Thursday, April 27, 2006

Offshoring or Lean- Which is correct?

Outsourcing remains a hot topic in the news and at many companies (though in the news it almost exclusively refers to offshoring). Frankly, there aren't many lean resources that discuss outsourcing relationships. That is why much of Improving the Extended Value Stream talks about outsourcing relationships in a lean environment.

I was having dinner with a client earlier this week and the topic of sourcing offshore came up. Thus, I decided to open this topic up for comment. Is offshore sourcing compatible with lean? I would maintain, that, with some exceptions, offshoring is an alternative to lean rather than part of the overall lean philosophy. Companies often faced with a need for cost reduction see lean as one choice and offshore production as the alternative. Offshore production often appears much better on paper than it is in reality. There are many hidden costs:
  • Significantly late deliveries resulting in unsatisfied customers (and the need to add more safety stock)
  • Lots of Money tied up in inventory resulting in reduced cash flow
  • The need for off-site storage
  • Quality issues causing costly rework and/or resulting in inability to get the final product to the end customer on time

These hidden costs are part of the waste that lean is aimed at eliminating. By implementing lean, we're trying to reduce the time and waste between order and shipment. Offshoring does the opposite. It very often looks great on paper but often results in lower "per unit cost" and higher overall costs leaving people (other than brokers who cut the deal between offshore manufacturers and American companies) scratching their heads.

I should say that if you can get closer to your customer by setting up manufacturing offshore (and then distributing the product to your customer from there), it might make a whole lot of sense. Toyota, for example, has "offshore" manufacturing set up in the United States precisely for this reason. The vast majority of offshoring, however, would not fall into this category.

Please share your thoughts and experiences.


kamal said...

How can ACM be a lean supplier if it is thousand miles from its suppliers and customer. I might prefer, if they just build in US or Mexico (if they think about labor cost)..

kamal said...

Darren,i agree with you. But i do not understand why Boeing (lean manufacturer) built a composites manufacturers in China and Malaysia (ACM). For example, ACM got raw materials from US, process them, and send back to US.A lot of wastes... i believe...