Viewpoints: Problems with Offshore Production
The past year's economy has been difficult for almost all American companies, but it may eventually prove to be a blessing in disguise for many job-shop owners and contract manufacturers. As times have become tight, many companies have begun to discover some of the hidden costs of foreign production. While offshoring the production of American goods will never disappear entirely, there are reasons to be cautiously optimistic about a smaller portion of jobs being shipped outside this country.
Manufacturing in a country with cheap labor often looks attractive on paper. Accountants crunch the numbers and believe that significant cost savings can be achieved by moving production to a nation such as China or India. This type of analysis rarely includes the true costs of establishing a foreign manufacturing facility. Overhead costs are sometimes not taken into account, such as the need to export engineers, training personnel, and purchasing managers just to ensure minimal effectiveness of a new facility. If such obvious expenses can be overlooked, it's easy to see how more subtle costs are often missed.
Over the past 20 years, many companies have discovered the hidden costs of poor or unreliable quality. A significant amount of precision work has moved offshore in years past, only for companies to find that many components must be scrapped or reworked upon their arrival back in the US. The die and mold industry, in particular, provides an example of companies that are beginning to bring work back into our country to achieve the necessary quality requirements.
Extremely high shipping times also represent a significant deficiency of overseas production. Depending on the country of origin, international shipping will add anywhere from ten to thirty days to the procurement cycle. This introduces substantial complexity to supply-chain management, which imposes additional cost. It also impairs flexibility, and does not allow for quick adaptation to changing business conditions.
When poor quality and long shipping times combine, the stage is set for disaster. When a large lot of products manufactured abroad arrives in an unacceptable condition, there is little a company can do to salvage the situation. Shipping potentially defective products to customers, or delaying delivery, are the only options, and both can have substantial negative long-term effects. To counter this, many companies with foreign facilities must maintain a safety stock much larger than would be required with domestic production. Holding excessive inventory always increases costs, but countless stories over the past year have shown us that doing so can threaten a company's very survival when unexpected economic turmoil occurs.
The current recession will have permanent effects on the operations of many companies. With foreign manufacturing's detriments of inventory and rigidity exposed, new opportunities will arise for shops here at home. As large corporations begin seriously evaluating the possibility of bringing outsourced work back to our shores, shops can take several steps to position themselves to take advantage.
One of the most obvious ways to compete with foreign competition is to negate its primary perceived benefit. Machine and automation technology have progressed by leaps and bounds in the last five years. It's becoming easier and easier for a shop to produce more without expanding its workforce. By minimizing the labor component in production, the appeal of cheap labor quickly disappears.
Even more importantly, American manufacturers must concentrate on optimizing the throughput of their operations. Streamlining the production process increases flexibility, and allows both shops and their customers to implement a just-in-time approach to their operations, reducing costs and risk.The less inventory required to meet customer demand, the smaller the chance of being stuck holding it in the event of an unexpected slowdown. Additionally, if all other things are held equal, customers will always prefer suppliers that have the flexibility to meet their specific needs in the timeliest fashion.
Production of certain types of goods will most likely continue to take place abroad. Products with heavy, reliable demand and low quality standards are immune to many of the hidden costs previously detailed. Still, there is a clear trend for many other types of work being brought back home. Companies will remember the lessons of this recession, and position themselves to better withstand any potential future economic crises. As a result, job shops and contract manufacturers who have optimized their operations will be in a strong position to benefit when the current economy finally turns around.
This article was first published in the January 2010 edition of Manufacturing Engineering magazine.