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Disadvantages of Outsourcing overseas - What are the Alternatives to offshoring your Manufacturing business

Updated on January 21, 2015
LeanMan profile image

I am a trainer and consultant in lean manufacturing, Six Sigma, quality management, and business management.

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 Production Overseas
Outsourcing Production Overseas | Source

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 Disadvantages

Outsourcing Quality Problems
Outsourcing Quality Problems | Source

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

Outsource Overseas or Improve Processes?
Outsource Overseas or Improve Processes? | Source

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.

Comments

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    • LeanMan profile imageAUTHOR

      Tony 

      4 years ago from At the Gemba

      This is a problem that has been going on for a very long time and is a major problem for many companies. I once worked for a company that was making parts for one of the world's biggest car manufacturers and was handed copies of our own parts to test. These failed catastrophically in less than 10% of the time that they should. The report went back to the manufacturer.

      These parts had been turning up in their own service garages across Europe so an instruction was issued to all service centers to stop doing business with this company in Eastern Europe that was supplying the parts and the report was given to the company itself along with instructions to stop copying the parts.

      I came into work the following Monday morning to find more than 100 messages on my works voice mail (my name and number was on the report) threatening my life and the lives of my family!! Copying or stealing intellectual property is big business.

    • tamarawilhite profile image

      Tamara Wilhite 

      4 years ago from Fort Worth, Texas

      Another danger of outsourcing is loss of intellectual property. There have been problems with Chinese factories accepting work instructions, blue prints and tooling designs before copying all of them at a factory across the street. Then they build your product without paying your royalties.

    • profile image

      LMS 

      7 years ago

      This is really great when it comes to IT technology and outsourcing. Nice hub

    • nabeelplus profile image

      nabeelplus 

      7 years ago from Karachi

      Well i think out sourcing or crowd sourcing is the future of how companies will operate effectively. If you have a look at most of government departments they too operate in this manner hence saving cost.

    • LeanMan profile imageAUTHOR

      Tony 

      7 years ago from At the Gemba

      Thank you for your comments Katie, this is far too common an occurrence in the west. The jobs that create wealth (rather than recirculate the wealth in the economy) are too often the ones that are outsourced overseas, meaning that our countries get poorer while the other countries get richer. Whilst I agree with free trade and so on most of these countries are subsidizing their own companies enabling them to take business where they would not have been able to before.

    • katiem2 profile image

      katiem2 

      7 years ago from I'm outta here

      A friend of mine just told me, while watching our daughters play softball, that her husband is losing his job of 20 years due to outsourcing, it does seem I'm hearing about this more and more. I appreciate your article on the disadvantages of outsourcing. :) Katie

    • LeanMan profile imageAUTHOR

      Tony 

      7 years ago from At the Gemba

      Thanks for your comments Khmohsin, I just hope that more people take up alternatives such as implementing Lean Manufacturing rather than outsourcing overseas.

    • profile image

      khmohsin 

      7 years ago

      hi, nice hub with great info ..keep it up man

    • profile image

      Orange Counry SEO 

      7 years ago

      I can see the nightmares of having inferior infrastructure. If you go international you have to be ready to have the right mindset. Do a ton of research first. Maybe even find out how other companies have succeeded or failed so you don't make the same mistakes.

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