Editor's Page -- Next-Generation Outsourcing

June 11, 2006
A new realism takes hold.

Now that the hype about outsourcing or, more specifically, offshoring has subsided, the real work of incorporating this important strategy into U.S. manufacturing business plans is underway. The outsized expectations of dramatically reduced costs have given way to right-sized reality: Offshoring is not always the best way to improve a company's competitiveness, or even to reduce its costs. The strategy works well in some situations, not so well in others and sometimes works in unexpected ways.

This healthy realism is as welcome as it was expected. Remember how happy manufacturing was to move on from the often-inane and ineffective quality circles of the 1980s to more effective strategies that encouraged employee engagement in continuous improvement. Likewise, it's good to finally bring offshoring down to earth, and to identify the important lessons learned from early efforts. These lessons are:

  • The terms "outsourcing" and "offshoring" are not synonymous, though the terms are often misused as if they were. A company can offshore without outsourcing by locating a facility in another country and selling there. It can outsource without going offshore by sending the work to another U.S.-based company. And it can outsource offshore, by, well, outsourcing to an offshore company. Though subtle, the differences between these approaches are critical to implementing effective offshoring and outsourcing strategies.
  • Neither outsourcing nor offshoring is just about reducing labor costs. While some companies understood this early on, it took others time to realize that outsourcing and offshoring also enable companies to break into new markets, to tap the innovations and expertise of partners and to more effectively execute other competitive strategies. In addition, the limits and potential liabilities of outsourcing and offshoring to lower labor costs have become clearer.
  • Outsourcing and offshoring are no longer confined to non-core processes. Increasingly, U.S. manufacturers are outsourcing and offshoring critical functions, such as R&D and product development.
  • See Also...

    Outsourcing's Next Steps
    Smartsourcing: The New Way To Drive Innovation
    The outsourcing of non-core functions, such as inventory management and logistics, has matured, resulting in more robust and more effective partnerships between companies and their outsourcing partners.
  • Offshoring is a function of the increasingly global nature of the manufacturing sector, not an evil plot by U.S. CEOs to disenfranchise U.S. workers. By now all but the most cynical accept the business case for outsourcing and offshoring.
  • Outsourcing and offshoring come with their own challenges, as the breadth of strategic possibilities grow. With each additional initiative, the supply chain becomes more complex and continuously changes.

In "Outsourcing: The Next Steps," IW explores the current state of a variety of outsourcing and offshoring strategies. We've defined the terms broadly to spur thinking on and greater understanding of strategies that are too often oversimplified. After reading the reports, it's clear to me that outsourcing in the future will not be considered a strategy, but will take its place in the toolbox of tactics you use to achieve strategic objectives. Whether strategy or tactic, manufacturing is still learning about these powerful business processes. Like many initiatives that have come before it, they seemed at first to be simple, quick fixes to a few specific problems. Instead, the range of possible implementations is vast and the intricacies are many; you'll do well to master them.

Patricia Panchak is IW's editor-in-chief. She is based in Cleveland.

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