The Outsourcing Compulsion

The conventional wisdom in government, academia and much of industry is that companies are choosing to close their costly domestic operations in favor of better prospects and profits in other countries. While it is certainly true that U.S. companies are being pulled overseas by the allure of potential profits and cheap labor, the vast majority are also being pushed overseas by something that is much more proximate to the U.S. domestic industrial structure than the desire for new markets, lower labor costs or greater efficiencies in sourcing: the United States’ dysfunctional distribution system. And, although its impact is ubiquitous, the clear connection of this force to the surge in U.S. outsourcing has gone largely unnoticed.

It is not corporate avarice that is driving a good deal of manufacturing out of the United States. Nor is it the desire for the cheapest price on the part of consumers. What is forcing thousands of companies to close U.S. operations and lay off workers is an imbalance in the sales and distribution model that has evolved over the past four decades. Distribution has been turned on its head as distributors have wrested control of the strategic prerogatives of manufacturers in order to capture a disproportionate share of the value of the supplying company’s products. The megadistributors end up profiting at the expense of their vendors, and manufacturers earn little or nothing on the sale of their own products. As a result of this phenomenon, U.S. companies have compulsively embraced offshoring not so much as a result of their internally generated goals and objectives, but rather as a necessary response to the demands of sheer corporate survival.

Back in the Day

Prior to World War II, producers sought to control every aspect of the goods that rolled out of their factories. Manufacturers viscerally understood that it was blood, sweat, investment and risk taking that brought their creations to the public. Industrialists purposefully exerted as much control as possible over the distribution and sale of their products. By exercising power over downstream value chain activities, manufacturers carefully safeguarded their own interests.

The industrial structure that emerged during the second half of the 19th century has been variously characterized as hierarchical capitalism, managerial capitalism or internalization. Here, vertically integrated companies created large production facilities that could take advantage of scale and scope while at the same time developing marketing, distribution and purchasing networks for specific products.