Estimated reading time: 2 minutes, 49 seconds

Rebalancing Your Sourcing Strategy

shorelineOutsourcing and offshoring have been the rage for quite a while, but there are now more onshoring initiatives in both the manufacturing and service industries that possibly a major trend reversal is occurring. At the beginning of last year, we predicted that companies might start looking at the best way of sourcing instead of just saying “let's outsource”. Then we pointed to a place it was happening successfully: General Electric's Appliance Park (now Electrolux)

Are we jumping up and down saying: ONSHORE? Not until YOU look at the impact on the whole supply chain. Think about coordinating B2B and B2C. Think about an end-to-end supply chain. Think about good in-house systems before you go out and try to lead your supply chain. Think about your forecasting accuracy.

What you DO HAVE is a broader set of options for sourcing. The latest term is defining “bundles of activities”. It is all about value-creating not just labor costs. Now, you have these options:

  • offshoring
  • nearshoring (locations in neighboring countries)
  • farmshoring (lower-cost locations in the company’s home country)
  • onshoring

Now we are also looking at diverging sourcing trends for manufacturing and for IT / business processes. Most onshoring initiatives have been in manufacturing because of increased domestic demand for goods such as machinery and automobiles that are typically assembled close to final demand. Then we have a decline in the US price of natural gas that is attracting some manufacturing industries.

But not too much activity with onshoring IT / business processes. Outsourced activities offer reduced costs; hedging production risk; good access to talent; avoiding fixed costs; quick response in adding / deleting activities; global talent pool; ability to establish a global network; hedging against risks like currency fluctuations; disasters and regulatory changes. So why rock the boat and onshore?

It is all about adjusting your thinking. Can't just say that “noncore” business activities can be offshored. So, what is core or noncore is open to interpretation. The finance function might consider sales a core activity because it generates revenues and view operations as noncore. Those in marketing and sales might consider call centers core because they are visible to customers and view R&D as noncore.

Some say IT project management is core and should be kept in-house, while software development is noncore and can be outsourced. Downside to separating the two activities is lack of good in-house project managers in the future. You all know the career path to an IT project-leadership role often includes deep software experience. My response: buy the project management experience when you need it.

Some of the considerations are interdependencies among activities, proximity requirements, language requirements. So defining bundles for consistent sourcing relies on same ownership model, and location. All kinds of considerations: an opinion from a trusted authority: GE CEO Jeffrey R. Immelt states bundling R&D and production into one unit at Appliance Park in Louisville, Kentucky reduced waste and cost and increase productivity to achieve a 68 percent reduction in time to produce.

By getting away from core versus noncore logic and instead begin bundling activities, won't you be in a better position to optimize your sourcing strategy? So now you have a network of locations and sourcing approaches, which hedges against geopolitical, currency, and other risks, plus access to a wealth of talent.

Conclusion is revising your sourcing strategy will maximize value for your enterprise.

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