Many companies rushed to Asia in the search for cheap manufacturing labor. Now, with a surge in energy costs and the additional risk posed by longer supply lines, they are rethinking that decision, says Gary LaPoint, assistant professor in the Whitman School of Management at Syracuse University.
LaPoint calls it the time of "irrational outsourcing" - that period of the early 2000s when manufacturers flocked to Asia, attracted by cheap labor. They did it "without much strategy behind those decisions," he says. "They really didn't look at the total cost, or long-term effects of what those moves were going to entail." The prevailing impulse was to migrate offshore because everyone was doing it; companies feared the loss of their competitive edge if they failed to go along.
Since energy prices began to soar, and the current recession hit with full force, companies have been rethinking their sourcing strategies. Some have begun pulling back production and sourcing to the western hemisphere, closer to markets. Mexico and Guatemala are among the countries in Latin America that are benefiting from the shift.
Other companies were stuck with their earlier decisions. They shipped equipment to Asia and lost proprietary rights to the products and processes they had developed, says LaPoint.
Expenses related to energy and currency conversion are now front and center in companies' global supply-chain strategies. Tariffs and quotas are yet another important consideration in their outsourcing plans.
Offshoring has had a serious impact on inventory levels. By relocating production to Asia, manufacturers extended their supply chains by at least a month. That change necessitated the placement of safety stock close to consumers, to make up for any production delays. Forecasts became less accurate at lead times expanded. As a result, LaPoint says, many companies are now suffering from the "double whammy" of stockouts and excessive inventories. "They pay to ship it in, then pay to sell it cheaper. And they take a loss on the product because of poor forecasting."
Regardless of distance, companies have to be able to balance a desire to outsource with the need to define their core competencies. "What separates companies today is their supply chain," LaPoint says. "That is a true differentiator."
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