Will bringing offshore jobs back to US be a long-term solution for reducing unemployment?
Even though Offshorent is in the process of transforming IT outsourcing arena, we would like to take a closer look at manufacturing offshoring.
In developed countries, “People Cost” is one of the most expensive line items in any business budget. So leveraging the wage difference between countries seemed like an obvious solution to keep the payroll cost under control. Thus, we began Offshore Outsourcing. Three areas affected by this trend are: manufacturing, information technology and business process. However in recent years, there has been a major push towards bringing outsourced manufacturing back home for various reasons. It is interesting to see whether the reasons that support this trend applicable to IT offshore outsourcing.
Before we dive into looking into the reasons, let us get some definitions out of way. Outsourcing is that when Company A gets some of its job done using Company B’s employees. Offshoring happens when the work is performed by Company B’s employees overseas. Therefore not all outsourcing are offshoring. However, in this blog these terms are used interchangeably.
Reasons for bringing manufacturing back are: rising labour cost in other countries , quality issues and amount of rework needed, transportation cost (time and money), lower salaries at home due to increased unemployment, foreign exchange rates & robotics. At present, all the factors combined except the last two is not sufficient enough to counterbalance the cost savings, and brings sustainable growth in US. In order to understand this fact a little better, we need to look at these reasons a bit closer.
• Labour Cost: Even though the wages has been rising in developing countries in manufacturing sector, still there is a much wide gap between the developed countries and developing countries like India and China. When you talk about increasing wages, it is mostly reported out based on national average or big cities. However, many pockets of regions still exist where labour wages is still lower. The other side of this coin is the decreasing wages in developed countries in manufacturing sector. But this is a forced situation due to unemployment. This forced lower wage is temporary situation because prolonged unemployment will cause the people to abandon the skills. That will lead to skill shortage and eventually drive up labour cost.
• Quality Issues: When a workforce is introduced to a new system or process, it will likely produce quality issues. These problems can be amplified by the distance, difference in culture, and communication barriers, when the workforce is from a different country. However, as the time passes by the remote work force get to know the process and quality starts to improve. Even further quality improvements are achieved by adopting quality measures and process improvements suggested by ISO and CMMI guidelines.
• Transportation Cost: According to industry data, the shipping costs have been directly proportional to the economic conditions here in US. Due to the recession, the air and shipping costs have fallen, but are expected to bounce back. Even though this is the general trend, some industries have figured out ways to cut these costs drastically. Eg: offshore printing, drop shipping companies are some examples.
• Foreign exchange rates: This is another area strongly tied to US domestic economic conditions. As you can see, all the above reasons do not provide sustainable means to bring back manufacturing back to home. However, the last reason, Robotics is definitely the solution. Very cost effective, easy to use robotic solutions like Baxter (http://www.rethinkrobotics.com/index.php/product_configurator/) can definitely bring back manufacturing. However, for unemployed, this is a double edged sword. If the reasons for bringing back offshore manufacturing are to bring jobs back US, robotics will not help move the needle of employment.
Another area to look into is the models like where Honda manufacturing cars in Maryville, Ohio. We need to identify, amplify and support conditions attractive to foreign companies to start manufacturing units here and thus improving our manufacturing sector.
The primary goal for bringing back offshore manufacturing should be improving economy. Just focusing on bringing jobs back for the sake of eliminating offshore manufacturing is not a sustainable model, and it will not work within a global economy. Globalization and technology will continue to shape up employment landscape as it has been for years. A more sustainable model is to equip our people recognize this trend ahead of time and re-equip them to work with the new conditions effectively. Working against globalization and technology is a futile effort.
In the next blog, we will take similar closer look into the arguments for bringing IT outsourcing back and evaluate the feasibility of the reasons for it too.