The Dangers of Offshoring - Improve your core competencies
Offshoring or Outsourcing Overseas
Many companies today are trying to cut costs and boost profits by offshoring their work to lower cost economies. Offshoring being outsourcing functions of your business to other companies in another country. However many are offshoring their core competencies, the business functions that actually make the business what it is!
for offshoring or Outsourcing overseas is either the need to lower costs to be able to compete and survive in
a market or to increase profits for business owners and shareholders.
Benefits of Offshoring
The main driver for offshoring is the obvious benefit of reduced costs. You are moving you production or service to a country with a lower cost base, the infrastructure costs are lower, tax costs are lower, and labor costs and all of the associated regulatory costs are greatly reduced.
This leads to what is usually a significant drop in the cost of a company’s products or services which can then either be passed to the consumer as a price reduction allowing the company to survive in a particular market or to expand their market share. Or the cost reductions are passed to the owners and shareholders of the business as increased profits.
The Immediate Impact of Offshoring.
The most obvious and most painful aspect of offshoring is the massive loss of employment that occurs where jobs are outsourced. If a large number of companies are following this strategy of offshoring then this impact is multiplied many times across the country.
The obvious cost of this unemployment is to the individual who now has no income; they then become a drain on society as a whole as they no longer contribute taxes and require benefits in many cases to survive. In addition to this they no longer are able to avail themselves of locally available products and services and thus a vicious spiral ensues where local companies have to lay off workers due to lower revenues. So each worker laid off due to offshoring of their job also contributes to the demise of other jobs within the economy as there is less cash circulating through it.
A company therefore may actually be cutting its own throat by making sure that its own customers are no longer able to afford its products or services!
But we will see new jobs after outsourcing overseas?
The argument goes that the extra money made by these companies will be recycled into the economy creating additional opportunities for those that have lost their jobs.
However the money that is being made is not going to the general population but to the top few percent that own and invest in these companies, what we see is the gap between those that have and those that do not becoming wider.
In the current economic situation these people that were once investing in other ventures, properties and so on are now sitting on their money as they are afraid to lose it, they are not providing additional spending to boost the economy.
What is a Core Competency?
A core competency is an aspect of your business that forms your competitive advantage and allows you to compete in the various markets in which you operate. It need not be a specific product, it may be your ability to develop new products quickly, your ability to build reliable product on time, or your respected customer service. Without these core competencies you lose your company’s ability to compete effectively.
Core Competency Video
Dangers of Offshoring
Offshoring a Core Competency.
What happens if you offshore your core competencies, what effect could it have on your business?
If your core competence was your company’s ability to make good quality reliable products and supply them on time and that is what your reputation and customer base was built upon, what would happen if you stopped manufacturing yourself and passed the work to a company in China?
In the short term you may see improved profits and even increased market share due to lower prices, but long term you may see a reduction in business as customers that used you based on your superior ability to deliver on time quality product become disillusioned due to increased lead times of importing product from china and quality problems due to a lower skilled less dedicated workforce. Your cost savings will also be undermined as time passes due to increases in transport costs (fuel), labor cost rises, and the potential import taxes!
What Happens When you Want to Bring Back Your Offshored Operations?
Leave it too long and you will lose this competitive advantage that you had, in addition you will have lost the skills, knowledge and equipment that you need to bring back the processes that you have outsourced and may never be able to re-enter the market. Once out you lose it you may never be able to get it back, just like the US TV manufacturing industry, they outsourced everything to the far east as traditional TVs became cheaper and then were unable to enter the market when new developments arose.
What are the Alternatives to Offshoring?
Instead of offshoring the work, what we should be doing is looking at how we can make these processes more efficient here. It may surprise you to know that most academic studies show that most people only add value 5% of their time, the remaining 95% being spent doing wasteful activities.
Imagine your day in the factory, how much of your time was spent waiting for a delivery of new products, moving product around that you did not need today to get to what you did need. What time was wasted whilst the engineers argued about a point on the drawing, or the supervisor not coming back to you with the information you needed.
How much of your office time was spent on the phone to the supplier that had failed to deliver, how many hours did you spend reorganizing the planning schedule because the boss promised an important customer that his job would be priority?
I think you get the idea, we spend more of our time dealing with things that we should not have to worry about than actually doing what the customer is paying us to do. All of these things are part of what lean manufacturing call the seven wastes.
Implement Lean Manufacturing
Lean manufacturing is probably one of the simplest and well proven business improvement techniques available. Implementing simple techniques such as 5S to improve your workplace organization can often see efficiency gains of between 10% to 30%, this is as applicable to office and service applications as it is to the shop floor in a manufacturing workshop.
The potential benefits of lean manufacturing can easily exceed the cost savings that you will see from offshoring.
Not only can you reduce your costs but in line with these cost reductions you will gain reductions in lead times for both products and development, improved quality and delivery. These factors can help you with regard to winning additional business against those companies that have off shored their products and services.
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 China.