourcing Overseas Trends
Bringing Production Home after Outsourcing Overseas
As costs begin to rise it may actually be beneficial to bring things back home, however this becomes increasingly difficult as time passes. Your company will have lost the knowledge, skills and experience to do the work and in most cases the required equipment and space also.
There may be no option but to leave production where it as there are no longer any home options and you no longer have the facilities and skills to do it yourself!
Having set up a whole production facility in China or India and sold off your equipment and facilities could you really afford to start over again?
Customer Focus or Focusing on the Stockholders?
The pressure to offshore your production is rarely driven by your customers, it is a move to increase profitability for the benefit of your stockholders. It is rare for a company to outsource product and then actually start to reduce prices to benefit the customer; unless of course they have to as their competitors are cheaper.
Greed is never a way to steer a successful business and it will eventually end in disaster. If you don't keep your customers happy you will eventually lose them as someone will come along who will provide them with what they are looking for with a better service.
Outsourcing Overseas Video
Alternatives to Outsourcing Overseas.
Offshoring is not the only way to reduce your costs and increase your profits for the benefit of your shareholders. The other option is to find ways to reduce your costs and improve your services rather than outsourcing. After all a penny saved as they say is a penny earned. In fact it is better than that, every penny that you save is directly a penny back on your bottom line.
Most business improvement philosophies such as Lean Manufacturing and Six Sigma will not only reduce your costs but will invariably also reduce your quality problems and delivery issues as well as reducing lead times. These techniques can be implemented in any area of your business, not just production.
In addition to this you will be maintaining employment in your home country, these more often than not are your potential customers with money to spend on your products.
Improve processes rather than Outsourcing Overseas
Continual Process Improvement to reduce cost
The benefits of Lean Manufacturing can be huge, most simple projects show efficiency gains of up to 25%, what would that do to your costs?
Simple techniques such as 5S can be used to organize your workplaces, both shop floor and 5S for the office. All of the various ideas can be implemented for both production and service and office settings. Many health care providers are now implementing lean thinking.
Why go to the trouble of sending your work overseas when you can get better savings by reducing the wastes in your operations here, not only getting cost savings but continually improving the reliability an quality of your products and services.
Focusing on the Customer
Lean very much focuses on providing the customer what they want, it is by working hard to provide the customer true value that you eliminate all of the waste in your process. So not only do you save money but you have happier customers also who are more likely to keep on coming back and supporting your company.
Outsourcing Overseas Links
The following are useful links for business support and lean manufacturing resources.
Manufacturing Improvements Institute for Manufacturing
Quality Institute Chartered Quality Institute
American Quality Society American Society of Quality
Manufacturers Association American National Association of Manufacturers
Business Innovation and Skills Improvement UK Department for Business Innovation and Skills
Trade Improvement International Trade Administration USA
Lean Manufacturing Improvements UK Manufacturing Advisory Service
Business Improvements UK Business Link
US Business Improvement US Business Link
Motor Manufacturers and Traders Society of Motor Manufacturers and Traders
Automotive Industry Action Group Automotive Industry Action Group
These Links will help you to find more information regarding Lean Manufacturing and trade to help you to make an informed decision regarding outsourcing overseas to countries such as India and China.