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The Outsourcing Compulsion

October 1, 2006 | Prof. Andrew R. Thomas , Prof. Timothy J. Wilkinson | Strategy

The authors make the case that the vast majority of U.S. companies are being pushed overseas by more than just the desire for new markets, lower labor costs or greater efficiencies in sourcing. The United States’ dysfunctional distribution system, they say, 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. Megadistributors like Wal-Mart Stores Inc. and Home Depot Inc. end up profiting at the expense of their vendors, and manufacturers earn little or nothing on the sale of their own products. The megadistributors not only control the delivery of their products to consumers but also wield tremendous power over their internal processes. Cut off from the ability to control distribution and sales, these manufacturers must chase the cheapest inputs, particularly labor, in order to generate adequate margins and maintain shareholder value. There is some hope: In high-growth emerging markets around the world, manufacturers still possess the ability to directly influence what happens to their products once they enter the distribution chain, but, warn the authors, this window is rapidly closing.

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