This story was written by Keith Dawson for UBM DeusM’s community Web site Business Agility, sponsored by IBM. It is archived here for informational purposes only because the Business Agility site is no more. This material is Copyright 2012 by UBM DeusM.
This story was written by Keith Dawson for UBM DeusM’s community Web site Business Agility, sponsored by IBM. It is archived here for informational purposes only because the Business Agility site is no more. This material is Copyright 2012 by UBM DeusM.

Rebalancing: Rethinking Offshored Manufacturing

Getting closer to where the customers are can mean big gains in agility.

Some companies looking for new ways to stay competitive are rethinking long-ago decisions to move manufacture and supply offshore. They achieve greater agility by pulling in supply chains closer to where customers are.

Companies have been relying on offshore outsourcing for many years to cut costs. While some today are weighing the benefits and costs of offshoring tasks higher up the food chain, such as IT, HR, engineering design, and research and development, offshoring began in manufacturing decades ago, and accelerated during the first decade of this century. America has lost 32 million manufacturing jobs since 2000, to the point where manufacturing employment, at 12 million, is numerically the same as it was in 1941. Over 42,000 factories have closed since 2001.

Outsourcing's real competitive advantage may accrue only to first movers. And outsourcing has costs and unintended consequences not usually factored into the equation, among them strained relations with labor, customers, and domestic and local communities. For example, a backlash is building against sending back-office jobs offshore: a bill was introduced in the House of Representatives last month seeking to make call centers ineligible for federal grants or loans for five years if they move jobs overseas. (A trade group representing Indian BPO outsourcing companies opined that the bill stands little chance of passing.)

The originators of the Design for Manufacturing and Automation process wrote a paper in 2004 arguing that companies should look to improve product design practices for US manufacture before considering moving manufacturing to China. They followed up in 2011 with an update (PDF) that further details the overlooked dangers and costs of offshored manufacturing: "Hidden costs exist because complete costs are rarely allocated to the product and reside instead in corporate overhead budgets. This distorts fair comparison of domestic and offshore manufacturing, leaving labor rates as a common, central metric."

Earlier in 2011 Accenture issued a report on the trend of companies rethinking offshored manufacturing titled "Manufacturing's Secret Shift: Gaining Competitive Advantage by Getting Closer to the Customer" (full report PDF here). They interviewed executives in 247 manufacturing companies from North America, Europe, and Asia, and "61 percent of respondents reported that they were considering more closely matching supply location with demand location by onshoring or nearshoring manufacturing and supply."

For most of these companies, the decision to offshore parts of manufacturing and supply was not an easy one, and the path to rebalancing closer to home will not be a slam-dunk either. Accenture notes, "Despite the desire to rebalance, it is readily acknowledged that rebalancing manufacturing and supply networks is not an easy undertaking. It is a challenging proposition -- one that will take years, and require extensive planning, engineering, and execution." But the gains in agility -- on the shop floor as well as in the ability to meet new customer demands for customization, personalization, and service -- can make the journey a worthwhile and profitable one.