Outsourcing Reconsidered

Two reports redefine its manufacturing impact.

For the foreseeable future, the outsourcing of production and services promises to be around, as manufacturers continue to pursue cost savings and competitive advantages. However, two recent reports from respected business research firms suggest outsourcing may not live up to executives' expectations nor, as many believe, be the primary cause of U.S. manufacturing's shrinking profile.

"With an estimated half of all offshoring operations destined to fall short of expectations, companies are under increasing pressure to calculate the risks -- not merely the rewards -- that offshoring entails," asserts the Conference Board. A variety of missteps can sink offshoring, the moving of factories and service functions from the U.S. to foreign locations, says the New York-based business research group. These mistakes range from poor project management and inadequate communications to ill-conceived transition plans. "While many companies tend to focus on security risks, a whole host of other risks, both at home and abroad, loom large: reputation/brand, social responsibility, geopolitical, human capital, regulatory and legal," contends the Conference Board. "Any one of these can turn a once-attractive potential savings into a costly endeavor."

Meanwhile, outsourcing, offshoring and corporate restructuring are not the primary cause of a shrinking U.S. manufacturing base, asserts the Manufacturers Alliance/ MAPI, an Arlington, Va.-based business and public policy research group. A decline in the number of U.S. manufacturing plants is a result of fewer businesses opening in the U.S. rather than of U.S. jobs being moved abroad, says Daniel J. Meckstroth, the alliance's chief economist. The alliance's report notes that from 1999 through 2002, U.S.-based multinationals opened 246 facilities in foreign countries while the number of manufacturing plants in the U.S. declined by 20,000, a number that's remained relatively constant. The reasons for fewer factories being opened include excess capital investments during the 1990s and rising imports of manufactured goods. But Meckstroth also notes, "Lean manufacturing practices, Six Sigma programs . . . and just-in-time inventory management all reduce the need for total numbers of plants and employees."

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