Accenture and Hindsight Consulting

By Kevin Meyer

Well another of the big five (or is it four or three by now?) consultancies has figured out that offshore outsourcing doesn't work.

The strategy embraced over the past decade by U.S. manufacturing companies to shift production to countries with cheap labor may no longer be appropriate, according to a consulting firm that has been a big promoter of offshore outsourcing. "Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs," according to Accenture analysts John Ferreira and Mike Heilala, who head the company's North American Manufacturing practice.

Now correct me if I'm wrong, but I thought consultants were paid the big buckaroos to use their immense insight and experience to help guide companies into the future, not restate the obvious of what has already happened.  What's next?  A flash of brilliance that the housing market was overvalued a couple years ago?

Bill and I and a huge number of other lean consultants have been saying that offshore outsourcing, especially to chase cheap labor, was a ridiculous proposition for many years.  I bet companies could have had us for a tiny fraction of what it cost to retain the likes of Accenture.  You still can, by the way.

Just for giggles let's take a look at some of Accenture's insight:

Having surveyed 287 manufacturing companies, Accenture found that 61 percent are considering moving some of their manufacturing back to their home market. Ferreira and Heilala describe this as being a "secret shift" and a "quiet trend."

And a "trend" we have been reporting on for a couple years, but ok.

Many manufacturing companies that shifted production offshore "likely did so without a complete understanding of the 'total costs,' and thus, the total cost of offshoring was considerably higher than initially thought," write the two analysts. "Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise."

Brilliant, simply brilliant.  Who would have thunk it?

Companies have found that managing their supply operations from afar has weakened their "overall operational planning, forecasting and general flexibility, while in some cases also driving up costs with the need for complex network management," according to Accenture. "In some cases, this situation has limited the companies' competitive advantage causing limitations on growth and revenue."

Almost half of the companies Accenture surveyed said they are facing issues regarding poor cycle and delivery times and product quality due to offshored manufacturing and supply operations. There have also been "dramatic" increases in many of the costs that first enticed them to move their production overseas.

Really?

Companies have not done a good job of determining the true cost of offshoring. They tend to look only at direct costs, such as logistics, product unit costs, supplier costs, manufacturing overhead, labor, material and packaging costs. But there are many other costs that have not been considered when shifting production to a foreign country, such as local taxes, regulations, customs duties, VAT taxes, the agility and speed of suppliers to respond to customer demand, poor quality inspection and validation, operational risks, inventory, safety stock, broker fees, infrastructure costs, tooling and mold costs, networks needed for plant material handing, training costs, organizational communications costs, local operations staffing, capital amortization, terms and exchange rage fluctuations.

"The overreliance on direct costs to the exclusion of other legitimate cost factors distorts the business case for offshoring and likely many decisions to offshore were incorrectly made," say Ferreira and Heilala.

Ok, sorry, I simply can't quote any more of the article without smacking my head into the wall.  Go to Manufacturing News to read more.  And think about whether you want a consultant that guides you into the future, or one that is exceptionally proficient at hindsight.

Maybe I'm being just a tad harsh.  Even in hindsight Accenture still realized how misguided their previous prognostications were ahead of most other management consultants who still tell companies that chasing cheap labor is the magic pill.

Comments

[Jim Fernandez]

Your being a tad harsh. As parents sometimes we need to let our kids touch the hot stove. Then we have to re-explain what happened. Then they connect the dots. That's just the way some people learn.

[Bill Waddell]

"I thought consultants were paid the big buckaroos to use their immense insight and experience to help guide companies into the future"

That's where you're wrong, Kevin. I have noticed an inverse relationship between fees and insights. The more the consulting firm charges, the more likely they are to recommend their clients follow yesterday's fad.

[Paul Todd]

I know you and Bill and others have been saying these things for years, but I am thrilled to see this report. Let's face it - many of the people who really need to understand these ideas do not read Evolving Excellence and do not attend lean conferences. What they do pay attention to is what big consulting firms say. We can't turn back the clock and make them listen five years ago, but now that they're ready to listen, we can help get them up to speed.

[Paul Todd]

Kevin:

Maybe you're not being too harsh after all. Having read the original Accenture report on which the Manufacturing News article was based, the authors seem remarkably unburdened by the irony that it was likely Accenture that advised many of the survey companies to outsource in the first place.

The authors work in the Manufacturing Consulting shop, and I suspect you could find others in a different department at Accenture who will still advise you to send your factory to China. You'll find the report on the Consulting tab, right next to the Outsourcing tab.

[Bill]

One thing that I see seldom mentioned as the reason for the shift to off shore manufacturing was the value of the US dollar to other currencies. The dollar became so high in value it became very difficult to export goods and many domestic manufacturers just got hammered by off shore competition flooding the US market.
I believe many felt little choice but to chase cheap labor, relaxed labor laws and other laws that were either not enforced or ignored. The profits had to keep coming for the CEO's to keep getting their multi million dollar bonuses.

[Bob Thomas]

There may be another reason Accenture has now seen the light. Like stock brokers it does not matter which way the market moves for them to make money as long as the clients are trading. Accenture make money by having a company move both ways as long as they are the ones being paid for the advice. Let's just hope down the road the new income stream does not advocate moving back offshore. I would like to think they really get it but I'm still not sure.

[Michael Heilala]

Thank you for picking up and commenting on our article and expanding the debate. As the co-author of this article, I appreciate your criticism on the perceived hypocrisy of pointing out the flaws of manufacturing outsourcing to low cost countries. However, we've never unconditionally recommended this to our clients. Each company’s or business unit's considerations are unique. Probably not surprising to you or your readers is that many US-based companies are now realizing that decisions made in the past may not have considered all of the costs associated with moving manufacturing operations to low cost countries. The point of our article and what our research supports is that companies should focus more on sourcing closer to their customers who represent their future growth is still the appropriate strategy. There is never a single solution for deciding to offshore. Our point was to open the dialogue that the economics are shifting and companies should take into consideration all of the total business costs of making these types of decisions. While it may appear we are engaging in "hindsight consulting", we're simply commenting on the current and future economics and political considerations of where to locate new factories. Fortunately for the US, the timing of these decisions based on macro and micro economics, incentives and total cost scenarios of these decision processes are changing to our country's benefit. We welcome more dialogue on the topic.