“We have a lot of our products made in China because it is cheaper than having them produced domestically”. We hear that statement a lot, but is off-shoring really cheaper? For the next couple Mondays, we will look into this deeper with a three-part series using information provided by Eric Burkland of the Ohio Manufacturer’s Association.Off-shoring is a huge subject and in order to evaluate the subject there are a lot of different things to review. Factors like region specific costs, quality, supply chain costs, operational costs, people/talent costs, travel time, fuel charges, etc. into the actual product cost. Many companies only look at the actual product cost and don’t take into consideration most if any of the other costs.
What many companies are realizing is that there is a possibility that many decisions to offshore were incorrectly made. This is becoming more evident in that many of these costs have increased dramatically from 2007 through 2010. For example many companies have seen their product costs increase by 73% and their logistics costs increased by 57%. Now keep in mind that this study is 2 years old, think of the additional costs today with the current fuel prices!
To discover what companies are doing to not only battle the continual price increases they are seeing from off-shoring but to also see how they are meeting customer demands Accenture conducted a survey of manufacturing companies. Accenture looked at why companies brought manufacturing back to the United Sates that had been off-shored.
The survey responses concluded that labor costs, proximity to the customer/market, skills of the workforce, taxes, and transportation costs were the most important in selecting locations for manufacturing operations. Indirect factors like government regulations, incentives, and others were still considered important, but by percentage, ranked less.
What companies are doing is reevaluating customer service requirements, total costs and operational agility. Companies are “rebalancing” operations with 61% reporting that they are considering more closely matching supply location with demand location. With this information, companies are considering actions with regard to supply chains and becoming more selective in their decision to off-shore.
And there are other challenges. Production skills, workforce availability, transportation costs, supply base access, capital required, and employment issues are all hurdles on the road to rebalance production and supply bases.
What have you experienced? Tell us your experiences with off-shoring and re-shoring. Do you think it is more competitive to be closer to your customer or to offshore because of low cost factors as listed above? Share your real world examples and opinions in the comment section below.
Posted via LinkedIn:
ReplyDeleteIn the internet marketing world, the answer is "it depends." Do I think that some things can be done offshore for cheap? Yes, especially basic tasks like data entry. On the other hand, I've found that for things like writing and customer support, the quality suffers and it's just not worth the trouble to outsource it.
I think there are costs that are overlooked when a company only looks at the part price. A local injection mold manufacturer told me that one of their product lines was off-shored about ten years ago. The automotive manufacturer who they supplied made the decision to produce parts in China. Paradoxically, even though the automotive manufacturer was willing to deal with someone on the other side of the planet for components, they saw the need to have the tooling produced close to the production line and pulled the tooling work from the American company. Had the local American company been able to cut the cost to half of the Chinese price, the work would still have gone overseas because of that corporate decision. Over time the automotive manufacturer had to deal with quality issues on the tooling which affected the production parts. They also had to deal with the time lag and communication issues for changes and runoff on new tooling. I have heard that ultimately they started having the tooling made in the US because it was more controllable while producing parts in China. Manufacturers need to count the cost of proximity to production when making their decisions.
ReplyDeletePosted via LinkedIn:
ReplyDeleteOur machining Tech center was in India with a 6 month wait on molding details we needed in less than 6 weeks.This kept me employed for a long time until the company moved to Mexico. There were times when the paper work was not done correctly and things were held up at the border for great leangths of time. I never understood it.
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ReplyDeleteWhen I worked at an Automotive supplier, the biggest hazard we experienced was Engineering changes. In the environment that I worked, we had 1 -2 months' inventory on hand. We had at least 1 months' inventory on the ocean. Our overseas Supplier had 1 months' inventory in the last stage of production plus 3 months' inventory released to their suppliers to produce. So with 6-8 month's inventory in process, the changes took more time than our Customer was willing to invest. You also need to consider whether the workforce is Unionized. In Korea, there is one month in the summer where negotiations take place and the only workers are management, which is producing product on a limited basis.
Posted via LinkedIn:
ReplyDeleteI asked a similar question a while ago in another group that I belong to. Some of the answers that I got were that parts came in broken (no one to fix them - scrap and rework), containers came in mismarked, later than expected, lost sales, extra trips to oversee operations by executives, language and cultural barriers, vast time zone differences, etc. In other words, a total loss of control. A couple responses said that labor costs were cheaper. Since that time my experiences and stories from others have me even more convinced that it is a disadvantage. Some people that I have talked to don't seem to have a handle on their labor costs. For those products that are capital intensive, it would seem that the labor costs are a small fraction of the overall cost and therefore should not be a factor in the decision to offshore. For those people that I have talked to, the cost of raw material to produce in the USA or offshore were the same. A number of companies seem to be lemmings and go offshore because the competition is doing so.
Fortunately, the trend seems to be shifting to slowly bringing the work back to the USA!
Harry Moser's organization, the Reshoring Initiative has an excellent worksheet for these very issues. The worksheet tool is available on the Reshoring Initiative's website, http://www.reshorenow.org/ , and it's free!
DeleteHarry spoke at TechSolve recently, and if you're interested in evaluating the total cost of one country versus another, check out his reshoring tool.
I, too, have heard Harry speak. He is doing yeoman's work to get manufacturing back in the USA.
DeletePosted via LinkedIn:
ReplyDeleteOver the last 15 years, working for large and small size companies, i have had little success with software development companies off-shore. when it is all said and done, the language and time barriers and the ultimate re-works has proven to be more expensive than doing the work State Side. In today's market, US companies have dropped their asking price for services and are producing quality work.
As far as products are concerned, all off-shore companies do is copy and they are terrible at that.
Posted by Alex Terzian
Posted via LinkedIn:
ReplyDeleteObviously there have been good and bad experiences about off-shoring. Most stories are about getting work done in China because it is seen as beeing so much cheaper than other countries. However issues of quality are always difficult to sort out due to factors such as language differences, time zones differences, and one of the biggest is cultural differences. I say this because even when communicating with someone who has good language skills it is too hard for them to understand why quality standards are so necessary if standards they are happy with in their country are much lower.
Off-shoring can be good if you look at countries that are not too different in culture from your own, are speaking the same language and of course offer a cost advantage.
Posted via LinkedIn:
DeleteI entirely agree with Bob's comments. I help companies to find a quality manufacturing partner/s in Europe and this arrangement works well for them. However, even in Europe there are different qualities and business priorities, therefore people have to be selective who they choose to work with, or they need to know their new market very well. No one can match labour cost with China but there are other hidden costs, as Bob mentioned, which are often overlooked, when off-shoring to Asia. It is always good to save money and make more profit but not everyone is driven by lowest price. Sometimes other aspects are as important as price, for example: confidentiality, quality, certificates, delivery time, customer service, easy access, and no hassle. It is important that companies know what they want to achieve and risks they take.
Posted vis LinkedIn:
ReplyDeleteI understand from people in HR that the cost of sending ex-pats to manage the Chinese operations is horrendous.
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ReplyDeleteExcellent article about a message that North American business leaders need to start taking seriously, we have to reverse the trend and get manufacturing back on our shores. I think the experiment is now showing more cracks and the almighty profit is not as great as published, it takes articles like this and brave politicians and business leaders to stand up and say enough is enough.
Having said that, labor must acknowledge that they need to bring something to the table by being more willing to accept less wages and benefits, many are finding out that working for less is much better than not working
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ReplyDeleteI hate to say "Me too", but I concur. Labor costs in Asia may be lower, but quality - especially the risk of counterfeit components - and transportation costs make up a large portion of the difference. Near-shoring makes much more sense.
Posted vis LinkedIn:
ReplyDeleteI have recently quoted for electronic products. I again crunched numbers and found it far cheaper to manufacture the product here in NZ with production as required, than be controlled with minimum overseas orders + shipping + entry charges + cost of funds etc to cover excess minimum order stocked items. Further if you need a slight change in design local production is always updated. I have also found that local business will always trim a few prices to help with local manufacture and assembly.
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ReplyDeleteMy experience is that there are alot of hidden costs in off shore sourcing, as well as negative capital impact due to much higher stock levels, safety stock and payment up front. Sending people overseas to inspect quality and set up rigorous systems and agree standard is not cheap, but the cost of 'mis-understood quality' is astronomical. I think we are in the twilight of global sourcing, but there is still a use for it on high volume comodity items. Complicated sourcing for items you sell to only one customer is a risky strategy. It takes a long time to switch off that supply line and you can get left with alot of obselete stock if only one customer is taking that item.