Monday, April 10, 2006

The Truth (Perhaps) About Global Outsourcing

10 lessons 2 authors have learned about the difficulties of "getting it done."

Read the article here.

1 comment:

Craig Maginness said...

This is a great article on some of the issues with outsourcing -- it makes me appreciate your site all the more as it was an easy wayt o get to this useful perspective.

Their 10 limitations, however, are fairly universal whether the outsourcing is domestic or international. As a fellow blogger regarding international trade, I want to add a global perspective with another issue with outsourcing that your readers might find useful specifically related to outsourcing abroad in an effort to lower costs of production.

Usually this scenario involves etting up ops in a developing country with low wage rates liek India or China. In theory lower hourly wages lead to lower production costs and a competitive advantage when the product is shipped back into developed markets for sale. Its a good theory, but I'd say most companies are just as likely to fail as succeed at this game.

So what goes wrong? Its all the other costs imposed by ops in a developing country.

(1) Poor transportation infrastructure makes it difficult to both source raw materials on the front end and more difficult to re-export finished product on the back end.

(2)A relatively unskilled workforce without exposure to modern developed manufacturing concepts such as 5S and lean craete the need for redundant employment and other inefficiencies leading to lower productivity.

(3) The challenge of managing remote operations to ensure adequate product training and buy-in to the outsourcing company's culture around quality and customer experience always takes more involvement than originally planned.

Finally, the big over riding issue here is that while the outsourcer is trying to get all the above right, the rapid expanding material aspirations of the developing middle class create a macro-economic dynamic that narrows the gap in wage rates which provided the rationale for outsourcing in the first place.

So the morals of this outsourcing story are -- (1) it can be done effectively, but it requires planning around a more realistic set of cost assumptions than most company's use; and (2) while low wage rates may be one reason to outsource to a developing country, to be successful in the long run, you should have other sound business reasons to be going abroad.