Tuesday, December 7, 2010

Some Cost Savings..But Maybe Not

For nearly 30 years, US business has been enamored with off-shoring (taking manufacturing and some services including design to other countries). It started with Mexico, then the Far East, India, South America, and now Africa.

Recently, I talked with a company that decided to move its manufacturing from the US to China. When I asked why, the answer was, "Because two key people have relationships with important people there." While relationships are important to getting business done in China, it doesn't mean that it's good strategy. I pondered if they've calculated the additional costs to rework/repair units when they arrive in the US for the first 6-12 months. I wondered if they included the higher inventory investment because of the long supply chain. I contemplated if they included the additional warranty expenses and loss of reputation when they don't find all of the problems in the initial shipments, and there's 6 months in the warehouse/logistics/manufacturing pipeline.

For a start-up company, it didn't make sense. If off-shoring was a good option, at least look at Mexico or Costa Rica where the logistics line isn't so long. Also, it doesn't take "3 days" (or feel like it) to get there.

From Fulcrum Consulting's latest newsletter, here's this tidbit also:

Many companies have decided to procure offshore from low wage countries, believing that it is financial insanity to bypass the savings available. They may be right, but some decisions to offshore may have been insane also.
A simple excel spreadsheet tool helps you consider all the costs of offshoring and ensure that your decisions make financial sense. While this free model only considers China at this time, it is fairly accurate for all far eastern sources. Go to http://www.reshorenow.org/ for access to the Total Cost of Ownership analysis tool.

If you are a supplier whose customers have replaced or supplemented you with offshore options, look at the model; then help your customer understand the Total Cost of Ownership. (Rebeccca Morgan)

I think it's necessary to review all of the costs before outsourcing, and think it through. As much as I enjoy the TV show "Outsourced" on NBC (anyone's who has made cross-cultural mistakes could relate to some of the show), most businesses need to review what they are doing when they outsource their operations. Decades ago, it was determined that the labor content, on an absolute dollar value, was the same whether the products were built in the US or the Far East. Are we really saving money, or are we hiding the extra costs in another general ledger account? Do we know what the true, total cost is or do we only know the procurement price?

It may make sense to outsource...and it may not.

UPDATE June 2012: The company that moved its manufacturing to China has gone out of business due to a lack of cash. Off-shoring creates a high demand for inventory, and therefore cash.

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