Well, the chickens are continuing to come home to roost. Or maybe in this 21st century of globalized supply chains, the Peking Ducks are coming home. (OK, we know it's "Beijing" today, but the menu at our favorite takeaway joint still says "Peking.")
Many of the pioneers who boldly sent both product and component manufacturing off to China have moved onward and upward, pocketed handsome bonuses, and are apparently immune from prosecution. But the cost-slashing offshoring that has been a given for CFOs for decades now has been exposed as a risky bet, with more downsides than anyone imagined at the outset.
It's not just China; it's the search for the low-cost labor source, wherever it might be, that has created some pretty shaky—and no longer slam-dunk lowest-cost-supply chains.
UNINTENDED CONSEQUENCES
When it comes to the unintended consequences of offshoring, the bad news comes in several flavors, all unappealing. Here are a few of the possibilities:
- One is the effect on inventories, which continue to be under pressure for reduction. Simply having a physically longer supply chain means more inventory to cover the replenishment cycle. Or generates significant risk in service performance, if one tries to hold stock to prior levels. Or both, if the equation isn't got quite right.
Add to that the safety stock needed to accommodate lowered reliability and increased variability in delivery performance. More of the same impacts. Put slow steaming into the mix, and you increase the upward pressure on inventories. Throw in the seasonal effects of monsoon/typhoon periods in Asia. It's enough to make one start talking with a clergyman, or with oneself.
Did we mention the consequences of work stoppages at arrival ports? Or challenges in finding transport capacity to move stocks from point of arrival to distribution destinations? Both require on-hand inventory stocks to make disruptions invisible to customers—or both can drive brand-killing customer delivery failures.
- Then, there is the elephant in the room of transportation costs. In the early days, it didn't matter much. Depending on where manufacturing had been previously located, offshored product typically incurred the additional cost of ocean transport, then over-the-road miles greater than when domestically produced. West-to-east container transport was significantly more expensive than the reverse. But fuel was cheap.
Surprise! Somebody changed the equation. Oil went up, diesel went up, gasoline went up—a lot. Then they went down—a little. Then up. This will continue for a long time with the overall trend being significantly up (unless everybody converts to natural gas, and soon). The offshoring command decision is getting shaky in this scenario.
Whoops! The big marine cargo lines opt for slow steaming, ostensibly because of the cost of fuel. But this adds more time to deliveries, requiring more inventory. And rail transport from the West Coast has a hard time promising narrow-window time-specific delivery, adding variability to chain performance and seeming to require even more safety stock.
- At least we could still enjoy cheap labor. Umm, not really. As less-developed economies begin to prosper, a middle class begins to emerge and wages rise, adding fuel to the growth of local consumer-based economies. And more prosperity, with further wage increases. And so on.
At least one qualified expert has projected that the combined effects of wage increases in China and transport costs will make the competitive advantage of offshoring to China trivial, if not invisible. China, in fact, has been looking for low-cost labor markets as candidates for moving some of its production out of the country. Some operations have been brought back to the United States, and some call centers have come home for variety of reasons, not least rising local wages.
Not that we in the United States have not been on a continuing search for low-cost labor all the while. Apparel, particularly, is manufactured in dozens of countries in Asia, Central America, and the Caribbean Basin. Vietnam is a hotbed recipient of offshored manufacturing. And so on.
But all of these developments merely postpone the inevitable of local growth and prosperity, and the perceived need to find the new low-cost labor source, no matter how far off the edge of the Earth it may be. The traditional offshoring equation, given all this, has become beyond shaky and may be nearing unsustainability.
AND THERE'S MORE ...
That three-legged stool ought to be enough to scare any executive straight, but just in case, here are a few more potential perils of offshoring:
- Too many spoons in the soup. The globalized supply chain can have a couple of dozen touch points, considerably more than its domestic predecessor. That's a significant increase in opportunities for things to go wrong. Right, Professor Murphy?
- Quality degradation. Labor cost savings might simply not be worth it if quality is not as high as it should be.
- Theft. Not necessarily what we laughingly call "shrink," but the appropriation of intellectual property, which does not seem to be either a crime or a sin in some cultures. So, how important are your designs, your patents, your points of product differentiation? How much or little damage does it do to your brand to have knock-offs produced and sold locally? Or your proprietary techniques, features, technologies, and designs made available to your competitors (who are also dealing with your offshore producers)?
- Diminished control. Face it. You no longer have, in many cases, much direct contact with and influence over the individuals who make your goods (nor with their management).
- Fines or jail time. Or rotten publicity and global disapprobation. When your offshore supplier (or its supplier, service provider, or other business partner) does something that is illegal under U.S. law, or international law, or engages in distributing baksheesh, or operates inhumane sweatshops, or brutalizes child labor, you are going to take major heat at best, possibly face major fines and penalties, or ...
How attractive is the Lorelei of offshoring continuing to look? Is low-cost labor still as alluring as a well-performed tango in Buenos Aires' La Boca?
WHERE TO GO FROM HERE
First, realize that the only defensible long-term reason to have a globalized supply chain is that it must be done in a rational and strategic context in support of organizational strategy that balances sourcing, manufacture, and distribution activities serving worldwide markets. Anything less is short-sighted, subject to deterioration, and possibly dangerous.
Second, begin with a clear-eyed assessment of options and alternatives to serve domestic or a selected few out-of-country markets.
Is reshoring at all realistic to consider? Are the requisite skills still resident? Can they be imported or trained? Are any dies needed in good repair? Can they be rebuilt and maintained? Can you commit to the time and investment of reconstructing a distribution network that is driven from a "new" point of product origin? Will you be able to, and are you willing to, acquire temporary talent and outside service providers to plug any gaps? Even with thorough and creative business cases, will the cost/price gap with competitors be small enough to create a value proposition for customers?
Fine point: If the original home base won't work, are there other in-shored locations that might?
Do you have the guts and the financial resources to get through short-term tough times in the interest of realizing long-term good times?
What are the nearshoring alternatives that split the difference between distant offshoring and reshoring, balancing the labor cost, transport costs, and distribution network investment to provide a cost-competitive solution? One (or more) that overcome(s) some of the other downsides of distant offshoring, including quality, productivity, loss of control, international law exposures, and replenishment cycle time length and reliability?
Are there distant offshoring options that overcome, reduce, or mitigate risks of present arrangements? Do they introduce new risks? What are the trade-offs?
Can you collaborate with another company with offshoring/outsourcing solutions that might make your combined network more cost/quality/productivity/reliability attractive—and effective?
There's probably a lot more, but these few points ought to be enough to get you started. As usual, it is never as easy as we'd like to believe.
The third major step is to translate what you found and learned into a plan—actionable, with clear accountabilities, focused on quantified business objectives, practical, with a manageable time frame, supported by advocates, champions, and sponsors.
Look, this is not a mindless, jingoistic pipe dream. It is all about sustained enterprise performance, long-term profitability, practical actions for competitive advantage, and getting outside the box on knee-jerk searches for low-cost labor for its own sake.
Go for it. And good luck. We have a lot at stake in what you decide.
