What is off-shoring?
Before we define off-shoring, let’s look at the difference between off-shoring and outsourcing, because often these two terms are used interchangeably, though their meanings are quite different. Outsourcing has been around for many years. Any company who uses an outside company to process their payroll, for example, is outsourcing that task. Other common examples are janitorial services, landscapers and off-site laundry services used by restaurants.
Off-shoring occurs when a company moves an operations function, like manufacturing of IT services, to an overseas location. Cost and proximity to the customer are the two biggest reasons for off-shoring.
The US has been off-shoring for a long time. When I was a kid, a lot of products were built in Puerto Rico. At that time, quality standards were low for products made in Asia, and a Japanese-made transistor radio was the epitome of cheap.
Going to China
But around 1990 US companies began shifting production to China. When I paid a visit to a manufacturing facility north of Hong Kong in 1993 it was like going to a third world country complete with armed guards at the airport, no paved roads, and a big factory out in the middle of a rice paddy. Cheap labor was the primary reason for off-shoring to Asia in the 90s, but these days some companies move production to China to be closer to their customers: the expanding Chinese middle class.
Where To Next?
Now we’ve added Mexico, India and Eastern Europe to the off-shoring mix, particularly for metal products in the Czech Republic, Hungary, Romania and other former Soviet states. Chinese labor rates are rising, and production is shifting to other areas, like the Philippines and other Southeast Asian countries. Here are four basic considerations for off-shoring (or re-shoring):
- Is off-shoring or re-shoring congruent with your strategy? This has to do with the nature of your product, the location of your customers, whether you are a highly innovative organization, and whether your products are slow or fast clock speed.
- What is your demand structure? Is it consistent or highly variable? Highly variable demand is very difficult to manage if you have long lead times, regardless of where production is.
- How flexible do you need to be? Operations needs to be so flexible that if you can sell a product, you are able to ship it, with high inventory turns and low cost. Highly flexible suppliers and supply chain make it possible.
- Look at total cost of ownership, not just part cost. For more on TCO, check out my article on the topic from last year’s eSide Supply Management. Social and environmental considerations are a part of this.
© Rick Pay, 2011 – All rights reserved