Latest Phase of Outsourcing Favors U.S. Suppliers

Originally titled 'Outsourcing Phase Two'

An expert with a view from both sides of the OEM/supplier divide sees the narrowing of this divide as one of the major positives favoring manufacturing in the United States.

We tend to think of “outsourcing” and “offshoring” as being related, if not roughly synonymous. Seemingly, one leads to the other. The outsourcing of manufacturing by major companies toward the end of the previous century made possible the widespread increase in the offshoring of this work right around the turn of the century. And now, in more recent years, the resurgence of manufacturing activity on U.S. soil is the result of a partial reshoring. Is that because of a retreat from outsourcing?

Not quite. This very last point is where the perceived connection breaks. Outsourcing continues, and if anything, OEMs today have carried it further. And this advance—outsourcing becoming more sophisticated—has disconnected it from offshoring. Where outsourcing of the past seemingly imperiled U.S.-based manufacturing, outsourcing today encourages it.

Manufacturing consultant Courtney Hill recently offered me a perspective on this. As General Manager for Manufacturing Technology with GE Aviation, he was an influential member of a major customer for outsourced manufacturing work. Now, as a board member for a large contract manufacturing firm and an advisor to many smaller suppliers, he gets to see the challenges and opportunities from the other side of the OEM/supplier divide. And one of the most important trends he sees is that very divide becoming narrower. OEMs and suppliers are coming together, he says, and this will be a major factor favoring U.S. manufacturing in the long term.

Mr. Hill (also a board member of the company that publishes this magazine) is in fact bullish about the long-term prospects of U.S. manufacturing for a variety of reasons. When I spoke with him recently to ask what he was seeing, my question happened to come just after the U.S. Congress had passed the recent cut in corporate taxes. That tax cut made the list.

“There is no doubt the overall business climate has become more conducive to growth in U.S. manufacturing,” he says. The tax change is the latest example of this. But the even broader positive he sees is the next phase of outsourcing, and how OEMs have increasingly come to view their outsourcing today. “Larger companies are getting away from commoditizing manufacturing,” he says.

Formerly, OEM companies thought in terms of sending away work—contracting with suppliers to perform particular operations. What has now become clear to many is that this amounted to outsourcing too little. The commoditization of operations left the OEM still with the administrative overhead of managing the supply chain. Today, those same companies increasingly want to outsource the administration as well, trusting suppliers not just for machining, but also for certification, subassembly and oversight of other suppliers. Commodity manufacturing can be sent far away, but manufacturing as something entrusted has to be kept closer.

Mr. Hill says, “I am seeing more and more strategic partnerships” as the model for how OEM-supplier relationships ought to function. The partnerships save cost, but require communication and even culture sharing to ensure the supplier administers the work in ways consistent with the OEM’s aims. This demands proximity, favoring U.S. production of U.S.-originating parts.

One other important factor he sees is technology. “OEMs want to make more sophisticated parts,” he says, leveraging new technologies to do so. Additive manufacturing is the chief example of this. But the learning curve of a capability such as this calls for ongoing communication in order to explore and realize its full possibilities. That communication, too, argues for proximity. In short, so long as manufacturing suppliers are asked to do more and technology empowers them to do more, this is good reason to expect they will be doing the work right here.