Vantage Point: The Hidden Costs of Manufacturing Offshore

Feb. 7, 2008
Production offshore is not for everyone.

Eric Larkin
Chief Technical Officer and Cofounder
Arena Solutions
Foster City, Calif.

There is no doubt that the lower cost of labor and overhead in Asian countries such as China, Malaysia, and Taiwan makes offshore manufacturing attractive, especially for OEMs that have a low mix of high-volume products, or sell their products in the region.

“Offshoring” problems crop up when companies hastily source from Asia before they back up their decision with numbers. This spells trouble for many small and midsize U.S. firms that lack a clear strategy, don’t spend enough to influence contract manufacturers, don’t really know how to do business in Asia, and have no access to local resources to manage day-to-day operations.

In addition, transportation and logistics are high on the list of challenges. Ocean shipping extends lead time by four weeks and reduces flexibility to make changes on short notice. Airfreight reduces the lead time, but is costly for large or heavy products. Different time zones and language barriers impose nontrivial communication challenges and often cause frustration and delays. Cultural factors impact how business processes are executed, how pricing and terms are negotiated, and how conflicts are resolved.

Before you decide to launch production in any region, travel there and visit some suppliers identified through trusted contacts. Leave the price negotiations for later. The purpose of your initial visit should be to understand the region’s capabilities, meet suppliers, and build relationships.

Develop a cost model that focuses on the total cost of offshore sourcing rather than on purchase price alone. This includes the transportation strategy (air versus ocean) and, most importantly, the cost of carrying inventory attributed to extended lead times. Also factor in the cost of supply buffers needed at various points in the supply chain and the overhead to manage an offshore partner.

If your cost model justifies going offshore, build resources on the ground in that country, supplemented by U.S. staff with sufficient travel budget to establish and maintain relationships with their overseas counterparts. This lets you use less-costly resources to manage local operations while the U.S. staff makes the strategic decisions.

Be sure your U.S. staff is educated on the cultural sensitivities that will undoubtedly influence rapport with your manufacturing partner. The ability to effectively socialize and establish personal relationships in Asia will be as important as the dollars you spend.

Last but not least, as you build your offshore partnership, keep in mind you no longer have the option to pick up the phone and explain a product change or drive across town to pick up prototypes. It is essential to put in place the appropriate software systems that let you collaborate effectively across time and language barriers. You’ll need disciplined product life-cycle management processes that clearly communicate hand-offs and changes. This is essential for managing the myriad of changes inevitable in fast-moving product-development environments.

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