INSOURCING: Time to Come Home

So many industries have “drunk the Kool-aid”, buying the premise that the way to improve margins is to outsource raw manufacturing, customer service, and technical support, particularly to Asia.

I have personal experience in China, Mexico, and Japan, and can say that making outsource relationships work can be challenging.  Working overseas where business practices and social norms are very different can be a major hurdle.  The communications task is very problematic – especially when local norms dictate that it is impolite to say no, or where people do not want to admit they do not understand something.

I have a friend who works in the steering and suspension business, having been engaged in China and India for many years.  He told me one story that illustrates how easy it is to under-appreciate the challenges.   He has a high regard for the technical ability and work ethic of his Asian engineering partners, but he told me an amusing story about cross cultural miscommunication.

Communicating engineering design intent is not always possible purely based on conveying technical specifications or mathematical data.   The products they were testing in the US that were designed in Asia were not performing up to expectations.  My friend’s US engineers were trying to explain what was wrong using terminology like “the steering was too ‘loose ’or that the suspension was too ‘stiff’”.   These are terms most experienced drivers would understand.   Their Asian colleagues all nodded affirmatively during the video conference meeting, but the truth was that virtually NONE of these Asian engineers had ever even DRIVEN a car in their lives – they really did not understand what was being said.

When you consider the communications challenges, re-work delays, the shipping times, extra inventory, obsolescence concerns and so forth you have to wonder if overseas outsourcing is truly economically sound.

It feels like more and more companies are reaching the conclusion that it does not.

  • Deloitte Consulting released a study as far back as 2006 concluding that 70% of large companies had negative experiences with outsourcing of IT services and 25% had brought outsourcing projects back in-house.
  • Boeing was plagued by massive supplier problems with its revolutionary light weight 787 Dreamliner program that significantly delayed its introduction.  In this case Boeing outsourced about 80% of its fabrication services.
  • Our national debt has now surpassed $15 Trillion dollars and our annual balance of trade deficit is in the $725 billion dollar neighborhood.
  • Faced with rising costs at home, even some Indian companies like Aegis Communications are opening call centers in the US, suggesting a reversal of this trend which was prominent during the 1990’s.

Futurist Patrick Dixon in this recent logistics conference talk discusses reasons why manufacturing outsourcing makes less sense today.  He chastises short-sighted companies that made outsourcing decisions principally on the basis of pure cost, without consideration for the increase is associated risks and diminished agility.

If we can get tactical for a moment, here is a marvelous 6 minute video case study about how a small apparel business called School House decided to reverse its own strategy, choosing instead to move its manufacturing from Sri Lanka to North Carolina.

While the task was not easy, you can see how they did it.

Here are a few interesting points that stuck out to me:

  • They are a small business, without much market power – but that does not stop them from being very selective about choosing a supplier partner . . .  (personally calling or visiting 100 places, narrowing down the list to only 5 facilities, from which they choose one.)
  • Look at their approach to selecting their partner. In addition to having the right equipment, etc., they are also looking for an “attitude” of the management (a willingness to “bring ideas to the table” that can help School House become more successful)
  • Notice how they seek to speak with the operators at the target supplier “to see what they think and feel about working for the company”  (Here again, they are looking for an attitude, an “open minded-ness to try something new”.  There is an adage that “the Secretary knows everything about an office”, and in manufacturing, the Operators also know a lot.)
  • Notice that they have VERY specific ideas about the kind of production skills they want – they are very picky about their products and the kind of factory that can produce them

I think we can all sometimes think about selecting suppliers from a checklist (like we would normally use during an audit) and overlook the key issues of

  • Management attitude and philosophy
  • Company culture
  • Employee attitude

In my experience, if these elements are lacking, I would also expect their operating and quality performance to fall short as well.  I also think it is very difficult to assess these elements (particularly when dealing with an Asian supplier because it is difficult for Americans to overcome the language and cultural barriers).


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Filed under Innovation, Strategy, Systems Thinking

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