Wednesday, September 24, 2014

Manufacturing, Services, Outsourcing and the Tsunami

I started off my career in the technology industry as an IT consultant at a multinational firm in India.  We used to work extensively for clients located outside of the country. This is what we would call as the typical “offshoring” model. Being in the service industry, I really did not appreciate this system until March 2011, after which I had a completely different take on globalization and souring of operations. At that time I was working for a client based in Tokyo, Japan. We had parallel setups running both in India and Japan as part of our “business continuity plan”. On March 11th 2011, Japan was struck by the tragic tsunami waves. This caused a complete disruption in operations for the Japan services team. But since we had a parallel setup running in India, this caused little or no damage to the overall services we were had to deliver to the client.

While the services industry had picked up rather quickly, many manufacturing companies struggled to get their business together after the aftermath. Car manufacturer Toyota had reported by the end of June that it had a lot of pieces still missing to complete their manufacturing process. As a reaction, Suzuki announced that it would be spending about half a billion dollars to relocate an electronics facility away from the sea. Impacts like these affected the manufacturing industry value chain more deeply than the services industry where recovery was quick due to a better offshoring model. So how do the offshoring models for both these industries stack up against each other? Lets take a deeper look.

There are a lot of similarities in the strategies that both the industries have adopted. One major tool that they use to evaluate if an operation should be outsourced (or off shored) is the Total Coast of Ownership (TCO). Key supplier decisions are based on TCO and not on the price. TCO also covers other regions that help evaluate strategic sourcing decisions. It includes the cost of diversity selection, cost of sustainability and supplier ethics. Both groups of industries have to agree on strong supplier relationships for the sourcing operation to be successful.

A general notion about outsourcing is that there is a drop in quality standards. This is not the case today. Companies are making informed decisions by taking into consideration quality. Both the services and the manufacturing industries converge on this.

On the flip side, there are factors on which both these industries have a diverging view on strategic sourcing decisions. Cost is an important factor to look into before making sourcing decision. In the services industry, more tangible proof for off shoring can be seen in the past decade, where a lot of multinational companies have offshored its services related to technology and customer services to English speaking countries such as India. Though these trends are faintly visible in the manufacturing sector, there is not enough tangible evidence or cost reductions in those markets. Quality, as discussed before, becomes at most important when off shoring decisions are made, especially in manufacturing.

Though the offshoring model works for companies looking to save on labor costs, it has brought about quite a debate in developed markets like the USA and UK. Their argument, bring home the jobs. This argument would work in the pre 1980’s era when developed countries controlled most of the world’s economy. Today, emerging markets like China, India and Brazil have changed the competitive landscape completely. To survive in the industry, be it services or manufacturing, offshoring has become more of a necessity than an option. Can you think of any company that has stuck to in house production model, without outsourcing or offshoring? I am sure you cannot think of one. So that leaves the developed countries only one option. Get aboard the off shoring boat, and play along with the forces of nature!


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