All over the world, heading offshore to outsource production has become something that it is had been accepted as the norm. Offshoring does indeed make sense for many companies, especially those that want to establish a global footprint. Too many, however, outsource production for the wrong reasons.
Lured by the promise of cheaper labor (which is starting to not be the case), companies are blind to the tactical costs of manufacturing overseas. While they may save money on unskilled labor and by achieving economies of scale, they ultimately will pay more because of longer lead times, increased inventories, the need for more management resources for planning and logistics, and constraints on their ability to respond quickly to changing demand.
White Paper: Hidden Risks and Costs in an Offshore Supply Chain
In fact, our friends over at the Rodon Group, with whom we’ve started an ongoing blog collaboration, starting with this post and more to come, have written a White Paper entitled, “Hidden Risks and Costs in an Offshore Supply Chain.”
There are many risks when it comes to selecting OEM suppliers. Understanding them is essential to running a successful business. In this new white paper from The Rodon Group, they’ll examine three strategic areas to include in your supplier selection process: Cost, Scheduling, and Compliance.
4 Strategic Considerations when Considering Offshoring Parts of your Supply Chain
Despite these and other hidden costs, offshore manufacturing has become a fact of life. Now the challenge for many companies is to manage the resulting global supply chain effectively. They can accomplish this by conducting thorough research, developing a logical strategy, and managing proactively to prevent problems. Effective management also requires establishing open communication with suppliers about expectations, especially when all requirements are contractual.
If you are considering offshoring some or all of your manufacturing, the following will provide a basic guide to the potential problems, business considerations, and success strategies associated with this increasingly common practice.
Know the pain points
No matter what business you’re in, you will find that offshoring brings many pain points to the fore. When outsourcing some or all of your operations, you will have to deal with longer lead times. Their length will be determined by the complexity, variation, and shipping times for the parts or products involved. Longer lead times will also require you to forecast inventory needs more accurately.
It goes without saying that nobody should jump right into something as complex and fraught with pitfalls as offshore manufacturing without first doing extensive, careful research.
One mistake companies often make is focusing on the lowest purchase price per item instead of considering the total landed cost of sourcing from offshore suppliers. Total landed cost includes such cost factors as transportation, port charges, duties and taxes, insurance, and material. It also includes internal, “soft” costs, such as those for capital tied up in excess inventory and storage and for often-overlooked considerations like the cost of handling inefficiently loaded containers.
Not all products are suited to offshoring. The ones that are most suitable may be those that have long lifecycles, are simple and cheap, do not undergo frequent design changes, will be sold or used in the region where they are produced, and/or require significant manual labor inputs.
Once you’ve completed that “homework” and (with the aid of a value-chain map) have developed plans to address every identifiable contingency, you can take steps to help ensure the success of your offshoring venture.
Perhaps the best advice is to do everything possible to avoid problems in the first place! And that’s essentially what the following suggestions are all about. They may seem quite basic, but these preventive measures are often overlooked when companies focus simply on cheap labor.
- Perform comprehensive assessments of offshore suppliers to ensure that they are capable of meeting your expectations. Look at areas such as manufacturing capabilities (such as productivity and quality) and capacities, quality systems, technology and technical expertise, ability to comply with specifications, cost structure, and financial stability.
- Lay out terms for agreements and partnerships in contractual form. Specify exactly what you need with respect to quality, cost, delivery, and service.
- Communicate regularly and clearly with offshore suppliers. Don’t assume that an offshore manufacturer understands what you require. Put expectations in clear, unambiguous writing, especially with respect to quality, and be prepared to follow up.
- Use key metrics and a scorecard system to understand if product is flowing as planned. Establishing a system for tracking and measuring performance— much like those you use on the home-based manufacturing floor—will allow you to assess offshore performance at a glance and will provide early warning when product flow is getting off-track.
- Visit offshore manufacturing sites regularly to find and solve problems before they become big enough to affect your company’s ability to profitably meet its customers’ requirements.
Weigh the facts
Offshoring can be a logical and cost-effective way to improve your company’s competitiveness, but as we’ve seen, there’s more to it than simply choosing a manufacturing site or finding a contract manufacturer overseas.
Ensuring success requires learning and weighing all of the facts before contracting with an offshore supplier. Map the value chain, understand your total landed costs, visit the potential supplier, and thoroughly assess its capabilities to be certain that the right partner has been selected. Once you’ve chosen that partner, document all of your requirements regarding order volumes, product specifications, and operational details in the contract. And finally, monitor offshore suppliers no differently than you would your own manufacturing operations.
Going offshore can improve your competitiveness and open up new markets; just remember to make that decision based on facts that take all costs into account. And once you’ve decided to manufacture overseas, stay vigilant and continue to carefully monitor and manage your supplier.