A Crisis in Global Logistics

I know I'm starting to sound like a broken record with my rants on the downsides of outsourcing, but I couldn't resist letting you know about an article from a financial journalist who actually gets it.  Jim Jubak is senior markets editor at MSN Money, and last week he penned a column titled Why Fewer U.S. Jobs Are Going Overseas.  The title is intriguing in its own right, but his reasons should give pause to all the outsourcing lemmings who continue to chase low labor costs while ignoring their total tangible and intangible costs.

Jubak cites recent evidence that the rate at which jobs are going overseas is decelerating, and suggests that it is due to a "crisis in global logistics."

We're headed for a pause in offshoring as companies cope with the consequences of the rush to move everything from manufacturing to assembly to customer service to low-wage countries.

The benefits of making products and providing services in low-wage countries disappear when you can't get products to customers on time or when the product doesn't work as expected when it finally does reach the customer.  In short, what's causing the slowdown in offshoring is a crisis in global logistics.

Holy cow, Jubak gets it.  He's already proven he's smarter than most CEO's.  After providing some supporting anecdotes and a brief discussion of Japanese quality problems, he continues to reinforce his main point.

The more functions a company outsources, the harder it is to keep everything coordinated. And when that outsourcing is actually offshoring, that challenge is even greater. Companies have to keep factories -- their own and those of outside suppliers -- at different stages of the production process coordinated and then manage very, shall we say, idiosyncratic transportation systems so that everything arrives at assembly points and then at resellers or retailers on time. And all over distances that can readily exceed thousands of miles.

And the outsourcing and offshoring of so many customer-service functions has actually made the process much, much tougher to manage since often critical information from customers that might indicate a problem isn't flowing into the company itself but into a call center staffed by workers who are not only reading from scripts to solve problems but who don't have the knowledge of the local market necessary to see a developing problem in complaints from individual customers.

I have to pause a moment to marvel at his genius in concocting the term "idiosyncratic transportation systems."  I guess that's one of the characteristics that distinguishes real journalists like Jubak from mere bloggers like myself.  Funny, just yesterday I had two posts on "idiosyncratic transportation systems" like the freak of engineering you see to the right, which is only used to transport parts between far-flung Boeing factories.

He goes on to describe two companies, Luxottica and Putzmeister, that are outsourcing to Asia for the right reasons: to sell to those new markets.  Their factories in Europe and North American continue to run full-bore, and the value to them of being close to their customers is greater than the wage penalty they're paying at their original factories.  They get it.  And then Jubak shows he actually understands a little about the growing concept of lean accounting, whether he knows it or not.

This kind of logistical foul-up is harder to cost than a simple rise in wages perhaps, but companies do eventually get it when a late product results in smaller than projected sales or higher returns, or a loss of market share. Rising wages in low-wage countries is having an effect on offshoring, but the biggest effect is a result of higher wages adding even more strains to global logistics and not from the jump in wage costs itself.

I may have to revise my stereotype of financial journalists.  Or at least Jim Jubak.  You might want to check out some of his other articles as well.  Hopefully his article gets read and helps keep some CEO's from destroying their companies by following the lemmings off the outsourcing cliff.

By the way, a hat tip to regular reader Dave Carson at Specialty Silicone Fabricators for bringing the article to my attention.  By engaging his team and using some very simple visual lean methods, Dave has accomplished amazing things with his complex medical extrusion operation.

Comments

[david foster]

One would think that any offshoring of component manufacture would be preceded by some fairly comprehensive simulation work, looking at variations in transit times and the effect on the ability to assemble the finished product. I wonder how often this is actually done.

[Mark Graban]

It's much easier to measure hourly labor cost and the impact on product cost than it is to estimate the cost of slower response in your supply chain.

[Dan Markovitz]

And let's not forget that the logistics challenge is ready to become more difficult than ever. The Democratic congress is prepared to pass a law supporting the 9/11 Commission's recommendation that all shipping containers (yes, that's ALL containers) get inspected before arriving at US ports.

The devil is in the details, of course. Who knows if this is really an achievable goal. But even if the policy is only partly implemented, we're likely to see slower and more expensive international shipping -- which makes offshoring and outsourcing a bit more obviously expensive.

[John Hunter]

I agree, Jim Jubak is very good. He is not like most financial journalist. He truly understands investing (his investing results are very good), financial statements, economics, markets, companies (they actual do stuff - they are not just financial statements disconnected from the physical world)... He is definitely worth reading. Even so, he is still a "wall street type."

Investing and economics is a big part of the reality of business. And so understanding that arena is important. Reading him is a good start. fool.com is another good place (though they have taken to a lot of short articles that say almost nothing, they still have good stuff too). Marketplace.org is another good source. And I am partial to my own curious cat investing and economics blog - http://investing.curiouscatblog.net/
One final economics one: Brad Setzer - http://www.rgemonitor.com/blog/setser

[Incredulous]

I'm starting to see some posts and editorials that say outsourcing is going to die off soon. Not for any good reason, just because as CEOs leave, the new generation will want to do everything differently than the old generation did and will "discover" that off-shore sourcing leads to "hidden" costs. There is also the 15 year wage cycle to consider, which states that 15 to 20 years after pumping all this money into an underdeveloped economy, the wages have increased to the point where the savings no longer off-set the increased costs of the long and large supply chain.

An observation on Dan's comment above: Shortly after 9/11 2001 my company joined the newly formed Customs Trade Partnership Against Terrorism (C-TPAT). C-TPAT is similar to ISO and QS systems--you meet certain security requirements and put good systems in place and you are certified. Certification means your shipments are not normally subject to delay and inspection at borders and ports because you are assumed to have secured them at all points. I'm surprised more companies have not taken advantage of the benefits of C-TPAT, but I'm not surprised the people we loosely refer to as our leaders in Washington seem to NEVER HAVE HEARD OF IT.