In the past two decades, there has been a dramatic shift by technology product companies to outsource manufacturing to low-cost countries (LCCs) like China, India, and Mexico. This follows a long history of outsourcing to LCCs by consumer product companies. LCCs may offer lower manufacturing costs resulting from cheap labor and perhaps less stringent environmental and workforce regulations. However, there are downsides to manufacturing in LCCs that may erode expected cost savings or create other commercial disadvantages. As these disadvantages become more apparent, many companies are reverting to US contract manufacturers. Here are a few examples:
Contrary to outdated beliefs, manufacturing capabilities, process controls, and quality assurance practices have improved dramatically in LCCs. However, inherent challenges still exist in producing consistently good quality including poor communication resulting from language barriers and time-zone differences, training limitations, and reduced on-site technical support.
Low Labor Content
The labor content of many electronic and electro-mechanical assemblies is very low, sometimes less than 10 percent of total product cost. Material costs are generally the same worldwide, especially for electrical components. Consequently, the cost benefit from lower labor costs can be negligible.
High Transportation Costs
The cost of transporting products from LCCs to their ultimate destinations can be very high, especially if air transportation is required. The cost benefit analysis of outsourcing to LCCs should include all logistics costs including freight, duties, and insurance.
Extended Supply Chain
The manufacturing of products in LLCs may add as much as a month to the overall supply chain due to additional transportation time and communication delays. This can be very detrimental due to increased lead times to customers, incremental inventory carrying costs, and rework that may be required for engineering changes that occur while products are in the supply chain.
Lack of Control
Companies will generally lose some control and visibility when they outsource to LCCs, creating increased risks.
As product lifecycles become much shorter, cycle-times for new production introductions become much more critical. The time to transfer a product from engineering to manufacturing is invariably longer when manufacturing is outsourced to an LCC.
Loss of Intellectual Property
Intellectual property is generally at greater risk in LCCs. At a minimum, the know-how to manufacture products may be applied to competitors’ products. In some cases, all or part of a design may be stolen to create a “knock-off” product.
After you evaluate these potential disadvantages to outsourcing your products to low cost countries, you may discover that the total cost of manufacturing in the US is actually lower. Please consider this as you formulate your outsourcing strategy.