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Overseas Sourcing: The End Of An Era?

September 14, 2010

In Supply Chain Management Review, Robert Rudzki has written a guest blog ‘Made in the USA – the New Frontier for Sourcing‘.

In the article, Robert observes how in recent years sourcing has moved from one ‘trendy’ offshore location to another. Often (I suspect) driven by consultants, this frantic activity revealed the immaturity of much sourcing judgment. Essentially, it confirmed the narrow ‘sticker-price’ mentality that drives far too much purchasing activity – and the lack of commercial acumen of the executives who stood behind it.

Of course it is easy to blame offshoring decisions on the demands of the CFO or CEO for ever-greater savings, but the truth is that savings could be achieved by working closely with established suppliers. As explained by a series of IACCM reports and articles, those attractive price reductions frequently had hidden costs behind them, not least because buyers were dealing in unfamiliar markets, with untested suppliers and unknown areas of risk. That is why many of these massive cost-saving deals have now (according to Robert) come back on-shore.

The article focuses on the United States. The phenomenon on which Robert writes was certainly not unique to the US, but was perhaps most pronounced and more exotic in the locations it was willing to choose. Those staid Europeans were castigated for being much slower to leap at the opportunities offered by globalization and for staying much clsoer to home – for example,  developing relationships or investing in Eastern Europe, Turkey and former CIS countries. Perhaps now those decisions – and the closer oversight and management control that they offered – do not look so unwise after all.

Some of the offshoring deals went badly wrong, leading to highly publicized reputational exposures on issues such as product contamination or the use of child labor. But most did not have problems of that sort – the issues typically went unreported. They were sometimes just recurrent quality or delivery challenges. Or maybe disputes that could not be resolved. The recent IACCM survey on ‘ease of doing international business’ highlights nine areas of risk that frequently were not understood or costed when these sourcing decisions were made.

There is mounting evidence that not all is well and this leads me to wonder whether there is a deeper malaise of more fundamental trust and integrity that is eroding offshore supply contracts. Not only are there the often public stories of fall-outs with outsourcing suppliers, but I heard last week that Chinese suppliers are owed at least $25bn in bad debt from US customers. Now is that because they can’t pay, or because they don’t want to pay? What hidden issues lie behind this number, if indeed it is true? Might some of the outsourcers see their remoteness and the limited ability of suppliers to take action against them as an opportunity not to pay the bills?

But of course Robert’s article may be missing a fundamental point. As reported previously in this blog, buyers did not always leap to an overseas source. Often they issued an ultimatum to their existing ‘partners’ to reduce prices dramatically or else … and of course, the way that lower prices were achieved was through outsourcing. So I guess the comforting idea that business is returning home may just be an illusion after all …… It would certainly be interesting to see how many of these ‘repatriated’ deals are in fact resulting in production in US factories.

Certainly there are some important questions to be answered about the ‘real’ sourcing trends and the actual behaviors and experiences of both buyers and suppliers. Far from bringing us closer, it may be that the last few years has simply demonstrated the size of the remaining gaps in broader business understanding; and in the honesty and integrityof today’s corporate behavior. Good topics for IACCM to research – and your comments will be very welcome!

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