Article
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The Idea in Brief
Companies today have unprecedented opportunities to move functions to low-cost countries and tap into the capabilities of overseas suppliers. But the plethora of options at their disposal poses difficult challenges. Managers have to determine which links in their supply chain—from materials supply to research and engineering to manufacturing and assembly—are best suited to relocation, and they have to weigh the various risks and benefits presented by different regions and countries. The danger is that the complexity of the decisions can lead to paralysis.
A recent Bain & Company survey reveals that the danger is not just theoretical. We canvassed 138 manufacturing executives in a range of sectors. While more than 80% of them believe that cost migration is a high priority in their industry, fewer than two-thirds have launched significant cost-migration initiatives. And even those making major efforts have focused on routine manufacturing and assembly processes. Only 15%, for example, are reaping benefits from relocating value-added activities such as research and development.
It’s clear that the question for executives is no longer whether to move costs to low-labor-cost countries (LCCs)—that’s now a given—but what to move, where to move, and how to move.
What many managers lack, however, is a framework for making these decisions, one that puts the relative benefits and risks of all the myriad options in the proper context and allows executives to make informed decisions that are consistent with corporate strategy.
The cost-migration imperative
We categorized the companies in our sample according to their cost position. Twenty-five percent rated themselves as “cost leaders” in their markets, and 33% characterized themselves as “cost laggards,” with the remainder falling somewhere in between. When we analyzed their operations, we found that the leaders were well ahead in pursuing cost migration, with more than two-thirds having already moved at least 20% of their supply chain costs to LCCs. In contrast, only 13% of the laggards had hit the 20% mark.The laggards, moreover, confessed to struggling with the practical aspects of overseas moves, while the leaders displayed a great deal of confidence and acumen in drawing on the resources of LCCs.