f an offshore manufacturing strategy, furthermore, Constantinos and Berg contended that American companies tend to magnify the significance of wages to total production costs, to defer action on more significant problems, and fail to consider additional costs associated with offshore production. The authors pointed out that, on the average, labor costs account for only 15 percent of total production costs. Thus, a 33.3 percent saving on wages represents only a five percent reduction in total production costs. Further, additional costs for shipping, paperwork and communications, and increased inventories typically add from 13 to 28 percent to total production costs. The savings attained on labor costs, therefore, are often a mirage.
The emphasis by American managers on the 15 percent of total production costs represented by labor, according to Constantinos and Berg, often cause these same managers to virtually ignore the remain 85 percent of those costs. The authors suggested that potential savings in the areas of administration, inventory control, marketing, research and development, and distribution far exceed the similar potential in the area of labor costs, and that these non labor savings can be attained without transferring production offshore.
Markides Constantinos C., and Berg, Norman "Manufacturing Offshore is Bad Business." Harvard Business Review, 66 (September October 1988): 113 114, 116 120.
Kenichi Ohmae observed in the late 1980s, that the focus on competitiveness was causing business managers around the world to ignore the true essentials of strategy.1 In essence, the emphasis on competitiveness was placing the focus of a business strategy on the competition, as opposed to where that focus belonged on the customer. Ohmae noted that business managers in both North America and Europe had adopted this emphasis on competitiveness from Japanese manufacturers who had been highly successful through the impleme...