Challenging the wisdom of outsourcing
BLUFFTON, Ohio—American companies are discovering benefits to bringing some jobs back to the United States, according to Dr. George Lehman, chair of Bluffton University’s business studies division.
Lehman discussed factors that contribute to the appeal of “insourcing” in a global economy Jan. 10 in his annual lecture as the Raid Endowed Chair in business. The title honors the late Howard Raid, a Bluffton business professor from 1947-79.
In his lecture, titled “Is Insourcing the New Outsourcing?” Lehman concluded that every company should think carefully about the long-term costs of outsourcing.
Outsourcing has become so widespread because of a huge, cheap labor force in China, the business professor suggested.
Other contributions to the growth of outsourcing have included increased transportation costs and efficiency of travel as well as increased global trade, which creates pressure to reduce spending, he said.
From 2000 to 2009, the U.S. lost 6 million manufacturing jobs to outsourcing. But despite this trend, outsourcing is becoming less appealing, he continued.
Lehman related the opinion of Jeff Immelt, CEO of General Electric, who stated that outsourcing is “quickly becoming mostly outdated as a business model” for his company.
The Bluffton professor said he believes the most important reasons for insourcing are linked to shortened product life cycles. When a company rapidly updates its products, such as with a smartphone, it is less worthwhile to produce the products in another country, he explained.
“Outsourcing production of a product with a seven-year life cycle makes a lot more sense than outsourcing a product that you will likely abandon or change dramatically in two years,” he said.
Lehman also suggested that companies on the receiving end of outsourcing are not content to just assemble products; they want to add value to the product, and as a result may transform into a competitor to the outsourcing company.
“Chinese companies want to do high value-added work as much as U.S. companies do. They, too, want to control their own destiny,” he said.
Lehman cited a case study of Haier, a Chinese appliance manufacturer. A western company contracted Haier to make its refrigerators. Over time, Haier learned how to build refrigerators that surpassed those issued by the western company, and as a result began to sell its own.
Today, Haier employs more than 80,000 people, distributes its products to 100 countries and reached $25.8 billion in global revenue in 2012, according to the Haier website.
Lehman stressed that he is not against outsourcing, but rather wishes to challenge the common belief that outsourcing is the best option for growth. “I am arguing against the idea that outsourcing products for production in China is, by definition, the progressive, cost-conscious thing to do,” he said.
He noted that insourcing does not need to replace outsourcing, but that company managers must ask hard questions about each method.
Whether or not outsourcing is effective should be based not only on cost reduction, but also on product innovation and ingenuity, he said.
“My own experience in the MBA program tells me that we have many quality, thoughtful people who like to make things. I hope that American manufacturing can continue to give them the chance to do just that.”