During the 'good' years when you were running near capacity, it seemed to make sense to outsource various products and assemblies to China or other low cost countries. Now, with revenues down as much as 20% or more – and the idle capacity and labor that go along with the decline - does this model still make sense?
The definition of comparative advantage refers to the ability of a person or country to produce goods at a lower marginal cost and opportunity cost than another person or country. The critical aspect of that definition is “opportunity cost”. With excess capacity and reduced revenues, does the calculation of our opportunity cost change? Should we not be outsourcing less and bringing more work back in house?
The answer is definitively no. It's true … we are all facing hardships with over-capacity and under-utilization. Thus, we make cost concessions to allocate overhead and retain employees – we retain functions that are outside our core but keep people busy and equipment running. However, now is the time to focus on reducing your overhead and capital expense to streamline your organization. Those that do will develop greater competitive advantage as the economy continues to recover over the next 12 to 18 months.
So what is the best solution? How do we integrate our supply chain while ensuring domestic capability and short leadtimes to our customer with minimized inventories? An integrated approach with operations in both China, or another low cost country, and the U.S. can be an effective avenue. You need the ability to have non-core parts and assemblies sourced in China while having final assembly, as well as redundant sub-assembly, in the U.S. The redundant capabilities ensures continual production, the final assembly ensures quality conformance at the critical inspection points. You also need a supplier/partner with vested interests in your success.
If the downturn has shown us anything it is that many of us have too much overhead. Resist the temptation to allocate this overhead and over-burden your organization for the future. An integrated supply chain allows us to focus on our core competencies and not retain unnecessary overhead while enabling us to better react to increased demands in the future at a far more competitive rate than those carrying such burden .
The author of this piece, Jeff Holyoak, is Vice President Development for Long-Stanton & Lee, a Long-Stanton Group company. West Chester, Ohio-based Long-Stanton Group provides metal, rubber, and plastic components and assemblies as well as Asian sourcing services with manufacturing and professional operations in both the U.S. and China. For more information about the company visit http://www.longstanton.com/
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