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:
Geopolitical Risk
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.
Country Risks
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.
Logistic
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.
Technology Focus
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.
Brand Image
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.
Conclusion
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.
Global Sourcing, Cranfield School of Management, UK
[ii] http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing-boom/309166/
[iii] https://www.gartner.com/doc/368056/potential-risks-offshore-sourcing
[iv] http://www.thomasnet.com/journals/procurement/globalization-presents-challenges-that-require-supply-chain-risk-management/
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