Exporting jobs overseas is now being looked at with increasing scrutiny. Companies in the USA are more than ever looking to see how they can keep jobs remaining in the USA. However the trend in business process outsourcing in the past 20 years has been going in the opposite direction. More than 6 million jobs are currently outsourced out of the US with an estimated 300,000 jobs outsourced out of the US every year. This trend has recently received more criticism.
There are many factors that go into the decision of companies to outsource. The majority of business processes that are outsourced have gone to overseas firms due to the large disparity in labor costs and the potential for huge savings. The justification has been that increased profits can be used to improve facilities and product outflow which adds to the local economy. However most economists think that outsourcing overseas hurts the economy more than helps it.
Outsourcing in the USA
However what if outsourcing in the USA can be done at a comparable cost to overseas firms to justify the change? Can the current outsourcing trend be reversed?
The first question to ask – are our assumptions correct? Is there such a wide disparity in costs? Or, are there hidden costs in offshore outsourcing that are not taken into account? When looking at some of these variables listed below the picture is less clear. You might be surprised to discover how these hidden costs make overseas outsourcing less attractive. Let’s look at some of these points.
1. Cost of goods - Certainly the labor component cost of procuring goods is going to be significantly lower; however that argument becomes null and void since many procurement outsourcing firms in the USA do not charge for their labor cost for sourcing and order fulfillment. Most charge for their services as a mark-up on goods per transaction. If the “local” supplier is an established firm with direct relationships with manufactures and wholesalers, then discounts they are able to obtain and pass on can neutralize the cost of the mark-up. An overseas procurement service might be setting a very low cost for their service and no-mark up cost of goods, however in the end, when product must be ordered and shipped, the real question is who is able to lock-in a greater savings on the cost of goods? Secondly the “local” supplier has more in depth knowledge of the market and multiple sources for specialized commodities, so they are more likely to provide a lower cost of goods. As surprising at it may seem you might actually be paying more in total cost per item via an overseas procurement service.
2. Accuracy - No matter how adept an overseas firm is there is always going to be some type of language and cultural barrier and this could affect understanding of the requirement and thus the ability to communicate the requirement to the manufacturer with flawless precision. Small details concerning product description may not be accurately conveyed. We know that the Suppliers/manufacturers do not always translate information correctly into their system and this problem is becoming increasingly more prevalent. Add to that mix the potential for further miscommunication and the potential for shipment of incorrect items increases, with potential devastating consequences. Case in point which you might remember: In 1999 NASA lost an orbiter built by one of the major aerospace companies since one team was using the metric system and the 2nd team was using American system of measurement. Even though the difference in measurements was minute the end result was that the spacecraft came 100 km closer to its destination than planned and the result was destruction of a $125 million spacecraft
3. Infrastructure problems - Overseas companies can be more prone to setbacks due to political changes, economic instability, changes in government regulations and the weather. The result is that you might be faced with a temporary discontinuation of services and that can have a paralyzing effect on your business. I know of a large manufacturing company in the USA that outsourced a good portion of their procurement activities to one of the premier firms in India. After only one year into the contract, that region in India was hit by a major flood which put them out of commission for over 2 weeks. The USA firm had to scramble to bring back the procurement function back under their roof until they could find an alternative procurement service company. This not only tied up their staff, it created delivery delays and loss of income.
4. Timeliness - Primary reasons why a procurement outsourcing firm is hired in the first place include increased procurement efficiency, elimination of bottlenecks in the flow of orders and delivery schedules and creation of the environment that allows procurement agents to focus more on their core activities. Increasing speed in procurement processing has become necessary for maintaining manufacturing throughput and generating faster roll out of new products. Increasing procurement speed can have the following tangential benefits: Reducing surplus inventory; reducing the risk of downtime and associated costs; Speeding up manufacturing cycle times; reducing time to market; Enhancing productivity of personnel; quicker fulfillment of customer orders; minimizing late deliveries and consequent penalties. Unfortunately working with overseas suppliers can adversely affect timeliness of deliveries. This can be caused by the increased difficulty of coordination between parties for complex transactions or simply the time zone differentials that can interrupt coordination at the worst times. There is also the increased difficulty in following up with suppliers to insure that orders go out for delivery by the promised date. There are also Holidays specific to each country during which the supplier might be completely unavailable. Lastly, how long does it take for an overseas firm to act on a last minute change order? What further delays can be involved in change orders?
5. Delays in HOT orders - Delays are always bad news but particularly damaging when the orders are marked HOT or URGENT, often when the required item is needed to avoid production shut downs. Urgent needs occur with regularity in the manufacturing industry as the ups and downs of production are hard to predict. Overseas firms may not be instantly available for orders that need urgent and immediate attention. In addition, when an urgent item is shipped real-time transmission of tracking data necessary to coordinate work shifts for the “local” company also may not be instantly available. Even a one-day production stoppage can result in losses of hundreds of thousands of dollars, obliterating any perceived savings from outsourcing overseas. Or sometimes a last minute item is needed to complete production of an item that has already been sold and awaiting immediate delivery and transfer of ownership. Case in point: a commercial aircraft was ready to be sold but needed one last small repair. The problem is that the only supplier for this item was over 1,000 miles away. The solution was to hire a courier to pick up the item, book the earliest flight and get the item delivered later that afternoon. The sale went off without a hitch saving tens of thousands of dollars but this type of critical time coordination would have been difficult to carry out if not using a domestic supplier.
6. Specialized sourcing – Due to rapid technological change products reach end of life cycles more quickly and become obsolete. When ordinary sourcing is not enough and extensive research is required to find replacements products you might consider to partner with a domestic company who would be more adept at provided the required research. Or, when a manufacturer drops an entire product line a local sourcing would have greater ability to advise of replacements products that can provide the same end result. It might be more cost effective to engage with a local sourcing company in the first place to solve these unexpected problems.
7. Security of data – In some commonly used overseas outsourcing destinations there is greater susceptibility to security breaches and data integrity. Data loss due to security problems can happen in any country, even locally, however when transmitting confidential data overseas there is naturally greater potential for breaches, especially when there is shared collaboration of data. Compromised data integrity can be a major concern as your company data in one of your company’s most important assets.
How Citizens of the USA Feel About Outsourcing?
Offshore outsourcing at first glance might seem to offer considerable savings however before you decide whether to outsource your procurement function or other business processes to an overseas firm rather than utilizing local resources you might want to examine all the hidden costs before making your decision.
Central Trading Agency is a USA Procurement Outsourcing company providing added value low-cost procurement services for the aerospace and manufacturing industry since 1996. For more information visit www.outsourcingintheusa.com or call 866-559-8581 or 425-489-8282.
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