Forbes magazine has a two-part series of articles that essentially blames Boeing’s problems on poor decision making around outsourcing and offshoring work done for the 787 dreamliner. After already being billions of dollars over budget and delivering the first planes 3 years late, the grounding of the entire 787 fleet adds insult to injury. The last time an entire fleet was grounded was 1979, and this is not the sort of thing that should be happening to a company like Boeing. As a market leader, they’re supposed to know better.
Steve Denning, the Forbes writer behind the series, goes on to say that bad offshoring decisions are “a disease that has been gnawing at the US economy for decades: flawed offshoring decisions by the C-suite.” He quotes Harry Moser, founder of the Reshoring Initiative who says that as many as 60% of offshoring decisions are based on miscalculations. “Many companies that offshored manufacturing didn’t really do the math,” says Moser.
Among the many faults found, the article particularly focused on the following:
Offshoring Manufacturing causes companies to lose the ability to innovate.
“The decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”
Companies make the decision to offshore after looking at the wrong metrics.
Firms typically focus on very short-term metrics such as the cost of labor and factory. But there are costs that are missed and the estimates of savings are typically false because they don’t include such things as the cost and risk of international supply chains in a time when speed in the market earns a premium and energy costs are making shipping increasingly costly. They don’t consider the costs of actually working with the offshore facility–sending your people there often enough to make sure the job is being done right. They don’t consider intellectual property risk. They’re not considering the problems of potential fraud on a massive scale as Caterpillar is reporting lately in the news. Or that other governments may be willing to lower their safety standards in order to get the product shipped and create jobs or other benefits in their economies.
Offshoring is never “just like we do it here only cheaper,” but that is the assumption that gets the decision to offshore made. Companies are repeatedly finding that while the initial analysis indicated there could be a 30% savings, these hidden costs add up to more than the 30%.
Companies fail to reverse earlier offshoring decisions even after they’re provably failing.
This wasn’t the first time Boeing had run into trouble with offshoring. Back in 2009, they had to spend $1 billion to bring a failed offshoring effort back in house. The trouble is that offshoring is such a politically-charged decision in my experience, that you wind up stacking the bench with those in favor of it and those who dissent wind up moving on. The decisions made are never revisited.
I’ve watched the offshoring movement in the computer industry all my career, and I’ve never seen it turn out well for any project that really mattered. I’ve repeatedly seen CEO’s and other executives grasp at the straws of lower costs, all the while forgetting their customers and their company’s need to deliver great products to those customers. I’ve left two different companies because they had decide to offshore and I didn’t want to be a part of dismantling the US engineering team I’d built that had given the company market leadership. Both have seen innovation stop and the loss of virtually all of the team that had been their during my tenure.
Companies shouldn’t outsource mission-critical components or innovation.
What does your company do? What is it’s distinctive competency?
I’ll give a hint: unless you run a management consulting firm, your company’s business is something more fundamental than cutting costs. In Boeing’s case, it is designing and building the world’s airliners. That’s their mission-critical business. With the 787, they not only offshored the manufacturing, but also a considerable amount of the engineering.
If you offshore the mission-critical components of your business, what are you left with? A bunch of bean counters cutting costs and sales and marketing hawking products. Doesn’t sound like a world-class company to me. The next time innovation changes the playing field, companies that are gutted like that will be roadkill.
As for innovation, assess whether innovation is mission critical to your company’s charter. If you’re in that business and you offshore the innovation, again, what’s left? If, on the other hand, you manufacture a commodity that only sells on the basis of price and doesn’t change much from year to year, it’s worth considering offshoring.
Companies radically underestimate the coordination risk when offshoring
Forbes brings up Apple, which for many is the very poster child of offshoring success. They point out that the reason Apple does so much better is because they build the product first in the US as a prototype and then the role of offshore suppliers like Foxconn is simply to make more of them more cheaply.
The other thing they point out is that the iPhone is simple compared to a 787. Yes, you can count the individual transistors on the chips and the pixels on the screen and conclude it is complex, but it isn’t the same at all as the complexity inherent in an airliner. Coordinating all that complexity is far harder than bringing together building blocks that are more or less off the shelf in a sleek industrial design package. In the end, Apple’s distinctive competency is more akin to fashion design than radical new technology.
Boeing had this coordination risk in spades because airliners have so many complex one-off parts. Separating groups across geographic boundaries makes it harder to coordinate. Scattering them across more than one company is still harder. Factoring in cultural and experiential differences is another difficulty. In end, Boeing managed to make their coordination challenges even worse by using a tiered offshoring structure. Essentially, they had offshore firms managing other offshore firms and the had no visibility into the deeper tiers. When things started to go wrong, it was very expensive to get it back under control.
Companies reach a position in the market where they start to feel invincible or where they don’t think anything else matters but shaving costs so their share price will rise and they can pay the executives bigger bonuses. It’s foolish thinking and not the kind of thinking that built those companies, but very few manage to put down the crack pipe of offshoring once they get started too far down the road.
Shame on investors for pushing management into such hubris while the hold the company’s shares for just a short time and then bail out to find the next one to raid. Shame on executives who think all they need to manage a company is a spreadsheet. Or as Forbes puts it:
The root cause of these errors is a focus on the dumbest idea in the world: maximizing shareholder value. Focusing on short-term shareholder value ended up destroying vast quantities of long-term shareholder value.
Before companies worry about shareholder value, they need to worry about how to add more value for customers.
Where we go from here is up to us. The article estimates that around 25 percent of the manufacturing that is currently offshored could be brought back profitably. As energy and labor costs continue to rise, especially in terms of differential wages, that number will continue to rise. Over the last three years, it is estimated that about 50,000 manufacturing jobs have been reshored. Some companies are finally realizing that instead of lowering costs they mostly succeeded in driving profits and knowledge to suppliers. A lot more is possible for companies that look at offshoring versus domestic manufacturing with open eyes.