For companies looking to outsource operations, Milind Joshi highlights the factors to be considered before choosing an offshore destination
While the previous two articles addressed the first two aspects of offshoring—whether to offshore and what to offshore—the most important question of all is: Where to offshore? The importance of choosing an offshore destination must not be underestimated. Once investments are made to set up plants, warehouses and the distribution network, undoing it or making major changes will be extremely tiresome. Hence, the decisions about the location, the company’s offshoring strategy and the relevant partner have to be made cautiously. When selecting a location, firms must consider the following factors: Environmental factors: Some environmental factors must be taken into consideration. These include political, legal, economic and cultural factors such as: Government incentives, free trade zones, FDI regulations GDP growth rate Political stability Currency policies Regional industry clusters IP protection, level of piracy, level of corruption Business ethics, legal hassles Public relations Language, cultural barriers,weather Market situation: The firm wishing to outsource must consider whether the market environment is conducive to outsourcing. The important factors are: Offshore market opportunity Proximity to key markets Competitors. Cost and quality: The cost and quality advantages and disadvantages should be considered from the point of view of: Cost competitiveness for labour and raw material Quality of local suppliers Infrastructure and other resources: Outsourcing makes little sense unless the infrastructure of the host country can adequately cater to the company’s needs. The firm must consider: Logistics and infrastructure advancement Technological advancement Resource availability, capability and maturity Educational capacity Along with these points, it would be crucial to understand whether local players can provide the product or service in the near future ie become potential competitors to the offshoring company. Some key questions that organisations need to ask themselves includes: Is there a threat of our competitors copying our business model and engaging in a price war? How long would it be before the local players can compete with us in the market? Can we gain adequate market share quickly so as to prevent local players from coming into the market?  Along with these guidelines, it would also be useful to hire some local consultants to help in the decision to move or set up manufacturing operations at an offshore location. While choosing the offshoring partner, the following parameters must be considered very carefully: Technology: Organisations need to check if the offshore partner is at par with or better than the technology requirements. Also, in case of any technological advancement, the offshore manufacturing partner must have the capability to upgrade to the new technology. Workforce skills: The availability of a skilled workforce will be an advantage as it will mean lower investments of time and effort in training, and the transition becomes quick and easy. Management skills: A skilled management team would help as well. As a result, organisations may not need to relocate local managers and transition time would be shorter. Labour availability: Labour availability needs to be checked for the current requirements as well as to fulfil additional requirements in case of future expansions at the offshore location. Expansion capacity: Operations in offshore locations need to necessarily be scalable in order to accommodate future expansion driven by growth in demand. Flexibility/agility: The capability of responding to design changes, new product introductions, etc. should be checked as it will be very important for future growth plans. Quality: Quality is a clear priority and hence it is necessary to check what quality processes are currently in place at the low-cost location. If such processes are not available, then organisations must check how easy or difficult it is to implement them. After-sales service and support: Organisations must check the capability of the offshore partner to provide after-sales service and support to the offshore customer-base as well as domestic customers. Shorter product life cycles: If ‘time to market’ is critical for an organisation’s business, then organisations must ensure that the offshore partner is able to squeeze product lifecycles. Clean environment: In certain verticals like healthcare and pharmaceuticals, a clean and healthy environment is mandatory. Making the decision to offshore to a low-cost country is just the start. Hence, organisations must structure and factor in all the key components. By doing so, they can arrive at a realistic assessment and the capability to fully utilise the vast potential that an offshore manufacturing initiative can offer. The author is Vice-President, Patni Computers |
