Is Outsourcing Losing Its Appeal?

Vertical integration? Manufacturing in-house? The last few weeks I've been reading things that make me think I'm living in the 1980s.

For more than 20 years now, the conventional wisdom has been that companies should focus on design and marketing and outsource the rest. This gave rise to a whole new electronics manufacturing industry. Indeed you could even say it was the birth of the modern supply chain, in which different pieces of the product are made by different companies, then put together by a contract manufacturer, and finally marketed and sold under a specific company's brand, such as Dell or Hewlett-Packard. These OEMs don't make their own parts, and they certainly don't do their own manufacturing.

Now along comes Google (Nasdaq: GOOG) with its Nexus Q wireless home media player, which is being built right in Silicon Valley, presumably by American workers. Google isn't giving up much information about the factory, including its exact location, but the company apparently gave The New York Times a tour. In a recent article, the newspaper reported that the product was being assembled "in a large factory 15 minutes from Google headquarters" and that it saw "hundreds of workers" at the plant. The article also noted that Google was using a contract manufacturer.

It would really be a surprise if Google started hiring assembly workers. Although, come to think of it, the company manufactured its own servers for years. And last year there was speculation that Google was considering making its driver-less cars in the United States.

Could this be a trend? The NYT article noted that General Electric Co. (NYSE: GE) and Caterpillar have recently brought some manufacturing back to the United States, and speculated that this just might be the beginning of resurgence in building products at home. In fact, the Boston Consulting Group reported last spring that a third of American companies with revenues of $1 billion or more were either planning or considering moving manufacturing back to the United States.

Then there's Lenovo. It's not moving more manufacturing to the States, but it is doing more of its own manufacturing. An article in last week's Wall Street Journal explains how the company is bucking the trend of using contract manufacturers. Lenovo sees competitive advantage in owning its own factory and using its own employees. It currently owns eight factories around the world and plans to build three more.

"Selling PCs is like selling fresh fruit," Lenovo CEO Yang Yuanqing told the WSJ. "The speed of innovation is very fast, so you must know how to keep up with the pace, control inventory, to match supply with demand and handle very fast turnover."

For example, Lenovo was able to adjust quickly last year when the Thailand floods caused a hard drive shortage. Certain types of hard drives were in short supply, while others were not, so it just shifted manufacturing to products for which it could get drives, enabling the company to increase market share, according to Gerry Smith, Lenovo's supply chain senior vice president.

Bringing more manufacturing in-house is part of a strategic plan set in 2009, according to Smith, when the company "came to the conclusion that even though all our other competitors are going in the other direction… we can move faster if we're more vertically integrated."

The future will tell whether the pendulum is indeed swinging back to in-house manufacturing. Meanwhile, it's worth watching Google, Lenovo, and any other companies going retro. It could have major implications for the worldwide supply chain.