Off-Shoring Comes Full Circle

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Off-Shoring Comes Full Circle

As off-shoring gained momentum over the past two decades, there was little expectation, especially in manufacturing, that the pendulum would ever swing back.  In fact, off-shoring seemed relentless.  Consider that, by 2003, up to one-half of manufacturing companies in Western Europe were off-shoring some or all of their production.  According to the Duke Offshoring Research Network, over 50 percent of U.S. companies were off-shoring production by 2008, double the figure for 2005.1  It addition, it was reported that of those companies, 60 percent had aggressive plans to expand their off-shoring activities.

Large, small and mid-sized companies were motivated largely by price.  However, smaller and mid-sized companies had an additional motivation:  Unable to effectively compete for top domestic talent, these companies turned offshore in their search for "innovation support."  Small companies have been particularly successful at finding and tapping into new geographical talent clusters, such as those found in Brazil, Egypt, Sri Lanka, and Russia.

Because the off-shore model encompasses such an extensive number of nations, products, and practices, it's difficult to determine the total dollar size of the activity.  But it's easy to understand what drove the practice.

It was kick-started by customer demands for lower prices and by the need to compete with companies that were already experiencing the cost advantages delivered by aggressive off-shoring.  It was a simple economic equation.  Suppliers in China and other low labor-cost countries were offering prices that appeared to be 25 to 40 percent lower than those of domestic suppliers.  Other factors included favorable exchange rates, access to cheap commodities, and low shipping rates.

But saving money was just one part of the equation.  To make off-shoring a winning strategy, companies also needed to meet target service levels as well as maintain and improve coordination with the foreign providers.  Many found that to be truly successful required a senior-level champion for off-shoring efforts, plus buy-in on the part of internal stakeholders and effective procedures for: 

  • Selecting off-shore providers
  • Conducting visits to provider facilities
  • Maintaining a corporate "off-shoring resource center"  

As you'd expect, doing all these things effectively posed big hurdles.  But, the expected return on investment was viewed as worth it — at least, until very recently, when the picture appears to be changing.2

Consider a few examples: 

  • Vaniman Manufacturing is a dental equipment producer that has been off-shoring most of its sheet metal fabrication to China since 2002...

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