For a better outsourcing strategy, prioritize supply chain efficiency over low-cost labor

While outsourcing began as a quest for cheaper labor, a successful outsourcing strategy depends on more than your ability to find a country with low labor costs. As wages rise in Asia, non-economic concerns—like efficiency and social responsibility—must become an increasingly important part of your outsourcing strategy.

Chasing cheap labor yields temporary savings

If you’re basing your outsourcing strategy on the low wages of a particular country, be warned that you are only achieving a temporary advantage. High labor costs in Europe and the United States are what initially led to the relocation of production to low wage countries, but the emergence of a middle class and rise in skilled workers is increasing wages and overall cost of business in formerly “low-cost” places like Asia.

If you are a manufacturer who is purely focused on cheap labor, just know that you can save money for awhile—but when the quality of life increases in a particular country, your search for cheaper production locations (a time consuming, risky and disruptive process) will begin again.

How quality factors into the cost equation

Another result of being purely cost-focused is that cheap materials and unknown (or possibly unreliable) suppliers can result in lower quality products. In the past, some manufacturers reasoned that even if there was a dip in quality, the gains from cheaper inventory made up for it, but this is a risky game to play.

With increased competition in every market sector, and the emergence of social media (which allows your customers to vocalize their displeasure with shoddy products much more efficiently) it is a much riskier move to allow the quality of your product to drop. Consider what level of quality you can achieve while maintaining profitability, but remember that low-quality products ultimately cost you more in warranty fulfillment and bad press.

Social responsibility is a required part of your manufacturing outsourcing strategy

While social responsibility may always have been the “right” thing to do, the increasing focus on (and visibility into) the condition of workers across the world makes social responsibility important from a business standpoint as well. Looking for the cheapest solution—at any costs—is a dangerous strategy, and one that can blow up in your face. (Take the recent bad press for Apple regarding Foxconn—no one wants to be the next manufacturer accused of, or confronted with, human rights abuses.)

And social responsibility isn’t just about the people you employ, it’s also about the way your company uses (or abuses) the natural environment.  Pollution scandals and child labor are unacceptable to the end-user—and have been for some time—but it’s not enough to be able to defend yourself when asked, consumers expect pro-active sharing of information. You need to know where your materials come from, and commit to a lower carbon footprint and better working conditions for the people you hire across the world.

Achieve efficiency and social responsibility with a short, lean supply chain

If low-cost labor isn’t the main priority when it comes to your supply chain, what should be?

One way to mitigate the increasing costs of labor is to focus on efficiency. And the best way to achieve efficiency is with a short, lean and responsive supply chain. With fewer people in the chain, it’s much easier to achieve clear communication and visibility that flows from the end-user, all the way to the original materials provider. And with a direct flow of information, you can take advantage of systems that automate the flow of communication through your supply chain, increasing your efficiency even more.

When the people making the product are effectively closer to the end-user, it’s much easier to funnel customer requests to the people building the product, and communicate information about shortages, changes in strategy, and deviations.  By streamlining the flow of product information, and setting up automatic feedback systems, you make it much easier to share information from the end-user to your manufacturing partners, and push improvements from the manufacturing partners to the end-user. This ultimately allows you to achieve better optimized inventory levels and lower inventory costs.

If you’re interested in learning more about supply chain efficiency outside the U.S., get in touch with Ard on LinkedIn.

About ProductStream

ProductStream is a Netherlands-based company that helps European businesses streamline their product development process from concept to production.