Sorting out offshoring versus outsourcing

The movement of manufacturing, IT, and other jobs overseas—known as offshoring—has a dark side. An article in The New York Times reported how the movement of toy manufacturing to contractors in China has, in at least some cases, involved the exploitation of labor. And while

At Rockwell Automation's recent Automation Fair, I had the chance to catch a panel about outsourcing that featured three manufacturing executives, as well as Dan Miklovic, a VP with analyst outfit Gartner G2. The session raised some valid insights, including this admonition by Miklovic: "Offshoring should not be confused with outsourcing ... the two are not synonymous."

The outsourcing driver, says Miklovic, is that "intense competitive pressures are leading us to take anything that's not a core competency and move it to a partner that can do it better." While panelists didn't deny the heavy use of overseas contractors, Miklovic points out that for some companies, "it may be better to outsource to Indiana, not India."

Mike Kearney, a panelist and senior VP of operations at Philips Lighting, pointed out that using offshore manufacturing partners is attractive because it can lower costs for using well-educated labor. But Kearney adds that offshoring has two potential downsides: increased logistics costs, including easily overlooked areas such as dock, duty, and broker fees; and most important, a loss of "supply chain speed."

The panel also noted that outsourcing usually is not an all-or-nothing proposition. In many cases, it's best to outsource assembly, but keep testing operations in-house. In other cases, during the early life cycle of product, it's often common to manufacture in-house, but once demand levels off, turn production over to a contractor. In other cases, manufacturing is kept in-house only as long as the manufacturing process and its related automation constitute a competitive advantage. Once that advantage is easily copied, it may make sense to outsource.

Overall, the panel agreed outsourcing can work if communication between partners is strong. This same belief is echoed by sources in this issue's cover story, which deals with outsourced production, and the systems and processes that help make the model work.

Other experts note the shifting information burden associated with outsourcing. Tom Dykstra, an industry manager with enterprise suite vendor IFS, says that for some companies, the use of enterprise systems is less about production and more about managing customer and product information. "There are product and customer information cycles that need to be managed, with service management processes driving a good part of the life cycle," says Dykstra. "In many cases, the enterprise system is used to manage your products as assets for your customers."

Granted, offshoring carries some harsh impacts, but if we separate tactical outsourcing issues from the offshoring hot potato, the discussion centers on adaptation, not resistance.