Why Offshoring Manufacturing “To Save Cost” Won’t, but Trying May Compromise Product Development, Delivery and Quality
Many companies are offshoring – designing products here for sale here, but manufacturing them overseas – because they think it will save cost. Their primitive cost systems make such a moveappear to be justified. However, if all that is quantified is parts and labor, then moving to a “low labor rate” country will appear to lower labor cost. If no other costs are quantified, it is a “case closed” decision based on a back-of-the-envelope calculation.
However, when measured on a total cost basis, manufacturing offshore for sale in the U.S. rarely results in a net cost savings,1 considering differences in labor efficiency and all the costs of shipping, quality, inventory, communications, travel, training, transferring products, support and complete sets of equipment needed for any manufacturer. Further, offshore manufacturing compromises six out of eight cost reduction strategies. They are:
1. Cost Reduction by Design
2. Lean Production Cost Reduction
3. Overhead Cost Reduction
4. Standardization Cost Reduction
5. Product Line Rationalization Cost Reduction
6. Supply Chain Management Cost Reduction
7. Quality Cost Reduction
8. Total Cost Measurement to Support All Cost Reduction Activities
For the sake of brevity in this article, you may find more detail on these eight strategies at www.halfcostproducts.com.
Missing the Biggest Opportunity
Eighty percent of a product’s lifetime cumulative cost is determined by product design.2 Unfortunately, offshoring production compromises all future design opportunities because it prevents Concurrent Engineering teamwork, which is the most promising opportunity for achieving truly low-cost products.
Naturally, offshoring prevents this teamwork because design engineers and manufacturing people are not in the same country and not even working at the same time. Without manufacturing involvement, engineers will design products alone, throw them over the ocean and get back parts that will only be as manufacturable as the individual engineer’s Design for Manufacturability (DFM) expertise. Further, dealing with the problems of offshoring (discussed below) will be a resource drain that in some companies consumes two-thirds of product development resources!
No Lean; Slow Responsiveness
Offshore plants, especially contract manufacturers, amortize their setup charges by building in batches (mass production) and shipping across the ocean in batches. It is hard to respond to volatile market conditions when so much forecasted inventory is at the plant and in the long “pipeline” across the ocean. The enormous potential cost savings from Lean Production will not be realized, because products can not be pulled 3 by customer demand across oceans, nor could they be builtto-order. Distance and remoteness will prevent the setting up of flexible plants that could mass customize orthopaedic devices for individual patients4 and, will cause device companies to thus miss out on those paradigm-shifting opportunities.
Quality Takes a Hit, Too
Without lean production and the design-for-quality contribution of good Concurrent Engineering teamwork,5 quality and reliability will not be designed in or built in, so the home office will have to rely on strict and expensive testing of all products, followed by repair costs or scrap costs, followed by extra setup cost to build replacement products and expedited shipping costs. Worse, if contract manufacturers are selected by low-bidding, quality may suffer even more for reasons such as a lack of long-term relationships in which manufacturers work together with suppliers, the unintended effect of driving up other costs many times the assumed savings, and others cited at www.halfcostproducts.com/low-bidding.htm.