Executive Briefings

Cheap Labor Doesn't Always Mean Higher Profits. So How Do You Keep Offshore 'Savings' From Evaporating?

The huge savings to be derived from offshore manufacturing are causing many companies to globalize their sourcing strategies. That's hardly news to most supply chain executives. What might come as a surprise is the ultimate impact of such efforts. The apparent financial windfall that comes from lower labor costs at the plant level doesn't always show up on the bottom line. In fact, says Bob Belshaw, senior vice president of GE Trade Distribution Services, outsourcing could prove to be a losing proposition. Speaking at the recent Supply Chain Operations Private Exposition (SCOPE) in Las Vegas, he cited an Aberdeen Group study from last year which found that half the companies that adopted global supply chain strategies ended up saving nothing. The lower cost of labor was offset by the need for increased inventory to serve as buffer stock, as a hedge against the variability that arises from longer supply lines. Often such companies found themselves resorting to pricey expedited transportation, in order to get goods to market on time. They were also faced with higher costs related to compliance, documentation and security. In short, says Belshaw, the push for cheap manufacturing in countries such as China can lengthen that all-important cash-to-cash cycle, while compromising customer service.

So what to do? Belshaw doesn't advise U.S. companies to bail out of China and bring their plants back home. They should realize, however, that outsourcing has reached a new level of maturity in corporate operations. No longer does it afford an automatic competitive advantage. "The competition is probably already sourcing in China," he says. The trick lies in adopting an unified approach internally, so that purchasing, logistics, finance and other departments can work together to head off supply chain disruptions, and minimize their impact when they occur. Another successful strategy is to take a broader view of how working capital is distributed across the supply chain. Vendor-managed inventory arrangements are one way to lower the cost of storing and paying for production parts. But smaller suppliers can't always afford to shoulder the extra financial burden that such programs entail. The obvious alternative -manufacturers taking title to goods earlier-isn't especially attractive either. Instead, a number of third-parties are stepping in to assume temporary ownership of inventory, paying suppliers at a discount early, then recouping the full price from buyers. Such entities can help to mitigate the risk of lengthier supply chains, says Belshaw. (For more on creative financing strategies in global supply chains, see: "Where's Your Cash? Well, It's Trapped in Your Supply Chain," GL&SCS, Sept., 2007.)

Visit www.gecommercialfinance.com.

The huge savings to be derived from offshore manufacturing are causing many companies to globalize their sourcing strategies. That's hardly news to most supply chain executives. What might come as a surprise is the ultimate impact of such efforts. The apparent financial windfall that comes from lower labor costs at the plant level doesn't always show up on the bottom line. In fact, says Bob Belshaw, senior vice president of GE Trade Distribution Services, outsourcing could prove to be a losing proposition. Speaking at the recent Supply Chain Operations Private Exposition (SCOPE) in Las Vegas, he cited an Aberdeen Group study from last year which found that half the companies that adopted global supply chain strategies ended up saving nothing. The lower cost of labor was offset by the need for increased inventory to serve as buffer stock, as a hedge against the variability that arises from longer supply lines. Often such companies found themselves resorting to pricey expedited transportation, in order to get goods to market on time. They were also faced with higher costs related to compliance, documentation and security. In short, says Belshaw, the push for cheap manufacturing in countries such as China can lengthen that all-important cash-to-cash cycle, while compromising customer service.

So what to do? Belshaw doesn't advise U.S. companies to bail out of China and bring their plants back home. They should realize, however, that outsourcing has reached a new level of maturity in corporate operations. No longer does it afford an automatic competitive advantage. "The competition is probably already sourcing in China," he says. The trick lies in adopting an unified approach internally, so that purchasing, logistics, finance and other departments can work together to head off supply chain disruptions, and minimize their impact when they occur. Another successful strategy is to take a broader view of how working capital is distributed across the supply chain. Vendor-managed inventory arrangements are one way to lower the cost of storing and paying for production parts. But smaller suppliers can't always afford to shoulder the extra financial burden that such programs entail. The obvious alternative -manufacturers taking title to goods earlier-isn't especially attractive either. Instead, a number of third-parties are stepping in to assume temporary ownership of inventory, paying suppliers at a discount early, then recouping the full price from buyers. Such entities can help to mitigate the risk of lengthier supply chains, says Belshaw. (For more on creative financing strategies in global supply chains, see: "Where's Your Cash? Well, It's Trapped in Your Supply Chain," GL&SCS, Sept., 2007.)

Visit www.gecommercialfinance.com.