Tuesday, February 25, 2014
DO OFFSHORE SOURCING AND ITS EMBEDDED RISKS RESPOND TO MCKINSEY QUESTION…“TIME TO RETHINK OFF-SHORING?” ?
This week readings relate to Supply Chain Networks that involve the movement of materials or information from the source point to its destination and the whole process of supply chain including its logistics. How the material are transported from one point to the other. It covers the globalization in supply chain that includes the offshore sourcing. As a part of reading we explored on the McKinsey Quarterly article by Ajay Goel, Nazgol Moussavi, and Vats N. Srivatsan. The article’s title is “Time to Rethink Offshoring? Impressed by the contents of the article I decided to explore on the offshore sourcing benefits and risks embedded to it.
One of the most noticeable developments of recent decades has been the move to offshore sourcing, often encouraged by the opportunity to make or buy products or materials at significantly lower prices than could be obtained locally. At the time that many of these offshore sourcing and manufacturing decisions were being made, the cost differential between traditional sources and the new low-cost locations was significant. However, in recent years there has been a growing realization that the true cost of global sourcing may be greater than originally thought[i].
Yet the situation is still promoting emerging companies to look opportunities for offshore sourcing despite the fact that the giant companies have slowly started to move back to United State the production facilities so as to mitigate the risk of losing market share and as a means to contain the risks that in recent years have led to increase of the costs of supply products. The benefits of offshore sourcing that for recent decades have influenced most of enterprises in the United States and European Union to move there manufacturing plants to offshore are:
· Lower cost of service
· Faster time-to-market
· High quality
· Timely access to relevant skill sets
· 24x7 support
As I mentioned above companies now consider returning back to US. After years of offshore production, General Electric is moving much of its far-flung appliance manufacturing operations back home. On February 10, Appliance Park opened an all-new assembly line in Building 2 largely dormant for 14 years to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory. In the midst of this revival, Immelt made a startling assertion. Writing in Harvard Business Review in March 2012, he declared that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.”[ii]
OFFSHORE SOURCING RISKS
Most enterprises in the United States and European Union have for recent decades relied in developing offshore sourcing strategy, however this strategy require an investment in first proper understanding the associated risks and investment in mitigating the risks[iii]. Offshore deals bring risks above and beyond those found in domestic outsourcing arrangements, project work or both.
However, many enterprises have employed offshore sourcing quite successfully but now the economic conditions have changed and the cost benefits are no longer there. The costs on offshore strategy have now far increased and when you add up the costs relating to mitigation of the following risks it is obvious that most of the companies will consider locating their production facility close to United States (here I am focusing on US based Enterprises that considered the offshore sourcing strategy decades ago). By examining the aforementioned list of risks and considering the costs relating to appropriate risk-mitigation strategies as well as the current changes in global economic conditions the answer to Mckinsey’s question could be derived.
Readiness for Offshore Sourcing
Risk management is an iterative, ongoing process that must be broken down into steps. The first litmus test in managing offshore risk deals with readiness. Is the organization ready to accept global delivery and offshore sourcing? Risks in offshore sourcing are as follows:
Operating in different countries significantly increases sourcing/project risk by adding geopolitical uncertainty to an already complex process. In several regions of supply, undercurrents of religious strife, border unrest, cumbersome political processes, corruption and deep-rooted bureaucracy make it difficult to develop and maintain a large-scale productions of goods including IT development and delivery capabilities. Events during the past years have brought many of these risks into sharp focus, making some enterprises reassess their willingness to commit to an offshore sourcing strategy.
Apart from the issue of geopolitical risk, other unique risks are associated with offshore sourcing. Some of the qualitative indicators of a country's suitability to effectively provide offshore sourcing include government support, characteristics of the labor pool, infrastructure, education system, cost, process quality, cultural compatibility, legal system and globalization skills.
Socio-economic and Political Impact of Mass Employment Shifts
Over the years now, as offshore services become a more prominent part of an enterprise's sourcing strategy, enterprises and offshore services companies may need to deal with the political and social consequences of a significant job migration to offshore locations. This has been acute as the offshore delivery of managed services caused job loss among the low- to middle-income "white collar" wage-earners.
SUPPLY CHAIN RISKS WORTH CONSIDERING[iv]
Product Costs Versus Supply Dependency
Switching to a low-cost supplier might mean being dependent. At the same time, mid-market organizations might not have the purchasing power and global sourcing opportunities that larger competitors have and thus might need to go with the lowest product cost just to compete.
Intellectual Property Exposure
Theft is on the rise, and standards (and enforcement) vary greatly by country. Large organizations might have the “pick of the litter” in terms of offshore manufacturers. Mid-sized manufacturers may not be so lucky.
Before determining the right business model, consider all relevant factors: transportation costs, shipping times, training, workforce output, time to hire, quality, trace-ability, sustainability, local business practices, government policies, and restrictions, etc.
New technologies emerge every day to “revolutionize” the supply chain, but not all technologies are alike. Focus on implementing and training your team on demand planning tools that actually predict and manage volatility, rather than on tools that give you point-in-time data or best estimate approximations. Focus on Supply Chain Risk Management for mitigation and supply network planning and optimization and finally logistics monitoring and visibility tools.
Today’s consumers have more options and want to know where products came from and how they were manufactured. What’s more, information is readily available to consumers, and with the prevalence of social media, bad news spreads fast.
Managing supply chain network is very crucial in this era of economic instability where the economies of scale on offshore sourcing facility are not favorable anymore. The natural disasters and other uncontrollable factors that render difficult to control costs relating to global movements of goods and services. The proper management of supply chain network could provide necessary information to decision makers on what decisions they need to make to ensure that the company benefits from efficient supply chain management system.
[i] Centre for Logistics & Supply Chain Management (2008), The True Costs of
Global Sourcing, Cranfield School of Management, UK