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Seven Offshoring Lessons for Global CEOs: What Are Yours?

Posted By Paul Tate, January 18, 2013 at 6:18 AM, in Category: Global Value Networks

Boeing’s recent Dream liner problems have prompted business author Steve Denning to assess the downside of the off shoring trend in manufacturing in broader terms--not just as a one-company issue for Boeing, but as what he calls "an economy-wide problem."

“Offshoring is not some menial matter to be left to accountants in the backroom or high-priced consultants armed with spreadsheets, promising quick profits,” writes Denning in his latest Forbes article. “It raises mission-critical issues potentially affecting the survival of entire firms, whole industries and ultimately the economy.”

Denning, former director of knowledge management at the World Bank and whose books on radical management techniques advise major corporations to urgently rethink their approaches to leadership and innovation to succeed in today’s globally competitive world, argues that CEOs must now learn seven key lessons about offshoring:

1: Use the right metrics – go beyond rudimentary calculations based on labor costs and short-term profit, and consider the total cost and risk of extended international supply chains

2: Review whether earlier offshoring decisions made sense – past experience can be a great teacher

3: Don’t outsource mission-critical components – there’s a big difference between outsourcing engineering and outsourcing production

4: Bring some manufacturing back – ensure you have, or can rebuild, the skills and capacity to do so if you need to

5: Adequately assess the risk factors – extended international supply chains have lots of hidden risks

6: Adequately value the role of innovation – the opportunity cost of lost innovation can be significant

7: Get to the root of the problem: maximizing shareholder value - "The errors of offshoring are not isolated events", says Denning. “They are the result of the underlying philosophy of shareholder value, rather than the true purpose of every firm: create value for customers.”

He concludes: “Success in this new world of manufacturing will require a radically different kind of management from the hierarchical bureaucracy focused on shareholder value that is now prevalent. It will require a different goal (adding value for customers), a different role for managers (enabling self-organizing teams), a different way of coordinating work (dynamic linking), different values (continuous improvement and radical transparency) and different communications (horizontal conversations). Merely shifting the locus of production is not enough. Companies need systemic change—a new management paradigm.”

While clearly highlighting aspects of his own management philosophy here, does Denning’s overall analysis about the need for closer CEO attention to offshoring decisions make sense for your corporation?

Are there other lessons or key decision factors that Denning has overlooked?



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Written by Paul Tate

Paul Tate is Research Director and Executive Editor with Frost & Sullivan's Manufacturing Leadership Council. He also directs the Manufacturing Leadership Council's Board of Governors, the Council's annual Critical Issues Agenda, and the Manufacturing Leadership Research Panel. Follow us on Twitter: @MfgExecutive



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