Outsourcing Alternatives

I have seen many companies that have outsourced their production and services to overseas companies in an effort to reduce costs. But are these really savings, are they sustainable? What are the outsourcing alternatives?

I see no problem with companies outsourcing “non-core” functions overseas to achieve savings where there is no viable option here. However many companies here in the west could compete with the likes of China and India if they thought long and hard about what they are doing and how they can improve their efficiencies.

I have seen many small engineering companies that have closed as their main customers have outsourced their production to China to save money, these engineering companies have failed to look at how they can effectively reduce costs to compete with the overseas competition. Most small engineering companies that I have seen are vastly inefficient and use far too much labor and take far too long to produce products, almost as long as it takes to have the product produced by even more but cheaper labor in China and then delivered to the West.

These companies need to look at how they can compete with the lower costs of their overseas competitors, with the increasing fuel costs and so on the difference in prices is reducing significantly and it is getting easier to be able to compete through improving efficiencies. In addition to this the culture of these low wage companies overseas is not conducive to creating a quality product, the workers are not fully motivated and thus do not “care” about what they produce, this is causing many companies here in the west to suffer many quality issues that they never experienced with their “local” suppliers.

Reducing costs for western companies through implementing lean manufacturing techniques is a very real and viable option, most companies that try gain very real benefits that make a major impact on the bottom line of the business, this can then be translated into price cuts to keep business here. Other options are things like six sigma, lean sigma, agile manufacturing and any other business improvement technique you can think of. But in my mind lean is the most viable and well proven alternative.

It is not just the suppliers to these bigger companies that are outsourcing overseas that are suffering, the companies that are doing the outsourcing are also finding many problems with regards to deliveries, and quality. Some are also discovering that they have outsourced some key areas of their company and that they have harmed their ability to design new products quickly as they have no manufacturing capability locally with which to prototype and prove concepts.

The outsourced product savings are also being undermined as costs rise for the transport and the like, the countries to which we have outsourced will also start to increase wages as there becomes more competition for employees and the employees want to consume more and offered financial incentives from foreign governments will disappear, all leading to the cost savings made being eroded. This saving that the companies have made is not sustainable, as the costs rise it will slowly disappear, then what will they do? Move production to another low cost economy? Bringing it back home will be very difficult as once skills, knowledge and equipment are lost it will become harder and harder to bring the production back.

Maybe these companies should look for longer term cost savings that are sustainable, implement business improvement ideas internally and work with their suppliers to help them become more efficient. With the level of waste in our processes there are so many oportunities to find way to reduce these seven wastes and thus reduce costs. There are many alternatives to outsourcing overseas, we should learn how to implement lean manufacturing, six sigma, lean sigma or any of the other ways to reduce our internal costs and better focus on the customer!