Wednesday, September 25, 2013

The value and future of offshoring


This week's topic on Supply Chain Networks interestingly brought up the issue of offshoring. "Issue" is the word I use because offshoring typically carries a very negative connotation in the U.S. It is often understood as large corporations shipping American jobs overseas on the backs of the working class to reduce cost and generate more returns. The McKinsey article was not so judgmental of offshoring but its valuation of this practice for the future seemed rather myopic.


Offshoring is a synonym to cost-reduction. Cheap and large labor, less regulated labor laws, abundant natural resources (i.e., rare metals, minerals) and the absence of an effective EPA, and other perks in Latin America, China, or India allow companies like Apple to sell its iPhones at the price point of $600 for material costs of ~$190 and probably less for labor (NY Times article for this week). The McKinsey article accurately points out that increasing wages and diminishing marginal returns of cost-reduction from off-shoring should have companies rethink the value of this practice. However, is offshoring only about cost-reduction? The McKinsey article was published in 2008. Here is another article published by Booz in 2006 that frames offshoring in a different context beyond simple cost-reduction (

In essence, the Booz article says cost reduction is a component to the benefit of offshoring but offshoring can also serve as a platform to enter Emerging Markets with pre-established infrastructure. The example this article gives is the value of creating Regional Service Networks in Asia.


Through this lens, when comparing the McKinsey article that frames offshoring as only a cost-reducer with the Booz article, which sees it as an early infrastructure investment to later drive the potential product distribution within BRIC-like countries, where does the future of offshoring stand?

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