Offshoring Risks And Recommendations: A Review

Offshoring is a type of outsourcing that entails the movement of parts of a supply chain’s operation to another country or region.

It is the setting up of aspects of a business or supply chain operations closer to the consumer to enhance access to the market and reduce the cost of this access. It’s no secret that supply chains can be expensive and consumer demands are increasingly changing.

Many times they are also complicated. Bringing the supply chain closer to them can help businesses monitor and meet their needs seamlessly.

Offshoring is a strategic move that accelerates growth, drives innovation, and boosts profitability.

 

 

Globalization has been all the rage with supply chains for a few decades, which is excellent considering its many advantages. With globalization, outsourcing has become a fundamental piece of global supply chains.

This has allowed these supply chains to leverage the expertise, skills, and resources of the businesses to which they are outsourcing, strengthen and improve their operations. However, offshoring is different.

In offshoring, supply chains are using their systems and standards to set up similar operations in new markets.

Considering the current crisis and risks plaguing the shipping routes and the general global trade market, the concept has been critical for supply chains. It allows them to bypass these risks and set up shop closer to the consumers.

However, like many other supply chain concepts, it is important to understand it. In this article, we will be exploring some of the risks and recommendations associated with offshoring.

Risk of off-shoring

No doubt in a most volatile economic and geopolitical landscape, global supply chains are turning to offshoring as a way to secure their operations and frankly their future. As key a component of many of these supply chains , offshoring has been great.

However, there are legitimate risks we must consider. Risks that have been made more prevalent in recent times. So what are these risks, and how do we get around them?

Loss of Control 

It is easier than you think to lose control of your supply chain.

Off-shoring your supply chain will mean subjecting that entire process to the laws and vulnerabilities of the new country or region. This can create opportunities where parties or stakeholders (internal and external) might be tempted to take advantage of your osupply chain operations.

The external parties could be vendors or suppliers. Remember that it is a new market and that comes along with some unknowns, including how how to manage the supply chain stakeholders.

Loss of control also aplies to quality and managing customers.

New regions come with new rules, policies, and contracts. While there is a gerenal approach to all of this, there are some nuances.

For instance, offshoring stakeholders in the new market may exploit inappropriate terms in a contract, There could also be the case of lack or a shortage of the necessary skills in the new location. Scenarios like this are quite common and can lead to a loss of control.

This could require considerable amount of resources and efforts to get it under control.

Although there is a considerable amount of vetting that goes on, there is an immense potential for errors.

Recommendation

When vetting, always go through the contract with a fine tooth comb but do not stop there. Engage the services of lawyers in the country you are off-shoring your supply chain to. These lawyers would be in the best position to advise your contract terms and guidelines.

Setting up a joint management system with the company you are off-shoring your supply chain is advisable. This management system would ensure your company’s interest is always taken seriously.

Hidden or Unforeseen Cost

Despite the number crunching, offshoring supply chain always has the potential for hidden costs. Outsourcing and offshoring are great ways for business organizations to reduce the cost of their supply chain. This is excellent, but what if there are loopholes in the system? 

Examples of hidden or unforeseen costs could be local disputes or wars, government policies, or operational costs such as bribery and security. These costs are especially true for businesses going into a region for the first time or without due diligence. 

Sustainable sourcing and the customer reactions to bad sustainable practices is also a form of hidden cost in offshoring. Nike is a great example of the blowback of bad sustainability practices and the PR nightmare that can result from it.

Recommendation

Conduct extensive research into the country you intend to offshore the supply chain to. Also, do your due diligence on the company or companies your supply chain wants to partner with. Always clarify what you expect from the collaboration. Preferably put them down in writing or contract for all parties concerned. 

Finally, always stay ahead of the region’s political climate and constantly use data analysis to predict the future of that collaboration.

Privacy and Security

Intellectual property theft is still a thing and is far more common than you think. The Apple vs Samsung case is a true testament to this. When collaborating with off-shore partners, especially those who could be in business with its competitors, an organization exposes its intellectual property to the risk of theft. 

Companies are often in bed with multiple partners. For example, a warehousing company might cater to several other companies needing its service, and a manufacturing company will probably do the same. 

It can take so much effort to ensure the security of intellectual property, which the contracted company may not be willing to pay for.

Recommendation

Partner with suppliers or vendors who are not in business with your competitors. If possible, outline in your contract that they cannot do business with your competition while the partnership persists. 

Vet the security and Integrity of the company you are partnering with and ensure that, as much as possible, you do not reveal product details to them. Just enough of what they need to partner effectively with your supply chain.

Communication Barriers

In off-shoring, you are dealing with businesses in other countries.

This typically means different time zones (some worse than others), languages, and culture. It can be hard to integrate all of this at the beginning which makes offshoring quite tedious. Because of these barriers, there could be poor collaboration and breakdown in different processes because of lack of understanding of information.

Sometimes it could be a standadization problem.

Recommendation

Consider partnering with businesses near your market or industry. This will significantly improve communication because these businesses have an idea of what you are talking about, even though there might be some differences.

Ensure that communication is clear, concise, and relevant. 

Wrap Up

Most often, the benefits of offshoring far outweigh the risks. But these risks can be quite a pain to the supply chain. 

As a supply chain manager or business owner going the extra mile to ensure these risks are appropriately tackled at the early stages of the off-shoring is excellent for the supply chain.