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Does Your Company Outsource Too Much (like GE)?

“In some areas we have outsourced too much,” General Electric CEO Jeffrey Immelt acknowledged in a speech as he announced …

“In some areas we have outsourced too much,” General Electric CEO Jeffrey Immelt acknowledged in a speech as he announced plans to open a new manufacturing research center outside Detroit that will create more than 1,000 jobs. Sometime after Immelt made his remarks, Boeing acquired a South Carolina factory from one of its key suppliers, Vought Aircraft Industries. Bringing the facility in-house, Boeing said, would help “accelerate productivity and efficiency improvements” on its much-troubled 787 Dreamliner program.

Some countries can make or do things more cheaply than others. Thirty years ago Shenzhen province was little more than a dirty village on the edge of Hong Kong. It since grew into a manufacturing hive of 12 million mostly migrant workers making everything from toys for Mattel to expensive electronics for Samsung. But labor costs in China have been growing by 20 percent a year, and as The Economist reports “Chinese workers want more pay, shorter hours and more benefits.” A number of firms making labor-intensive products like shoes, apparel have pulled out of China and moved to Bangladesh, Vietnam, Cambodia and Indonesia where the infrastructure may not be as good but where the costs are lower. But the trend toward onshoring is not just about changes in wage rates. Even for manufacturers low wage costs have become less important because as a percentage of overall costs—shipping, time-to-marketdevelopment—they are declining.

Technology allows a U.S. based company to improve the productivity of other components of the value chain in ways that where something is assembled is less important than other factors. Apple, for example, has 150 suppliers many of which make or finish their parts in China. Researchers at the University of California at Irvine found that total worldwide labor costs for the iPad was $33 of which only $8 represented China’s share. The real value add for Apple comes from product design and software which is derived from its cluster of connections up and down Silicon Valley.

Much of the earlier movement of off-shoring came about in part from the urging of people like the late Peter Drucker. In many of his writings he advocated farming out activities of a company in which it had no “special ability.” “Leadership” in any industry, Drucker wrote, “rests on being able to do something others cannot do at all or find difficult to do even poorly. It rests on core competencies that meld market or consumer value with a special ability” that the business possesses.

For Drucker it was not just about cutting costs, but unfortunately many companies used it as a blunt instrument to reduce costs in their supply chain. But as the economics of doing business in Asia combined with the U.S.’s ability to improve productivity across the entire value chain now attest, companies are rediscovering that true comparative advantage needs to be re-examined. The question of whether to off-shore or onshore isn’t so straightforward as it was once thought to be. Speed, agility, and innovation are driving competative advantage far more than mere labor cost. All elements of the value chain are being re-assessed forcing many to rethink which links are best kept closer to home and which ones need to be closer to the customer.

Many CEOs and other business leaders are coming around to the view that U.S. business locations are attractive alternatives to international sites. In a free webinar, sponsored by Louisiana Economic Development, experts will discuss the latest trends in onshoring. Learn more and register for this free webinar.

About JP Donlon

JP Donlon
JP Donlon is the Editor-in-Chief of Chief Executive magazine.