Four Factors To Consider BEFORE Choosing Outsourced / Offshore Manufacturing
In a 1988 Harvard Business Review article, the authors argue that offshore manufacturing is not the right strategy for every organisation. They cite names such as Kodak, Fairchild Semiconductors, and Black & Decker, as examples of companies which, at the time, successfully eschewed offshoring. Ironically, most of the businesses mentioned in the article are today either bankrupt, in financial decline, taken over, or have long since taken to offshoring or outsourcing their manufacturing.
This isn’t to say that the authors were wrong. On the contrary, what was true then still holds now: offshore manufacturing isn’t always the best route, and certainly not for everyone. And yet, mention the terms “offshore” or “outsourced” in the context of manufacturing today and most people immediately imagine a factory in China. Understandable, given how until recent times China was universally considered the world’s factory (more on this later).
To offshore / outsource or not to offshore / outsource – here’s what to evaluate before you decide.
But outsourcing and offshoring aren’t necessarily the same thing. The former is concerned with the manufacturing operation’s geography, and ownership may or may be yours. The latter is to do with ownership, and location may or may not be in the home country. Ultimately, the motive for both strategies boils down to one thing: cost reduction.
If you’re evaluating whether either of these is a good strategy for your business, here are a few things to keep in mind before you make a decision.
1. Cost and Price are Not the Same Thing
A few years ago, a major European shoe brand decided to wind down their manufacturing in Tunisia, moving it to Romania instead. Even though the manufacturing price per pair was higher in Romania, the company did this for one simple reason: the overall “cost” of producing in Europe was lower, especially when factoring things like time-to-market and logistics.
The point is simple: direct, tangible figures such as production outlay aren’t the only ones that matter. Admittedly, it’s much harder to pin down concrete values for intangibles such as opportunity cost, market share cost, or intellectual property risk. Nonetheless, these are factors you cannot afford to ignore.
2. There is No One-Size-Fits-All Approach
Generic advice, such as, “only attempt to offshore / outsource when production volumes are very large”, or, “only once you’ve debugged the product and production process”, is too superficial to be universally useful. There are plenty of examples of successful companies that started with outsourced / offshore manufacturing right from the outset: Boltt, EUME, Fuse Chicken, CarSense, Axes, Suffolk Latch, to name but a few.
Conversely, there are many projects that didn’t work even when they tried o/o after scaling up. The top priority for most new-product projects is to get products out the door and in the hands of customers – to as many customers, and in as little money, as possible.
This is a typical scenario for small startups, but we have worked on projects with tight budget constraints even for large multinationals. In either case, if the cost of domestic or in-house prototyping / minimum viable product development is prohibitive, or high enough that it saps funds earmarked for other purposes, it makes sense to explore other manufacturing options.
3. Not all Offshore / Outsourced Manufacturing Options are Equal
The number one reason why some businesses prefer in-house manufacturing in the early stages of product development, is because of the challenges involved in finding reliable manufacturing partners. The general consensus is that it is difficult to find a manufacturer who will be as committed to ensuring product quality as you would be if you were making it yourself. This is true for a variety of reasons, chief amongst which are capability, communication, and culture.
Technical competence and capability are relatively easier to evaluate and measure, but communication and cultural issues often become stumbling blocks, and these are harder to measure and protect against. Getting your manufacturing partner to understand exactly what you need, having them explain exactly what you can expect from them, making sure they are not over-promising – these are challenges that cause delays, breakdowns, cost overruns and failed launches in most projects.
At Engineering Plastics, a well-trained team with experience serving customers globally, is backed by a modern manufacturing facility.
Having a manufacturer who is fluent in English is really just the bare minimum. At Engineering Plastics, our team has extensive cross-cultural experience. Not only have we engaged with businesses across Europe, North America, Africa, and East Asia, but key people have also lived and worked abroad. This equips us to work better with customers regardless of where they’re from. We know when a “no”, or, “we can’t do that”, is in the best interest of your project, and we don’t hesitate to say so, early rather than late.
4. China is Not Always the Answer
For many years, especially through the ’90s and early 2000s, China’s domination of the manufacturing space was absolute. Thanks to low labour costs, the artificially undervalued Yuan, and economies of scale, practically anything could be manufactured cheaper in China than anywhere else in the world.
Today however, China has become a victim of its own success. The economic growth spurred by their industrialisation has sharply driven up real estate and resource costs in Chinese manufacturing hubs, increasing labour costs in the process. Real estate in Shenzhen for instance, is on average more expensive than even New York, LA, and San Francisco.
Consequently, over the past few years several businesses have started to move their manufacturing elsewhere. From the auto majors to the tech giants, many companies have begun extensively manufacturing in India, for both domestic and export markets. This list includes not only US, European, Japanese and Korean corporations, but even Chinese companies like Xiaomi and Huawei.
China’s sprawling manufacturing hubs no longer guarantee the cost advantage they once did.
Of course, there are no doubt certain types of products where manufacturing in China may still be the best option (zippers, for instance). But when it comes to non-commodity parts or products, such as custom injection moulded parts or CNC milled parts, you might enjoy several benefits by thinking outside the China box.
Engineering Plastics’ location in Mysore, offers us the unique advantage of being in one of the world’s most cost-effective manufacturing centres. It’s also in a state with great education infrastructure, allowing for a skilled, educated, and English-speaking workforce. Why not get a free manufacturing assessment and quotation for your next project, or talk to our team, and see if we’re the right fit for you?