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Does Offshoring Still Make Sense?

Archstone Consulting (2-17-2009)
Archstone Consulting, a leading management strategy and operations consultancy, has announced a new study showing that companies are contemplating the re-establishment of manufacturing domestically, amid rising costs and other strategic challenges within the offshoring model. As companies reassess their manufacturing and supply chain strategies for today's global economic environment, the trend may create significant job opportunities in the US, according to the study.

"For years, the concept of off-shoring, or moving production and/or sourcing operations to a foreign country, has been the mantra of any supply chain manager looking to cut costs," said John Ferreira, Principal and Global Manufacturing Industry Practice Leader, Archstone Consulting. "Now, amid volatile oil prices and an uncertain global economic future, this analysis no longer is a certainty. Furthermore, companies that will commit to domestic manufacturing can spur much-needed improvements in customer service, innovation, and job creation - especially when servicing the large domestic market."

A Wake-up Call for Manufacturers
The Archstone study revealed that in the last three years, manufacturers have seen a significant increase in costs related to off-shoring manufacturing for export purposes rather than in country demand, which include:

• Ocean freight costs have increased 135 percent, highlighting risks and cost volatility.
• The global commodity price index has risen by 27 percent.
• The Chinese Yuan has gained 18 percent in value compared to the U.S. dollar.
• Chinese manufacturing wages have risen by 44 percent.

The True Cost of Offshoring
In addition to the rising costs of conducting business on a global basis, the study found several soft cost issues, which affect the true cost of offshoring, including:

• Slower Cycle/Delivery Time (59% of respondents)
• Reduced Supply Chain Flexibility and Responsiveness (56% of respondents)
• Lost Visibility, Coordination and Control Over the Supply Chain including Quality (50% of respondents)
• Bottlenecks in Logistics Networks (e.g., ports, transportation) (50% of respondents)

"The perceived 25-40 percent cost savings associated with offshoring has previously been made possible by low labor costs, cheap commodities and favorable exchange rates - factors that no longer exist in today's marketplace," continued Mr. Ferreira.

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