Harley-Davidson's first attempt at outsourcing fails, earnings dip

US motorcycle maker Harley Davidson Inc came late to the offshoring game.

But now that the company has moved some production overseas and built up a roster of foreign suppliers, it is discovering why so many pioneers of the strategy are scrambling to relocate back home.

Far-flung supply chains required by overseas sourcing can create all kinds of unforeseen inventory expenses, quality control problems and unanticipated delays, as the Boston Consulting Group and other analysts have pointed out.

For Harley-Davidson, they turned a happy debut into a near-debacle, as its second-quarter earnings released on Tuesday showed.

Until this year, all Harley-badged motorcycles were built in the United States using parts that were almost exclusively sourced domestically.

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That changed earlier this year with the introduction of the Street, the Milwaukee-based company’s first new motorcycle platform in more than a decade and its first Harley-badged lightweight bike since the 1970s.

Street motorbikes destined for the North American market would be built at the company’s Kansas City, Missouri plant. But to keep prices low, Harley-Davidson said the U.S.-built bikes would feature more foreign-made content and components than any motorcycle in the company’s history.

Streets bound for the rest of the world, meanwhile, would be built in India.

Harley-Davidson hoped to begin shipping Streets to its US dealers this spring. But on Tuesday, it admitted the launch had not gone as planned. Instead of showing up in showrooms in large numbers in May, the Streets only began to trickle in at the end of June.

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The company blamed foreign component makers whose parts failed to get to the Kansas City plant on time.

Bob Klein, a spokesman for Harley-Davidson, said the problems forced the company to “slow-walk” the startup of Street production. He said the issues have been addressed, that the company is “catching up on parts deliveries to the US” and that Harley-Davidson’s “ability to supply the U.S. dealer network will improve” later in the year.

Ironically, Harley-Davidson’s decision to move production overseas comes as many other US manufacturers are doing the opposite.

Analysts at BCG, which first flagged the reshoring trend in 2011, say a number of factors, including rising overseas wages, are driving the return of manufacturing to the United States.

But BCG says a key factor is concern about “supply chain risks” and “headaches associated with operating a supply chain extending halfway around the world.”

It is a lesson Harley-Davidson is learning.

“This is the first time we’re manufacturing product internationally, and with that, a majority of the supply chain is international,” Chief Financial Officer John Olin told investors during a conference call.

“And not only is it a much longer supply chain, but it’s with a lot of new suppliers …. We’re going through a learning curve.”

Reuters