The decision whether to outsource or onshore (“re-shore”) your manufacturing operations is a complex one. Executives have to evaluate not just the labor costs of various areas, but also what the decision will mean as far as quality control, logistics, and public opinion are concerned.
“A few years ago, manufacturers were tripping over themselves to outsource to China,” says Ian Benoliel from NumberCruncher, makers of All Orders inventory software. “Not so much anymore, as unit costs are steadily rising due to the price of oil and workers’ demands for higher wages and more benefits.” Benoliel continues, “Engineering has also been a nightmare, where any change in design causes major production delays. Customer service has also been impacted due to increases in delivery time.” While no two companies face all of the same challenges, there are some common considerations for every firm that goes through this process.
Wherever you choose to establish your production facilities, shipping methods and costs need to be considered, along with how to ensure that only quality products leave your factory. Also, the political and economic stability of an area can directly affect your bottom line. Even if wages are significantly lower, risks to your supply chain and operational stability may make some locations far more desirable than others. It’s critical to do your homework and analyze all possible issues that can arise in a particular country or region before basing operations there, regardless of how enticing that location may seem based solely on labor costs. Some of the major considerations include:
In an article about outsourcing in The Economist earlier this year, the author states that, “… Companies are increasingly factoring in the rising cost of shipping goods across oceans, and the risk that natural disasters or geopolitical shocks could cut off essential supplies.” How much will shipping add to your production costs? Does established transportation infrastructure exist in your desired location? If not, how much will you have to invest to build the necessary channels to receive supplies and distribute finished goods?
In order to realize the gains offered by lower wages, good quality control has to in place at the source of manufacturing. How can you ensure that the goods produced in your factory meet company quality standards? What kind of oversight is provided at the manufacturing facility, and by whom?
Skill level of the labor force
Certain areas of the world have a greater percentage of highly trained laborers. Does the area offer a well-educated work force? How technical are your products? Do nearby vocational or technical schools work with companies to provide skilled laborers for specific needs? Are there enough workers available to fully staff your manufacturing facility?
Political and economic stability
Can you reasonably expect your supply chain and distribution channels to operate uninterrupted by political or economic events? What is the government’s attitude toward overseas companies who do business in their area? For example, North Korea’s refusal to allow workers to return to factories in the Kaesong Industrial Region (which is jointly operated with South Korea) has caused close to a billion dollars in losses so far.
Many areas, both in the U.S. and worldwide, offer incentives to attract new businesses. After President Obama’s 2012 “State of the Union” address, the New York Times reported that the President had, “ … Called for a wide-ranging package of policies to help create American manufacturing jobs, including trade enforcement measures, business tax breaks, and worker training programs.” What kinds of incentives are available for your particular firm or industry? Do tax benefits exist that can help offset labor costs?
For your customer, how important is the location where the product is made? To some, having a “Made in the USA” sticker can determine whether or not they purchase a particular item. Others simply want the best possible quality product at the lowest possible price, regardless of the product’s origin. If you know your customer base well, you’ll know how much of a factor this is for your clients. Many consumers, especially after the Rana Plaza tragedy, are concerned about conditions in overseas factories and make buying decisions accordingly. What will the working conditions in your factory be like? Are employees paid a living wage based on the local economy? Does the facility meet basic standards of safety and health?
While not an exhaustive list, these are some of the basic factors that must be evaluated before making a decision to move your manufacturing overseas or to bring it back to the U.S. Each company will weigh these factors differently to meet the unique considerations of their organization, their products, their employees, and their customers. After a thorough analysis, you’ll know which choice is right for you.