C. F. Lynch & Associates

What's In a Name?

By Clifford F. Lynch

DC Velocity, June 2005

Just when we thought we finally had our industry terminology straight, up pops that old semantics devil. The latest case involves the term "outsourcing" Ė which most supply chain managers understand to mean an arrangement under which a company hires an outside logistics service provider to handle tasks that could be, or once were, provided in-house. Outsourcing can be domestic or international. And thatís where the trouble lies. Some have begun to think of international "outsourcing" as synonymous with "offshoring," the controversial practice of shutting down U.S. factories or offices and sending the jobs overseas. And as a result, the mention of "outsourcing" today is greeted with the same enthusiasm generally reserved for the avian flu virus.

As often happens, this misunderstanding has been perpetuated by some of the general business publications. For example, when Forbes published a chart sourced from Forrester Research summarizing the results of a survey of companies that use offshore labor, it titled it not "Who Is Offshoring?" but "Who Is Outsourcing?" Itís no wonder weíre confused. To be fair, itís not just the business press thatís responsible for the confusion; newspapers are to blame too. Between January and May 2004, U.S. newspapers contained 2,634 articles on service outsourcing, most of which focused on job losses, according to an International Monetary Fund working paper.

Itís not that concerns about U.S. job losses arenít real. They are. Between March 2001 and March 2004, private-sector jobs dropped by 2.6 million. Total manufacturing jobs fell 12 percent, while software jobs within the manufacturing sector plummeted by 19 percent. The people in the latter group, of course, are the very segment of the workforce who had long been assured they had the precise skills required for success in the global economy.

That only made it sting all the more when about five years ago, U.S. businesses discovered they could save millions of dollars by sending their IT systems development and programming work to India and China. For those laid-off programmers, thereís little prospect of relief. This particular brand of outsourcing is expected to continue. Gartner Group predicts that by 2015, 30 percent of the IT jobs in the United States and other developed countries will be offshored to low-cost countries.

While no oneís happy to see U.S. jobs disappear and livelihoods destroyed, the fact of the matter is that no supply chain manager will be able to function in todayís global economy unless heís given the freedom to use whatever resources are necessary, regardless of their location. And whatever you choose to call it (I prefer the term "international outsourcing"), I believe that hiring foreign logistics service providers will remain a vital part of our supply chain strategy. In fact, I predict that the practice will gather steam as we take an increasingly global approach to our thinking and our operations.

In the logistics industry, at least, itís not the corporate pursuit of cheap labor that drives companies to hire a foreign partner. Itís simple common sense. Today, most of the stuff we buy originates offshore. Consider that Wal-Mart alone imported $18 billion worth of Chinese products in 2004. Or that the 8,000 companies in Chinaís Zhejiang province alone produce one-third of the worldís supply of socks. It stands to reason that if youíre responsible for shipping socks out of Zhejiang, youíre not going to be using a third-party service provider out of Little Rock, Ark.

I should note that in the heat of argument, one fact rarely gets mentioned: The exporting of jobs can be a two-way street. In 2003, U.S. companies may have offshored $43.5 billion in jobs. But in the same year, we insourced $61.4 billion by providing labor to foreign companies.




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