Oxstones Investment Club™The End Of The Age Of Outsourcing
Dana Olson, 11.04.10, 6:00 PM ET
Outsourcing overseas as we know it may be over. Once irresistible to any company looking to increase profitability, outsourcing is not what it used to be. It has been weakened by increasing shipping and transportation costs, quality control issues and a surplus of available, skilled American workers.
Large global companies aren’t likely to stop outsourcing or offshoring in the near future, but a growing number of small to midsize ones are rethinking their overseas operations and actively exploring options for relocating them to the U.S.
California-based Seesmart LED, which makes light-emitting-diode light bulbs in China, represents a new crop of American companies that want to do what they can to support the U.S. economy. It is exploring ways to bring its entire overseas operations, ultimately 250 to 500 jobs, back to the U.S. within the next two years.
Seesmart LED’s chief executive officer, Ken Ames, says the pull to create American jobs and help the economy is greater than the potential cost savings from operating overseas. “In reality, the cost to create the same jobs in the U.S. is not that drastic,” he says. “Somebody has to stand up and say this is a good country, and if we work as a team we can get good quality jobs back. America needs jobs.”
That sentiment is shared by executives at a growing number of American companies. Manufacturers, whether with only one or two production facilities or with all of their production outsourced overseas, are finding that, when all costs are considered, cheaper labor is often not enough for a dramatic savings. Most will bring jobs back if it makes financial sense and they can help the U.S. economy.
There is also the PR factor. Business leaders increasingly recognize that consumers can have negative reactions to products being made in China or other countries and value a label that says “Made in the U.S.A.” And then there’s the goodwill to be won by moving or keeping jobs in the U.S.
Allstate Insurance recently passed up sites in India and the Philippines to open a $12 million call center in San Antonio. Despite the higher cost of labor in the U.S., the company listened to its customers who said they would think better of the company if it stayed put. That signals a turning point for American companies as they acknowledge that the long-term boost to their reputation from keeping jobs in the country can outweigh the meager cost saving associated with cheap labor.
With unemployment at nearly 10%, there is an ample supply of qualified and affordable American workers with a wide variety of education and job skills who can’t get jobs. Yet cheap labor remains the top reason American companies look beyond U.S. borders. Most companies that jump ship for labor reasons fail to evaluate the overall operating costs of doing business abroad. Once they factor in rising shipping and transportation costs, the addition of increased quality control and the management of unreliable fulfillment dates, they may find that they’re not actually saving any money.
Shipping and transportation costs alone can make outsourcing prohibitively expensive, particularly if a company has a high-volume, lower-price product. One Minnesota manufacturer that imports materials to China for production and then ships the finished goods back to the U.S. is contemplating how it can save on its exorbitant shipping costs and estimates that producing in the U.S. will actually save it approximately 25% of the overall cost of each piece.
Another reason manufacturers in particular are thinking twice about operating overseas is quality and reliability. Too often companies that produce overseas fall victim to quality control problems in countries that don’t have standards consistent with America’s. There is also a question of reliability, getting products produced and shipped on time. China has rolling power blackouts that affect production and delivery.
The benefits of outsourcing and offshoring are clearly waning for a growing number of American businesses. More companies with overseas operations should rethink their reasons for outsourcing and consider how coming back home can improve their profitability as well as contribute to the future health of our economy.
Dana Olson is president and chief executive officer of Ecodev, which provides site selection analysis services and economic development consulting for companies that need to relocate or expand.
Tags: outsourcing, USA