Article Abstract:
Managing the Reality of Offshore Assembly
Assembly Magazine; 3/2005
By: Senior Editor, Austin Weber
The Offshoring Promise
“Low-cost countries are changing the competitive landscape,” reports Austin Weber, senior editor of Assembly Magazine, in this article. However, simply moving overseas to take advantages of offshore production comes with significant risks. North American companies are finding, the lower labor force costs that come from manufacturing in a low cost country do not always mean lower operating costs. One of the misconceptions Weber states in this article is the mistaken belief that “offshore manufacturing is always cheaper.”
Indeed, North American companies who have moved to China are coming back in increasing numbers. Weber cites one example, Epson Portland Inc, who laid off 75 percent of their workforce in 2001. After Epson reviewed the total costs from their offshore production, they found that “tariffs, currency fluctuation, freight charges and other costs often negated offshore labor savings.” Since then, Epson has increased their production at its North American factory. “In fact, the facility is now producing five times as many cartridges per worker as its sister plant in China,” Weber reports.
Costs of Offshoring
For North American companies, reducing operation costs is a major priority in staying globally competitive. Offshore manufacturing appears to be an attractive solution, especially because an Asian factory worker costs $1 an hour, compared to $15 to $30 in the United States. China is especially becoming a primary player for those seeking to move production overseas. “China has accounted for 33% of all offshore activity in the past 4 years,” said Director of Labor Education Research at Cornell University. They have a vast cheap labor force, pro-business policies, and among the largest growing markets in the world. But even in China, offshore manufacturing is not always the most cost effective solution.
The savings created from low wage labor countries are often offset by the incremental costs associated with expanding and more complicated supply chains; The lower quality requires more testing operations, and drives the costs of inventory. Kevin Keegan, a director at Pittiglio Rabin Todd & McGrath says that there are hidden costs to offshoring, not often easy to quantify, but no less real. “These include the somewhat intangible—but very real—costs associated with managing cultural and language barriers, overcoming limited supply chain expertise, and coping with a supply chain rendered far less flexible because of the physical distance between the company and its manufacturing partner.” Shipping across the Pacific alone can add 15% to the cost of the product.
Lean Manufacturing
Many companies who move manufacturing overseas do not consider these hidden costs. They may also not consider alternative solutions that will make their company more competitive and viable over the long-term. For example, Don Penkala, president of Granite Bay Consulting Inc., urges manufacturers to determine the relative benefits of offshore vs. lean manufacturing. “Offshore manufacturing may be able to reduce costs in the short run, but implementing lean principles has enabled many manufacturers to produce more efficiently and profitably within the United States and gain a long-term competitive advantage,” notes Penkala.
Penkala did a study of 29 companies and found that the savings average for offshoring was 11.4%. Compared to companies that implement lean manufacturing principles, “11 percent improvements are conservative,” noted Penkala. “When a company successfully adopts lean principles, annual gains of 10% to 25% are common. So the question that must be asked is ‘What is the benefit of offshore manufacturing vs. lean manufacturing here in the United States?’”
Austin Weber’s article is a wealth of information about the pros and cons of offshoring. The analysis and comprehensive sources provide information that can be used immediately when determining how North American manufacturers can remain globally competitive. To read the full article, visit our articles page. There you will find other articles that address the real costs of offshoring.
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