Outsourcing May Be Bad for You

The risks have to be examined with respect to many factors I would think: timeline, criticality, local risks, global risks, one frequently forgotten - PR risks.

One of the things we had to accept on a project we worked to Just-in-Time (not outsourced) was that sometimes things would conspire to make things Just-Late. If that isn't acceptable, don't do it.

Manufacturers have proven increasingly mobile in search of solutions to localized problems: wages in China went up, manufacturing went to Malaysia within months.

An excellent example of global risk was when diesel worldwide went to triple it's normal cost. Transportation costs went way up suddenly; and those who had factored cheap transport into the model for moving manufacturing far away got pounded, but only when compared to those who didn't.

And then there is the cost in goodwill of snatching up a lot of jobs and throwing them over the border. Oddly, the American consumer seems to have a very short memory. This cost seems to be localized and short in duration.

As a systems engineer I take a systems view - there is an expertise to making things beyond just design - experience with the failures maybe?

If you quit making wheels, but buy wheels; you forget the critical portions of wheel design. When you cannot analyse the wheel, perhaps you forget the inputs you need to the axle design. Don't know if it works this way, but suspect it does. Makes me want to keep critical industries close to home. Of course that discussion leads to protectionist legislation and then someone's ox is getting gored and they all run to the trough.

I do not think any manager oursourcing is neglecting all these aspects. The cost he bears includes all these aspects. he/she does consider the landed price of the item and compares that with the in house production cost.

Only aspect he/she can not precalcualte is the exchange rate. but certainly the outsourced item cost is low enough to cover the possible change in exchange rate

Generally speaking, outsourcing loses a company customers in service industries, for example look at the mess Sun Microsystems is in because of mishandled outsourcing shook the customer base to its core, ESPECIALLY those customers that were used to and very happy with StorageTeks "insourcing" for years till the company was taken over by Sun (4.1 Billion Dollars in 2005!!). They left Sun in droves......faster than Sun could fire the employees!! Just about!!

Customers do not want to talk to 5 different companies when they have a single problem, they don't want to referee meetings as each representative says "its not us!"...

I have been to such meetings as a STK representative and found the problems for the customer, because I was trained to do just that, it was never STK, but we rarely charged for this service.....it was fantastic PR and sold more equipment.

I can honestly say that Sun today is EXACTLY where we said it would be in 2005 after they took us over and let 85% of the STK employees go........today its probably nearer 98%........

Sun let go its CEO fairly recently (a great move), but that is too little too late......I would not be surprised to see the company go into chapter 11 in the next 12 to 24 months......the recession will give them the final push in that direction I feel!! Whether they ever make it out of chapter 11 is another big question......

Scott got his money all out I suspect!!!! Right on time! The same as the Pat Martin did from STK.........

A***HOLES all of them, only in it for their own personal gain.......sadly.

Before either starting to work for a company, or buying their stocks and shares, see if they outsource, if they do, steer clear of them!

Sun's shares went from $27 to $10 in a relatively short time, in spite of Sun buying itsa own shares as fast as it could over the last 15 months!! A sure sign of problems to my mind....now they are "under value" which leaves the company open to an aggressive takeover and a split up!!!

signed by a very

bitter ex STK/Sun employee!

To my mind, outsourcing should only be done as a last resort; that is if the place you are outsourcing to has better technology, better controls and better (not cheaper labor). Outsourcing for "fin and profit" is stupid, especially if you are going to lose key technical people because of the action. Unfortunately, most MBA's have only been taught the financial side of business and unless one has a strong technology basis (as well as consideration of the long term downside of financially based actions) the business will go down the tubes. Especially since business is generally considered to be amoral, so ethic rarely enter into the decision. That in my opinion, is unfortunately what has happened to many American businesses.

GA for that from me.

I agree with you 100% on all points!!

I agree with AG and you get your second GA. (sorry andy about that and hope you do not mind being AGed but we normally have a habit of acronyms in our company)

We too face the problems of outsourcing.

In current scenario too, some of the parts of our equipment (they are huge) are outsourced.

As ex-quality manager (now bliss fully in manufacturing) we had the problem that you have said

Let us say we outsource a hydraulic equipment (we actually do) - The pump goes wrong - Now we have to co-ordinate between customer, hyd assembly supplier and the pump supplier (and in a certain cases there is a dealer in between)

As usual every agency tries to pass on the Buck to others (or even us saying it was as per spec and if it fails then it is not their baby)

Secondly- since it is a huge equipment- from our dispatch to the ultimate E&C takes 24-36 months only in a few exceptional cases 12-18 months. At our place the policy is 18 months from date of dispatch (for each). In the chain you can understand that the guarantees/ warranties are over almost always before the equipment goes on stream.

Most of the time (since we do not shirk the responsibility saying even my term is over) we bear the cost associated

- but that is always done after the systematic failure (ie all other coaxing bearing nil result).

- In addition to the cost , the second problem is since it is outsourced, we do not have the spares (in earlier cases of in-house, the inventory was always there to be diverted)

- Since the stand alone module is offloaded, the external features are maintained, but we do not know the internal features (eg if the original had pump A, only pump A will have the mounting dimensions we have to get the model and company name of pump from equipment and wait till the pump is supplied - pump B will not suit unless you re-adjust the piping)

- The quality aspects are not always adhered to - the pride that is taken by the organisation for its own product is usually missing when one does for others and even more when the brand sold is mine. Is it natural for say a toy manufacturer to take the special cares (some times innovations) when it knows that it will be sold under say Mattel Brand ?

- In quite a few cases we have faced IPR violations by the suppliers - when they have taken our technology (we had to provide it obviously) and at a later date supplied the subsystem with minor changes here and there (like generic drugs we can call it generic engineered)

The questions here is not only the economy, as you have pointed out, the companies reputations are too at stake. We try not to outsource critical processes, but end of day who to decide what is critical ? Looking at another angle, nothing is critical.

Giving an example in a Turbine or a generator what is critical ?

Rotors ? Blades ? Bearings ? casings ? one one side all these are critical, from other angle they are not.

Unless you have vendors, (i think Japanese have them) who are not bothered about the legalities and take pride in their work and take their share of responsibilities and are averse to lawyers, outsourcing may be an area to be treaded with extreme care.

I always felt that a customer will understand the delays and waits only if he gets the best and the market will not forgive you for supplying in time (or early) but making customer suffer.

In quality aspect, it is the total quality cost that has to be borne in mind and not only the immediate cost and then only outsourcing to be considered.

Did I talk too much ?

No, it was valid and interesting to me at least!!

"Outsourcing" I see it the same way I saw sub prime loans; we all saw how they turned out. How do you expect some one to pay you back when they simply can't? Yet the banks said yes. Outsourcing same thing. You outsource all your work to lower paying labor countries and leave the typical American with out a job or send him to a lower paying job who is going to buy the product when it comes back to America? Not the lower middle class wage earner anymore.