Business Columns & Blogs

Outsourcing not always a bargain

We all outsource. Most of us could change our own oil (and some of you probably do).

But by the time we gathered the proper equipment and supplies, removed the oil-pan plug and filter without permanently wrecking the fittings, replaced the oil after remembering to put the plug back in, and figured out how to responsibly dispose of the used oil, the accumulated expense and lost time would far exceed what it would have cost to go to someone who does oil changes for a living.

Oil changes aren’t a core competency for most of us. Our productivity is improved by outsourcing the job.

Businesses outsource all the time. Most businesses aren’t big enough to staff their own legal, accounting and IT departments, so they outsource that stuff to have more time to concentrate on what they know, are good at and actually makes them money.

So there’s nothing inherently wrong with outsourcing in theory.

But like so many ideas that work well in theory, they can break down when taken to extremes in reality.

Such as what happens when, just to pick a random example, you’re a global aerospace company that decides you can concentrate on designing and selling airplanes, leaving most of the messy details in between to others.

Some might argue that those messy details, such as fabricating components and subassemblies, should be among an airplane company’s core competencies, and that they matter, especially when you wait until final assembly to find out that the pieces don’t fit together or that the quality of work is such that it has to be redone.

Some are turning out to be right, to the extent that Boeing apparently agrees with them. Between the recent announcement of a major increase in employment in a Seattle-area plant to develop composite-materials parts for the 787 program, and pronouncements by executives that the company will bring some work back in house, it’s evident that Boeing is acknowledging there might be something to the concerns about massive outsourcing after all.

Boeing had its reasons – stated and unstated – for outsourcing so much of the work on the 787. Those included a strategy of providing contract work to companies in countries from which Boeing hopes to win orders; a more-efficient, less-costly production model; and the long-term shift of production work away from the Puget Sound region and the contentious relations between Boeing and its labor unions.

Critics of the trend had their own reasons for warning that Boeing would regret its outsourcing binge, and those critics weren’t just union members watching jobs leave.

When you turn over a job to others, you also lose a lot of the oversight and control of that work – which is not a problem as long as what you get back is what you expected or hoped for.

The debate over outsourcing gets exponentially more divisive when a second word is conjoined with outsourcing – offshore. (Companies can offshore work while still keeping it in-house.)

Outsourcing work offshore runs the risk of transferring technology and expertise to countries that have visions of someday doing the entire job themselves, cutting you out of the action entirely.

Whatever the motivations, companies are rethinking the outsourcing (and offshoring) strategy, or at least how much they rely on it. There’s even a movement known as reshoring (or back-shoring or on-shoring). Several trade associations earlier this year held a show in California for domestic contract manufacturers to pitch their services to big companies such as Boeing (which was one of the exhibitors). Reshoring advocates say offshoring isn’t as cheap as it looks once all costs are factored in.

Scott MacIndoe, chief executive of Fiberlay, a Seattle company supplying materials and equipment for use of composite materials, made the same point at a recent exposition the company had for its vendors and customers in Renton.

“I see a lot of companies starting to come back from China, with freight rates increasing, labor costs starting to go up, and the quality not there,” MacIndoe said. “They’re finding that even though it’s more expensive to manufacture here, sometimes it’s lower cost in the long run.”

One of the constant hazards in the media business is taking a few anecdotes and good quotes and weaving a trend out of them.

Is reshoring for real? The Federal Reserve Bank of Philadelphia’s Business Outlook Survey of manufacturing executives in its region, released in August, posed this question: “Since the beginning of the year, have you returned any of the activities or production you previously outsourced or moved abroad back to the U.S.?” Just 4.5 percent of respondents said they had, and that was down from 6.2 percent two years ago (9.7 percent of respondents said they’d outsourced or moved activities offshore this year).

That prompted the Alliance for American Manufacturing, an outspoken critic of China’s trade and currency policies, to say that while there may be some scattered instances of onshoring, the idea that there’s an extensive trend of bringing work back to the U.S. is overblown and a “myth.”

What matters in the debate are the size and direction of the trend. The size is, as the alliance suggests, probably not great.

The direction doesn’t look favorable, if you’d like to see more work done in this country and if those survey numbers are at all correct.

But if a major company such as Boeing, whose outsourcing strategy has been intently watched since it was first announced and whose unhappy experience with it has been extensively and publicly documented, decides that keeping more of the work in-house isn’t a bad idea, that has huge potential for shifting the debate and the trend.

Boeing may still believe that the problem with outsourcing was in execution rather than its flawed interpretation of the theory, and we won’t really know how much the company has changed its mind on the approach until we see how it goes about developing and building its next new plane (which could be a 737 replacement).

But recent developments suggest that the trend toward outsourcing every production job in America is not inevitable, and that more American companies are coming to realize the value in the insistence of every independent-minded kid: “Please, I’d rather do it myself.”

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Bill Virgin’s column on business and economics appears Sunday in The News Tribune. He is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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