Outsourcing isn’t about low labor costs anymore

Jaguar Land Rover's largest market is now China
Jaguar Land Rover’s largest market is now China

Outsourcing has traditionally been the province of Purchasing and Operations. Focused on lowering costs, these departments would generally look to a small number of low wage countries.

There are two dynamics that are causing production locations decisions to change: Increasing labor costs are making outsourcing for lower labor costs less attractive. Secondly, politicians are increasingly using their power to create jobs in their own countries regardless of the cost of labor. This is going to put new pressures on Operations and HR to manage their workforce more effectively to remain globally competitive.

How do politicians wield this power? In different ways, but each reflects a need to convert regulatory authority, purchasing power or control over natural resources into quality jobs. To understand how this works, let’s take a look at a couple of examples:

United States

In the U.S. the New York Transit authority purchased $599 million worth of trains last year from Bombardier. A Canadian company. The trains they purchased are manufactured in Bombardier’s Plattsburgh, NY facility. The state government has effectively converted purchasing power (of the rail cars) into good jobs in upstate New York.

NY Congressmen Bill Owen proudly announced the benefits of the deal:

“Bombardier and our community leaders work tirelessly to ensure that the region continues to emerge as an industry leader in the assembly and manufacture of transportation equipment.”

China

Let’s go to China to see a second powerful example of government at work. In November last year, Jaguar Land Rover announced that they were partnering with Chery, a Chinese Auto manufacturer.

“The joint venture will blend together the heritage and experience of luxury premium vehicle manufacturer Jaguar Land Rover with the intricate knowledge and understanding of Chinese customers evident at Chery,” JLR said.

Interesting comments, although it seems that Jaguar Land Rover was doing a pretty good job at understanding the market on its own as The Wall Street Journal reported yesterday that sales increased by 32% over last year on the back of a soaring Chinese market.

Maybe there is more than market knowledge being sought by JLR. The auto blog provides a little more clarity. By setting up local automotive production (which requires a joint venture in China) JLR can also avoid the 25% import tariff it currently faces on its products.

Another example of how the government can use its power, in this case the ability to tax and control company formation, to encourage the increase in skilled local jobs. But like most companies, Chery has its eyes set on more than producing cars for the Chinese market. Auto Blog continues…

“The partnership with Jaguar Land Rover signals the start of international expansion and strategic development for Chery Automobile.”

India

Every effort at creating jobs does not go so smoothly. In this case we’ll move to India. There’s a pending change in India’s regulations. The Wall Street journal reported on these draft regulations a couple of weeks ago.

The draft regulations would require that a substantial percentage of technology hardware purchased by government agencies and some companies come from India-based manufacturers. Foreign players would have to swiftly set up local factories to market their products here.”

In this case the government has the power of both regulatory control and purchasing power to create local manufacturing jobs. But it hasn’t thought through the practicality of trying to stand up an industry overnight. If you look carefully at the U.S. and Chinese examples, they started small and take place over decades. This allows companies to adjust and make changes as they learn. In this case India is going to disrupt a large market. The challenge here is that the buyers of this equipment probably still need it at competitive prices. Secondly, for manufacturers, it will take time to create the infrastructure, skilled employees and a supply base.

 

So why does this change in outsourcing strategy matter for readers of Lean Labor? It signals a shift from companies making decisions about moving production and employees overseas due to cost considerations to them making production decisions based on new revenue considerations. Previously all decisions were based on cost, delivery and quality. Now the decisions will be based on revenue opportunities with the pressure on Operations to make it profitable.

This means that the workforce and its managers are going to be under the same pressure to manufacture competitively, but now they will face the added complication of managing multiple cultures, languages, time zones, exchange rates and regulations among multiple production facilities.

What can you do to get started? From a systems, measurement and policies perspective, the companies that I’m working with are putting a repeatable plan in place to get acquired companies, jv’s or start-ups on board quickly. Policies and procedures are being standardized to a practical point. Companies recognize that a one size approach doesn’t work though and enough flexibility must be left in the system to let the local employees manage the nuances of each country and situation. More teeth are being applied to standardizing all types of data so that it can be quickly rolled up, analyzed and acted upon. Automation is being implemented to ensure administration costs don’t overwhelm smaller populations of employees.

Having a solid plan in place with documented success in other locations ensures that there is less room for the local facility to negotiate a unique environment. At the same time a well crafted plan makes sure that moral, engagement and the potential for innovation aren’t crushed.

For HR and Operations this represents an opportunity to create competitive advantage through the workforce. Those companies that can master distributed manufacturing and workforce management will have access to an increasing number of growing markets. Those that don’t will be stuck servicing larger mature markets as their competitors grow around them.

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