People Innovation Excellence

Outsourcing Revisited

Outsourcing

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BY TERENCE T.BURTON

INDUSTRIAL ENGINEERING – MAY 2013; VOLUME 45; NUMBER 5

Outsourcing, a term to describe the transfer of U.S. jobs to developing countries, emerged significantly over the last decade or so. Its original objective was to set up a national presence in other countries such as China, Brazil, India and others with the potential for high revenue growth for goods and services. Today, more than 50 percent of revenues in many corporation come from international markets. The availability of low wage Chinese workers was another factor.

What a winning strategy: big incremental global revenues, unlimited availability of resources, significant labor cost reductions, fewer government regulations, lower taxes and huge profits – right?

In fact, more than half of outsourcing decisions need significant improvement to maintain profitability and achieve valid long-term feasibility. The total hidden costs of outsourcing typically fall between 14 percent and 60 percent of the purchase price. But in some isolated situations, the hidden costs are more than double or triple the purchase price.

So that, in reality we need to improve outsourcing not because someone made a mistake but because outsourcing is dynamic process where circumstances have changed dramatically.

10 outsourcing improvement opportunities

The outsourcing process is a complex network of physical and transactional processes. Outsourcing has added dozens of new links, touch points, people, variations and risks to the supply chain. Many organizations could have hundreds of new opportunities for improvement depending on the size, scope, content and geographical logistics of their outsourcing activities. These are 10 areas that usually generate significant savings:

  1. Cost of outsourcing strategy
  2. Cost of management and coordination
  3. Cost of sales and operations planning
  4. Cost of inventory performance
  5. Cost of supplier management
  6. Cost of quality
  7. Cost of unplanned logistics and premium freight
  8. Cost of warranty, returns and allowances
  9. Cost of cash flow
  10. Cost of unplanned and unforeseen risks

Transactional forensics for the future

Transactional forensics is an appropriate name for this approach. It involves setting up deliberate process experiments for transactional stream mapping and classification to discover the root cause and magnitude of problems and/or verify that problems have been eliminated through the right  data-driven improvements and corrective actions. One must do a thorough job of classifying and allocating hidden costs while not double counting them.

It s no secret that most outsourcing decisions were fueled by the expectation of huge revenue growth and labor savings. Some executives are reluctant to revisit past decisions because short-term performance and compensation objectives are being met, and incremental country revenues continue to cover hidden wastes. Materials, not labor, are the largest cost driver in many products, so chasing labor  savings is yesterday’s rain.

Complacency, postpone mentor procrastination about outsourcing improvement are not winning strategies. The real winners will succeed at lean outsourcing, whether that means finding millions of dollars of new opportunities in relationships with their Chinese contractors, reducing complexity and risk in their global supply chains, or deciding to move thousands of manufacturing jobs back to the U.S.

The full version of the article is available in IIE Laboratory. It is also readable online for IIE member through accessing the iienet.org website. Contact Maya (President of IIE BINUS University Chapter) at mayarininta@yahoo.com for more information on the IIE membership.


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