What Are the True Costs of Offshoring?
June 4, 2013
There is a growing trend to reshore manufacturing back to the U.S. as managers re-calculate and compare the true total costs of production. Still, there is a range of hidden metrics that are not factored often enough when determining where to produce goods.Michele Nash-Hoff, author of the book "Can American Manufacturing be Saved? "The buzz at the show was that manufacturing is returning to America, and every contract manufacturer I spoke to at the show had experienced a 'reshoring' event," said Nash-Hoff. Time magazine's April 22 cover article also noted the reshoring trend. The article "Made in USA: Manufacturing is Back -- But Where are the Jobs?" is replete with photos of consumer products that have returned to American-based manufacturing from offshore. What is refueling the trend of reshoring? Brands are not returning on an impulse or because of public pressure, IndustryWeek Too many companies moved their production to countries like China based solely on the unit prices. "Buyers are rewarded with the money they save their company based on the piece price," added Nash-Hoff. "They fail to see the bigger picture." As the cost of manufacturing overseas is being re-examined using total costs models, several factors have been at the forefront. Nash-Hoff listed a few of the major factors that first led to bringing work back to the U.S.:
- Inventory: "Businesses are being forced to buy larger lots to get the best China price," she explained.
- Cash flow: "Lower-volume businesses are being forced to pay for parts before they're shipped... Only the major companies are getting favorable terms."
- Travel: This can chip away at savings "if traveling to Asia becomes necessary or frequent," which she said often happens when "the qualities of parts are sub-par and the manufacturing has to be reworked."
- Currency Fluctuations. Last year's invoice of $100,000 could be $140,000 today.
- Appropriate Management Skills. Many companies underestimate the people, process, and technology required to manage an outsourcing contract.
- Design Changes. Language barriers make it difficult to get design changes understood and implemented.
- Quality Problems. Substitution of lower grade or different materials than specified is a common problem.
- Legal Liabilities. Offshore vendors often refuse to participate in product warrantees or guarantees.
- Cost of Transition. It is easy to overlook the time and effort required to successfully offshore production. It takes from three months to a year to complete the transition to an offshore vendor.
- Poor Communication. Time zone differences and language barriers can make communication complex and burdensome.
- Intellectual Property. Foreign companies, particularly Chinese firms, are notorious for infringing on IP rights without legal recourse for American companies.