Offshoring and outsourcing are often misunderstood
Source: http://bit.ly/eV2gme
"Obama" isnt a four-letter word, but in the days leading up to this months midterm elections, many Republican candidates wielded the name like a bludgeon.
Democratic office-seekers countered with their own "O" epithets: "offshoring," "outsourcing" and cover the kids ears "offshore outsourcing."
Given the sluggish economy and the nations nagging unemployment problems, its no surprise that politicians would seek to capitalize on corporate downsizing, especially whenever and wherever they could link work-force reductions in the United States to work-force expansions overseas.
Mike Kallmeyer, host of ONN-TVs Ohio Means Business program, explored outsourcing and offshoring and what they really mean with an expert on the subject: John Gray, assistant professor of operations at Ohio State Universitys Fisher College of Business.
An edited excerpt:
Q: I think its good to start by defining the terms. First of all, offshoring what exactly is it?
A: Offshoring is taking an activity and moving it to an offshore location such as India or China. That activity could be managed by your own company still; it could be wholly owned by you, whereas outsourcing is taking an activity and having it managed by another company, though that other company could be right here in Ohio. The terms were actually often misused during the election.
Q: Theyre often interchanged.
A: Yeah, theyll say, We need to stop outsourcing. Really, they mean, We need to stop offshoring when theyre talking about job losses.
Q: These things carry a negative connotation because we think that jobs are going overseas, and in many cases, they are. But other countries do the same thing, right? Right down the road in Marysville, we have Honda.
A: Thats correct. Honda has set up a huge operation in Marysville, Ohio, and thats spawned all sorts of suppliers around there. And certainly, Ohio has benefited from Honda and other companies offshoring here to Ohio.
Q: What are the specific advantages of offshoring for a company? Why do they do it?
A: Well, from a company perspective, usually the advantage is cost. If you have a high-labor operation, then even with Chinas emerging economy, costs are still very low there. Its a dollar an hour, still, in most areas for a manual laborer.
Also, you may want to enter one of those markets. Those economies are growing and the consumers are starting to purchase more and more. That may be a way to get access to a market to offshore to India or China, for example.
Q: And outsourcing what are the advantages of outsourcing?
A: Often, you have companies take a tire manufacturer in the auto industry. It used to be, back in the 1920s and 30s, that auto companies would make their own tires. But it makes more sense to have a company specialize in tire manufacturing and have the auto companies outsource to (that manufacturer).
The benefits there: The company you outsource to gets the benefits of economies of scale. They get deep knowledge of tires. And you can benefit from that by getting a cheaper price and better quality, possibly, than you could in-house.
Q: On the flipside of things, what are the risks of outsourcing and offshoring?
A: Well, when you outsource an activity, another company is now managing it, so their incentives are to improve their own profits in the long term.
Some companies have done a great job take Honda, again of developing deep relationships with their suppliers, where they align incentives through long-term relationships. But thats very difficult to do.
If you outsource products or services to a company and they develop some skills that are going to be hard to get somewhere else, you have a risk that you could be locked into that relationship, and those companies could possibly jack up the prices or hold you hostage in the relationship.
Q: And the risk of offshoring?
A: Think about products: Youve sent a product to be produced overseas. The monitoring cost can get out of control if you start having quality issues. You have longer lead times. You have a risk of port shutdowns. You have, maybe, different quality expectations in some of these countries.
And in some countries, you even have a risk that the government, the host government, may choose to change their policies significantly.
Q: The thing about offshoring it seems like you lose a little bit of control.
A: Thats definitely true. And a lot of smaller companies will actually use brokers, and then theres a whole other layer between you and the actual operation and so theres an even deeper loss of control.
Q: What are the trends in both outsourcing and offshoring? Where are we going?
A: With outsourcing, its hard to say. I mean, there was a great move toward outsourcing in the 90s, and thats slowed down a little bit. Offshoring seems like it might be slowing down a little bit (too), due to the currency issues I just discussed and the increased realization of some of the risks and monitoring costs.
Costs have been increasing in the emerging economies at the same time our unemployment has been a little higher and theres been a little more wage pressure here. Maybe that has leveled off the (respective) costs, to some degree.
Tags: china, offshore, outsourcing
Source: http://bit.ly/eV2gme
"Obama" isnt a four-letter word, but in the days leading up to this months midterm elections, many Republican candidates wielded the name like a bludgeon.
Democratic office-seekers countered with their own "O" epithets: "offshoring," "outsourcing" and cover the kids ears "offshore outsourcing."
Given the sluggish economy and the nations nagging unemployment problems, its no surprise that politicians would seek to capitalize on corporate downsizing, especially whenever and wherever they could link work-force reductions in the United States to work-force expansions overseas.
Mike Kallmeyer, host of ONN-TVs Ohio Means Business program, explored outsourcing and offshoring and what they really mean with an expert on the subject: John Gray, assistant professor of operations at Ohio State Universitys Fisher College of Business.
An edited excerpt:
Q: I think its good to start by defining the terms. First of all, offshoring what exactly is it?
A: Offshoring is taking an activity and moving it to an offshore location such as India or China. That activity could be managed by your own company still; it could be wholly owned by you, whereas outsourcing is taking an activity and having it managed by another company, though that other company could be right here in Ohio. The terms were actually often misused during the election.
Q: Theyre often interchanged.
A: Yeah, theyll say, We need to stop outsourcing. Really, they mean, We need to stop offshoring when theyre talking about job losses.
Q: These things carry a negative connotation because we think that jobs are going overseas, and in many cases, they are. But other countries do the same thing, right? Right down the road in Marysville, we have Honda.
A: Thats correct. Honda has set up a huge operation in Marysville, Ohio, and thats spawned all sorts of suppliers around there. And certainly, Ohio has benefited from Honda and other companies offshoring here to Ohio.
Q: What are the specific advantages of offshoring for a company? Why do they do it?
A: Well, from a company perspective, usually the advantage is cost. If you have a high-labor operation, then even with Chinas emerging economy, costs are still very low there. Its a dollar an hour, still, in most areas for a manual laborer.
Also, you may want to enter one of those markets. Those economies are growing and the consumers are starting to purchase more and more. That may be a way to get access to a market to offshore to India or China, for example.
Q: And outsourcing what are the advantages of outsourcing?
A: Often, you have companies take a tire manufacturer in the auto industry. It used to be, back in the 1920s and 30s, that auto companies would make their own tires. But it makes more sense to have a company specialize in tire manufacturing and have the auto companies outsource to (that manufacturer).
The benefits there: The company you outsource to gets the benefits of economies of scale. They get deep knowledge of tires. And you can benefit from that by getting a cheaper price and better quality, possibly, than you could in-house.
Q: On the flipside of things, what are the risks of outsourcing and offshoring?
A: Well, when you outsource an activity, another company is now managing it, so their incentives are to improve their own profits in the long term.
Some companies have done a great job take Honda, again of developing deep relationships with their suppliers, where they align incentives through long-term relationships. But thats very difficult to do.
If you outsource products or services to a company and they develop some skills that are going to be hard to get somewhere else, you have a risk that you could be locked into that relationship, and those companies could possibly jack up the prices or hold you hostage in the relationship.
Q: And the risk of offshoring?
A: Think about products: Youve sent a product to be produced overseas. The monitoring cost can get out of control if you start having quality issues. You have longer lead times. You have a risk of port shutdowns. You have, maybe, different quality expectations in some of these countries.
And in some countries, you even have a risk that the government, the host government, may choose to change their policies significantly.
Q: The thing about offshoring it seems like you lose a little bit of control.
A: Thats definitely true. And a lot of smaller companies will actually use brokers, and then theres a whole other layer between you and the actual operation and so theres an even deeper loss of control.
Q: What are the trends in both outsourcing and offshoring? Where are we going?
A: With outsourcing, its hard to say. I mean, there was a great move toward outsourcing in the 90s, and thats slowed down a little bit. Offshoring seems like it might be slowing down a little bit (too), due to the currency issues I just discussed and the increased realization of some of the risks and monitoring costs.
Costs have been increasing in the emerging economies at the same time our unemployment has been a little higher and theres been a little more wage pressure here. Maybe that has leveled off the (respective) costs, to some degree.
Tags: china, offshore, outsourcing
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