How Outsourcing Undermines U.S. Industry

I recently made fun of a couple of articles on the Harvard Business Review website. So it seems only fair that now I want to praise a different one of their articles.

This one has to do with outsourcing, which lean advocates have long criticized. We argue that outsourcing in search of cheap manufacturing often ends up not saving money because of additional costs and problems it creates. We also contend that a total commitment to a lean strategy can streamline your company to the point where you can compete effectively with cheap overseas competitors.

But there is another, possibly more important argument against outsourcing – that it undermines a company’s – and an industry’s – strengths and core essence. That argument is articulated extremely well in an HBR article by Gary P. Pisano.

The culprit is the outsourcing of development and manufacturing work to specialists abroad. The result: a damaging deterioration in the collective capabilities that serve high tech. This industrial commons includes not just suppliers of advanced materials, production equipment, and components, but also R&D know-how, advanced process development and engineering skills, and manufacturing competencies.

Making matters even worse is something that has been largely ignored: In addition to undermining the ability of the U.S. to manufacture high tech products, the erosion of the industrial commons has seriously damaged the country's ability to invent new ones (original emphasis).

The prevailing view of the past 25 years has been that the U.S. can thrive as a center of innovation and leave the manufacturing of the products it invents and designs to others. Nothing could be further from the truth.

This logic is predicated on utterly false assumptions about the divisibility of R&D and manufacturing and basic competitive dynamics.

In many cases, R&D and manufacturing are tightly intertwined. Unless you know how to manufacture a product, you often cannot design it. And, to understand how to manufacture it, you have to have manufacturing competencies and experience. The notion that you can design a product in the serene world of the R&D laboratory without any knowledge of the rough and tumble world of production is ridiculous.

To innovate, you need great two-way feedback. You need to transfer knowledge from R&D into production, but you also need to move knowledge from production back to R&D. The act of production creates knowledge about the process and the product design.

I agree completely.

However, if you’d like to read a different point of view, check out another HBR article, this one by David B. Yoffie.

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