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Weekly UpdatesCURRENT STATE OF OUTSOURCING
Global competition dictates that manufacturing firms deliver quality goods to customers on demand and at lower costs. One of the ways to be competitive is through innovation in products, processes, and services. To increase productivity and lower costs, companies are using leading manufacturing approaches (such as continuous improvement program, just-in-time inventory system) and progressive human resource (HR) practices. Another way to remain competitive is through outsourcing the business processes.
Outsourcing is defined as "purchasing ongoing services from an outside company that a company currently provides, or most organizations normally provide, for themselves" (Linder, 2004). These activities may range from manufactured parts to services, such as payroll, human resources, accounting, etc. Outsourcing is not limited to domestic suppliers, but it also includes foreign suppliers (off-shoring). In this paper the term "outsourcing" is used to encompass both domestic as well as off-shoring activities and is consistent with the framework of outsourcing activities provided by the GAO study (2004). Improvements in global telecommunications technology, infrastructure growth in developing countries, and decreasing data transmission costs have accelerated the pace of outsourcing activities (The GAO Study, 2004). As a result, U.S. companies outsource not only manufacturing jobs but also high-paying professional jobs in the service sector in the areas of high-technology, office support, computers, business management, and architecture (Mangan, 2004). Some 3.3 million U.S. jobs, accounting for $136 billion in wages, will be outsourced overseas or "off-shored" by the year 2015 (Mangan, 2004). Outsourcing allows firms to offer products or services to their customers faster, cheaper, and better.
Improved productivity, achieved through outsourcing, is assumed to contribute to the financial strength of a firm and make it globally competitive. Outsourcing has been used by many organizations to meet short-term objectives like downsizing and reducing costs. For example, Delta Airlines' outsourcing activities resulted in $25 million savings in 2003 (Weidenbaum, 2005). Others have taken a long-term approach by outsourcing non-essential work to free up resources and time to focus on areas of core competencies and competitive advantage (Chamberland,2003). In a recent survey of procurement executives (jointly done by CAPS Research and A.T. Kearney Inc.) more than 80 percent of the respondents indicated that cost reduction and need to focus on core business were the main drivers to outsourcing (Monczka, Markham, Carter, Blascovich, and Slaight, 2005). The underlying assumption being that outsourcing will make a firm financially strong.
One industry that has been actively involved in outsourcing activities is the automotive parts manufacturing. The industry uses different production technologies and manufactures a variety of products ranging from plastic molded parts for automobiles to components for airplanes; thus supporting different industries. The automotive parts manufacturing industry is heavily integrated between the U.S. and Canada. Today, every vehicle assembled in North America contains nearly $1,250 worth of parts manufactured in Canada. There is a high concentration of these firms in the state of Michigan and the Province of Ontario, Canada. The industry customers (the automakers) are keenly aware of their suppliers' potential in reducing costs. Foreign automotive parts manufacturers, particularly the ones in China, India, and Mexico are gaining competitive advantage over their North American counterparts by producing better quality products at lower prices. Hence, the automakers are demanding from North American suppliers prices that are in line with foreign suppliers' quotes. This has put a tremendous financial stress on the industry.
Compared to others, the automotive industry provides well paying jobs to the U.S. workforce (Bureau of Labor Statistics, 2005). However, it faces a number of problems including overburdening health-care costs, union strife, over-capacity, exposure to high steel prices, and competition from abroad (Welch and Byrnes, 2005). Thus, it is not surprising that, because of lost business, more than 200 auto suppliers in the $10 million-$500 million revenue bracket are in financial trouble (Basu, 2004). Even large corporations are financially struggling because of foreign competition. For example, in October 2005, the Delphi Corporation, the largest automotive parts manufacturing company (based in Troy, Michigan) filed for Chapter 11 bankruptcy. Hence, it is important to find out if outsourcing of business processes will provide financial stability to a firm.
Unfortunately, most of the outsourcing research focuses on the information technology sector. Given its potential for major impact on the North American economy and the workforce, it is interesting to note that academicians have not given the automotive parts industry the attention it deserves (Mahnke et al., 2005). The published research is either by the U.S. government agencies, such as the General Accountability Office (GAO) or the private sector, such as Forrester Research Group. It is, therefore, not surprising that the published work lacks rigor and a balanced perspective on the issue of outsourcing in this industry. Although the reported studies contain a lot of information, little statistical analysis exists. We also did a search of JSTOR archives to identify the published research on outsourcing. The search yielded 993 responses. Except for a few, none of the articles was related to the focus of this paper. In addition, not a single research paper examined outsourcing issues related to the automotive spare parts industry. Hence, it is hard to draw concrete conclusions about effectiveness of an outsourcing strategy.
OBJECTIVES OF THE STUDY
We undertake an empirical investigation of the issues discussed above in the automotive parts manufacturing industry in the state of Michigan and the Ontario Province, Canada. In particular, we examine the extent to which outsourcing is used in the industry and compare the financial strength of firms that outsource versus those that don't.
OUTSOURCING FROM RESEARCH PERSPECTIVE
Major sources of published information on outsourcing have been newspapers, trade journals, reports of consulting groups, and the studies undertaken by the government agencies. This published research falls in two categories: favoring or opposing outsourcing. Articles supporting outsourcing emphasize several benefits including facilitation of round-the-clock work schedule, greater global presence for the companies and their products, increased focus on core competencies, quicker production cycles, improved service to customers, increased capabilities, lower production cost, and higher productivity (The GAO study, 2004; Linder, 2004; Babcock, 2004). Other benefits include access to a stronger talent pool, lower inflationary pressures on the U.S. economy, and the destination countries purchasing more U.S. products; thereby increasing global market share of outsourcing firms (Global Insight, March 2004; Weidenbaum, 2005).
Critics argue that the gains cited above come with risks that are inherent in the outsourcing business. Often, companies underestimate these risks. The reported risks associated with outsourcing are: political instability or military tension in destination countries, local economic conditions, lack of infrastructure and legal framework, anti-American sentiments, and cultural incompatibility (SHRM Research, 2004-2005). The presence of these risks may result in actual benefits being much lower than expected. According to a recent survey, 75 percent of managers believe that outsourcing outcomes have fallen short of expectations (Linder, 2004). Also, a supplier of an outsourced business process today may become a competitor tomorrow. Moreover, outsourcing forces firms to undertake indiscriminate downsizing that could lead to lower employee morale, abdication of accountability, and risky financial maneuvers needed to facilitate outsourcing (Blumberg, 1998). As a result, approximately 20 to 25 percent of all outsourcing relationships fail within two years and 50 percent fail within five (Linder, 2004). Some of the academic research on outsourcing suggests that business processes will be outsourced so long as the relationships result in economic benefits to all parties through synergistic combination of capabilities, knowledge, or assets (Dyer and Singh, 1998). However, no empirical analysis exists to support the theory. Also, focus of the academic research is on outsourcing in the information technology sector.
SURVEY METHODOLOGY
Based on the issues identified by the published research, a survey questionnaire was developed. The measure related to outsourcing is discussed extensively in the GAO study (2004). The financial measure was developed using well-established constructs in the literature (Golhar and Deshpande, 1999; Kaplan and Norton, 1996).
Since most of the automotive parts manufacturers (NAIC Code #3363) are located in the state of Michigan and the Ontario province of Canada, we focused on the target population in this region. The Harris Infosource Selectory database identified 517 such companies in Michigan, while Scott's Directories listed 420 companies in Canada. Of these, 23 U.S. and 29 Canadian firms were either acquired by other businesses or went out of business. This resulted in a net sample population of the 494 U.S. and 391 Canadian firms, respectively. The survey was then sent to CEO's/Presidents of firms. A total of 160 firms returned the completed survey, resulting in a response rate of 18 percent. Of these, 90 were U.S. respondents.
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