There’s no one-size-fits-all strategy when determining whether to outsource or insource manufacturing operations, says Sam New, director analyst at Gartner.
Manufacturers debating outsourcing versus insourcing must consider opportunities vis-a-vis their enterprise-level strategy, New says. The “astute organization” isn’t focused solely on reducing costs through outsourcing. Rather, it thinks about strategic benefits from using third-party manufacturing partners, such as design and engineering, and sourcing and procurement logistics.
However, long-term competitive advantage occurs only if the relationship is approached correctly, New says. Reverting to classical negotiation styles or treating contract manufacturers like standard commoditized direct-material suppliers often effectively “sets a ceiling on the joint value that can be created.”
Continuing uncertainty over U.S.-China relations has many companies considering either nearshoring completely or engaging in what’s termed “China-plus strategies” – remaining in China but also moving some production to other nations. New says there are myriad problems associated with the China-plus strategy. “One is workforce readiness. In many countries, we don't see the workforce readiness that we see in the PRC. Another issue is production capacity. Brand owners falsely assume they can effectively lift and shift out of China right into a new geography. Their belief is that the production capacity available there will be allocated to them, and that's not necessarily true. So there's this sense of security around the ability to lift and shift that may or may not be real.”
Two other problems face companies looking to re-shore domestically. First, the U.S. has outsourced manufacturing to China for so long, it has fallen behind in technological advancements. Second, capital expenditure must be thought through. “If you're carrying equipment on your books, you own the depreciation of it,” New says. “The initial goal of outsourcing manufacturing was to convert fixed to variable assets. Repatriation of work would entail reacquiring those fixed assets that we attempted to divest in the first place through outsourcing.”
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