What’s Next When Offshoring Isn’t So Cheap?

What’s Next When Offshoring Isn’t So Cheap?

     
Article image
About the Commentators
  • author image
    Joe Manget

    Joe was formerly a senior partner and managing director in BCG’s Toronto office and the global leader of the Operations practice.

  • author image
    Pierre Mercier
    Pierre is a partner and managing director in BCG’s London office and the leader of the firms’ supply chain topic.
 

What’s Next When Offshoring Isn’t So Cheap?

As China’s Cost Rise, Six Strategies to Win

  • Add To Interests
  • SAVE CONTENT
  • PRINT
  • Over the last decade, offshore manufacturing seemed like a no-brainer. Cheap, plentiful labor was readily available in developing countries like China, India, Mexico, and Eastern Europe. Falling trade barriers, inexpensive energy, and low transport charges further strengthened the case for making products overseas. In this golden period, even an ill-conceived, poorly executed strategy could deliver big savings.

    But suddenly, the case for outsourcing isn’t so clear. Recent headlines trumpet the skyrocketing wages at Foxconn and Honda factories in China. These and other factors like quality concerns, the weakening U.S. dollar, rising fuel costs, and the risks inherent in longer supply chains have many companies rethinking their sourcing strategies.

    Is it time to retrench?

    Not if you want to stay in the game. Consider that many multinationals like GE and the big pharma companies expect that over 50 percent of their revenue growth over the next 10 years will come from developing economies. Or that China surpassed the U.S. for the first time in 2009 to become the world’s top market for new vehicles. This story is playing out in industry after industry. At the same time, emerging challengers from low-cost countries are beginning to compete with established multinationals for the same customers, suppliers, and resources.

    Offshoring isn’t going away, but companies will have to be smarter about it. Most have barely tapped the surface of what they could achieve by operating overseas. Now that the days of easy pickings are over, here’s what it will take to win:

    Look beyond cost. Cost arbitrage isn’t a strategy; it can’t confer a competitive edge over the long haul. Forward-looking companies see outsourcing and offshoring as tools to achieve strategic objectives such as scale, flexibility, and access to talent, resources, and new markets—not just lower costs. Outsourcing must be part of a larger global strategy.

    Don’t replicate—rethink. Many of the factories that companies set up in low-cost countries were replicas of their high-cost domestic plants. By not capitalizing on local conditions and capabilities, they never achieved real savings over their domestic counterparts. When wages are relatively low, for instance, create labor-intensive processes to reduce the cost of equipment, technology, and automation.

    Redesign products and distribution. Choose fewer and simpler features that better suit the market instead of overengineering. Or rethink traditional distribution channels. To deliver SIM chips and prepaid cards to its customers in Mumbai, a mobile phone operator in India tapped into the existing network of “dabbawallas,” couriers who deliver lunch to the city’s workers every day.

    Localize. Customers in low-cost countries often need lower prices or products with different features—like the clothes washer that also washes vegetables that a Chinese company developed. Few U.S. or European companies have the same degree of insight into offshore markets. Yet these developing economies are home to the “next billion” consumers. To reach them, global companies must become local companies.

    Diversify. Given the risks and uncertainty around rising costs, labor shortages, currency volatility, and growing protectionism, smart companies will keep their options open by aggressively migrating to a more diversified approach to global sourcing by maintaining a portfolio of supply sources in different regions to mitigate risk.

    Keep moving. In a global enterprise with a truly global strategy, a company can make, buy, or sell wherever the customers, talent, or resources are, and wherever it makes the most sense from a cost, quality, or efficiency standpoint. Conditions, customers, and costs all change over time, so the “best” locations will also change. Stay flexible and keep moving. Global networks should not be static.

    The playing field is becoming more level—and the game more interesting. Instead of contemplating a hasty retreat, companies should be refining their capabilities and defining a focused attack.

    This article originally appeared on the Harvard Business Review website on January 12, 2011.
  • Add To Interests
  • SAVE CONTENT
  • PRINT