In the increasingly competitive global marketplace, manufacturers need to continually strive to reduce costs to keep or increase market share.\u00a0 This is one of the key factors in making the decision of whether to make parts in-house, outsource to domestic suppliers, or outsource offshore.<\/p>\n
Even after a company makes the decision to outsource to a supplier, most don\u2019t look beyond the quoted unit price in making the decision about which supplier to select.\u00a0 This is especially true when comparing the quotes for domestic vs. offshore suppliers.\u00a0\u00a0 Some companies choose to outsource offshore because the price is cheaper than a domestic supplier.\u00a0 They don\u2019t add in the costs for transportation, much less all of the other \u201chidden costs\u201d of dealing with an offshore supplier.<\/p>\n
In order to make the correct decision for outsourcing, a company needs to understand the concept of \u201ctotal cost of ownership\u201d for outsourcing manufacturing.<\/p>\n
What is \u201cTotal Cost of Ownership?\u201d\u00a0 It is an estimate of the direct and indirect costs and benefits related to the purchase of any part, subassembly, assembly, or product.\u00a0 The Gartner Group originated the concept of\u00a0 (TCO) analysis several years ago, and there are a number of different methodologies and software tools for calculating the TCO for various industries, products, and services.<\/p>\n
Total Cost of Ownership includes much more than the purchase price of the goods paid to the supplier.\u00a0 For the purchase the types of manufactured products we are considering, it should include all of the other costs associated with the purchase of the goods, such as:<\/p>\n
The search for low cost areas for manufacturing isn\u2019t something new. Fifty years ago, northern and New England companies started moving manufacturing to the southern states. Twenty-five years ago, many West Coast manufacturers started moving high–<\/ins> For the past 15 years, many manufacturers have sought to reduce costs by offshoring all or part of their manufacturing processes in China.\u00a0\u00a0 In the last decade, outsourcing offshore\u00a0has evolved from a little-used practice to a mature industry.\u00a0 Even conservative companies are now willing to experiment with going offshore to gain a competitive edge.\u00a0 The concept of globalization has become part of the fabric of today\u2019s business.<\/p>\n Many times, the decision to outsource offshore\u00a0is based on faulty assumptions that can have unpleasant consequences.\u00a0 In some cases, the basis for the decision is well intentioned, such as to win new business by being close to a customer.<\/p>\n But, with every business decision comes an assumption, and more often than not, the related assumptions are erroneous.\u00a0 Here\u2019s a list of well intentioned but often-faulty assumptions:<\/p>\n In actuality, many case studies have shown that these assumptions were orders of magnitude off from reality.\u00a0 The problems with making these assumptions are:<\/p>\n Accountants deal with hard costs such as material costs, material overhead costs, labor costs, labor overhead costs, quality costs, outside services, sales, general and accounting costs, profits, etc. What they don\u2019t measure are the intangible costs associated with business such as the true costs of delay, defects, and deviations from standard or expected processes (the three D\u2019s).<\/p>\n These costs are often called hidden factories because they keep everyone busy generating absolutely nothing of any tangible or openly measured value.\u00a0 Another way to understand these costs is that they produce results that no one, especially the customer would want to pay for.\u00a0 In addition to obvious direct costs – such as additional meetings, travel, and engineering time – hidden factories also indirectly produce many forms of \u201csoft\u201d costs, such as loss of good will, loss of competitiveness, extended warranty costs, and legal costs.<\/p>\n When it comes to outsourcing, there\u2019s more to consider than the quoted price.\u00a0 Some outsourcing costs are less visible \u2013 or downright hidden.\u00a0 Here are the top hidden costs of outsourcing offshore:<\/p>\n In the past, my experience was that once manufacturing moved out of the United States, it rarely came back.\u00a0 However, in the past three years, we have seen more companies coming back from doing business in China. The main problems these companies encountered were:<\/p>\n There\u2019s also a growing realization that when it comes to quality and location, location may be the best guarantee of all.\u00a0 It\u2019s hard, very hard, to outsource\u00a0quality, particularly to a distant land many miles and time zones away.\u00a0 A growing number of manufacturers are realizing that \u201cyou get what you pay for\u201d from their offshore suppliers. Applying good quality principles takes money, education, and experience, many of which are in short supply in the low-wage countries capturing the majority of offshoring\u00a0dollars these days.<\/p>\n The \u201cdesirable\u201d locations for cheaper outsourcing will change over time just as they have in the past fifty years.\u00a0 The purely financial benefits of lower pricing will erode over time.\u00a0 The challenge for America is to keep as many companies as possible growing and prospering within the United States.\u00a0 As more manufacturers gain a correct understanding of the True Cost of Ownership for outsourcing manufacturing, it will help bring back and maintain more manufacturing in the United States.\u00a0 You can help save American manufacturing by making sure everyone in your company gains this correct understanding.<\/p>\n","protected":false},"excerpt":{"rendered":" In the increasingly competitive global marketplace, manufacturers need to continually strive to reduce costs to keep or increase market share.\u00a0 This is one of the key factors in making the decision of whether to make parts in-house, outsource to domestic suppliers, or outsource offshore. Even after a company makes the decision to outsource to a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-138","post","type-post","status-publish","format-standard","hentry","category-general"],"_links":{"self":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/138","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/comments?post=138"}],"version-history":[{"count":2,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/138\/revisions"}],"predecessor-version":[{"id":140,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/138\/revisions\/140"}],"wp:attachment":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/media?parent=138"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/categories?post=138"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/tags?post=138"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}} <\/del>volume production offshore to Hong Kong, Singapore, and the Philippines. \u201cOffshoring\u201d refers to relocating one or more processes or functions to a foreign location.\u00a0 The next lower cost area was Mexico with the advent of the maquiladoras.<\/p>\n\n
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