Did the outsourcing pendulum swing too far?

Over the last few years, it’s seemed like everyone is moving to China. And, it’s not just manufacturing. In the last year, Modern has written about:

A leading WMS company that was purchased by a Chinese software company, 

Whether China poses the same threat to the US distribution industry as it has to manufacturing

A 3PL with plans to establish US-type distribution centers in China to do direct-to-store delivery from Asia

Charlie Barnhart, founder of Charlie Barnhart & Associates (www.charliebarnhart.com), a consultant to electronic manufacturers on outsourcing strategies, says he is seeing evidence that industry is beginning to pull back from China.

“The simple fact is: We outsourced too much, too often and too far away,” says Barnhart. “Right now, we are shipping parts from North America to Asia, shipping components back to North America for final assembly, and then shipping the finished product back to Asia to sell it. If you add it all up, the parts in your average household appliance have more miles on them than the space shuttle. This is ludicrous.”

Barnhart says he monitors the number of deals being made in China as well as the number of deals that fall apart before a year is up. He is seeing is a decline in the number of deals being made, and an uptick in the number of deals that fall apart in less than a year.

“The most important thing I can tell you is that China is in a state of flux,” says Barnhart. “I don’t think this is a bubble that’s going to burst, but I do think there’s a change in the air, and a lot of it is being driven by the price of oil.”

But, it’s not just oil driving a shift in strategy. In his most recent newsletter, Barnhart identified several trends at work:

Labor: Theaverage cost of labor for outsourced manufacturing services in most global geographies continues to rise at a rate equal to or slightly above the currency adjusted local inflationary index. The largest increases occurred in Western Europe and China. Both of these trends are expected to continue through 2008.  

Usable Capacity: The majority of outsourcing continues to chase a diminishing available capacity principally located in the river deltas of China and the non-euro based countries of Central & Eastern Europe. Translation: China, in particular, is running out of room to add more manufacturing capacity in developed areas. Instead, Barnhart says China is trying to direct new development into outlying areas in the West with limited infrastructure and limited skilled labor. 

Risk Factors: China, along with India and Malaysia, became riskier places to do business based on something Barnhart calls the composite business risk (CBR) indicator.

As the situation in China deteriorates, and with the high price of transportation and fuel surcharges, Barnhart is advising his clients to adopt a regionalization strategy: If they’re going to outsource, then they should outsource to countries with relatively low operating costs in a region: “All of this means that Mexico (for North America), Thailand (for Asia) and the euro-based countries of Eastern Europe (for Western Europe) are the best value, lowest risk solution for high volume requirements,” he says.

The shifting outsourcing landscape that Barnhart talked about reminds me of a conversation I had with Sun Microsystems a few years ago about the migratory supply chain. The idea was that today’s supply chains aren’t etched in stone: Just as geese fly south or north, depending on where the best food supply is located, companies need flexible supply chain processes to move their manufacturing and distribution operations as conditions warrant. “The supply chain is more fungible than is believed by the public,” Barnhart says. “We already ship all over the world today. With oil at $100 a barrel, the supply chain solutions that are going to work are the ones that address that problem.”