Near sourcing often outperforms out sourcing

Published in UT San Diego, February 26, 2013

Sometimes the grass is greener across the street and not across the ocean. Meet “near sourcing” — the new version of outsourcing. The goal is to keep more jobs close to home, in this case, right here in San Diego.

When Rempex Pharmaceuticals needed to make a small batch of a new antibiotic to use in clinical trials, the company didn’t have the expertise in-house. “We examined a number of options around the country and ended up in San Diego. Althea Technologies had the ability to meet our needs quickly, and their price was competitive,” said Daniel Burgess, president and CEO of Rempex. “They were 10 minutes away, so we could be there for the manufacturing runs, which saved us a month in getting the drug into the clinic.”

A local initiative aims to help local companies expand on the nearness.

“We believe that the region’s ability to be competitive may depend on making it easier for companies to find the right near-sourcing partner,” said Kevin Carroll, executive vice president of CONNECT, an organization dedicated to growing the innovation economy. Companies seeking global suppliers can access the San Diego East County Economic Development Council’s free database that contains more than 5,000 companies.

At a recent near-sourcing workshop sponsored by CONNECT, participants examined the case study of a thermal transfer manufacturing company whose senior vice president of operations had concluded, “We need to be in China.” Led by David F. Pyke, Ph.D., dean of the University of San Diego School of Business Administration, we learned that “we need to be in China” is a statement fraught with challenges, dangers and many meanings. Does it mean we need to sell, manufacture or partner in China? Companies often fail to ask the right questions and consider the consequences, risks and potential problems. While outsourcing may be the correct answer, they need to understand all the issues before making such an important decision.

Companies generally move operations offshore because they want to save money, but “they overestimate the savings that they will get and underestimate the related costs,” Pyke said. “The time and the cost of developing a new platform or a new version and getting it up and running properly in a factory in a different language and culture is highly complex.”

Another mistake companies make is only looking at the unit labor cost instead of the total landed cost that includes labor, shipping, tariffs, the cost of employees going back and forth, and customer service.

Even more than cost, companies need to rank the importance of quality, delivery and the impact of that famous, and inevitable event, what do you do when the stuff hits the fan — and the fan is 5,000 miles away.

Pyke advocates a framework that involves executives from all parts of the company so finance, human resources, operations, supply-chain managers and marketing managers are in the same room discussing the trade-offs and risks, including intellectual property protection, regulations, mismatch of culture and foreign exchange.

In other words, decisions that might seem like no-brainers are actually brainers.

“The amount of work and discomfort to open up a supplier in China or do business several time zones away may not be worth it, and you may have serious concerns about intellectual property and quality,” Pyke said. “Executives have said to me I know it’s going to be more expensive and take longer to get up and running. Then when the smoke clears, it’s even more expensive and takes even more time.”

That sentence strikes us as obvious, but it also suggests that blind optimism still can overrule rational behavior in corporate decision-making. You know it will take longer and cost more, but somewhere in your mind, you don’t really believe it until you get the bills.

Rule number 164

If you want egg rolls, you don’t have to go to China. Great ones are right here on Convoy Street. And the travel time is much less.

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