Turning the tide: Outsourcing, quality control and consumers
Thursday, September 18, 2014
Manufacturing companies are always looking for ways to cut costs and increase profits. One method often used is to outsource manufacturing and product assembly to countries with low labor costs.
Outsourcing does lower production costs, but in many instances it lowers quality and diminishes the customer base. While cost per unit is lower, often so are sales. Companies lose quality through outsourcing because they lose control.
Outsourcing mishaps are frequent. For example, Boeing Aircraft Corporation outsourced some of the scut work on its futuristic 787 Dreamliner in 2003. The result was parts not fitting together correctly, late deliveries of components and Boeing having to intercede financially to prevent their subcontractors from going broke.
More recently, there have been a number of outsourcing disasters involving consumer goods — toys manufactured in Asia coated with lead paint, contaminated dog treats that made dogs ill and killed them, and clothing made in South America and Asia that was improperly sized and fit poorly.
Consumers are aware of these mistakes, and perhaps they have had enough. Companies may have to return production to the U.S. if they are going to stem the tide of declining market share. However, when a company decides to outsource, they typically sell off equipment and compromise local talent pools. It is not a simple process to undo an outsourcing decision.
Following the recession of 2008, American consumers — although greatly concerned with their own finances — also had a renewed interest in where the products they buy come from. Consumers based their buying decisions on more factors than price, including:
- Creating jobs
- Environmental issues
- Human rights concerns
- Keeping money in circulation
- Decreasing dependence on other countries/economies
This information is not anecdotal. Many studies support that among American consumers, "Made in America" is important.
- A 2012 study by Harris Group and American Express revealed that 63 percent of high-end shoppers preferred to buy American.
- A 2012 study by J.D. Power showed a significant rise in the number of Americans saying they are loyal to U.S. automobile manufacturers.
- Boston Consulting Group reports that consumers at home and abroad say they are willing to pay more for certain products bearing a "Made in the USA" stamp. BCG also reports that 80 percent of Americans are willing to pay a premium for products made in the U.S.
- Consumer Reports National Research Center reports that 78 percent of Americans said they prefer an American-made product to the same one made abroad.
The Harvard Business Review showed how GE has changed its thinking on sending jobs overseas. It invested heavily in retrofitting its appliance manufacturing plants in the United States and opened a new aviation plant in Ellisville, Mississippi. While a business case exists for these decisions was the primary focus of the article, it is interesting to note that GE labeled outsourcing for lower wages as "yesterday's model."
Steve Denning writes in Forbes that there is a shift occurring in America, he calls it "customer capitalism." Denning says that the customer is the true source of business value. He thinks, as do others, that once companies shift their focus to delighting their customers, companies are more insulated from business cycles and make more money.
To do this requires changes in thinking of everyone involved in manufacturing, including company leaders, management consultants, government, investors and politicians. All must learn to think for the long term, and reject short-term gains as not good for business or the country's economy.
Jack Welch, former CEO of GE, once championed outsourcing to maximize shareholder value. Later, he called this thinking the "dumbest idea in the world."
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