Offshoring OEMs Overlook Sources of Expense
Subtle factors affect the economics of sending manufacturing away.
When an OEM company “offshores” its manufacturing to a cheaper locale, the hoped-for savings don’t always materialize, says Harry Moser, chairman emeritus of machine tool supplier AgieCharmilles. The reason is that the offshoring companies often fail to account for all the sources of expense. That is why he sees cases of such work now being “reshored” to North American producers.
He is an advocate of this reshoring, and one of the organizers of the NTMA/PMA Contract Manufacturing Purchasing Fair designed to foster reshoring relationships between OEMs and producers. U.S. manufacturers ought to equip themselves, he says, to show customers the impact of offshoring decisions. To better calculate the total cost of ownership (TCO) for a manufactured product, he helped to develop a “TCO Estimator” that several OEM companies are now beta testing. The utility seeks to account for the actual savings and actual costs of sending a component overseas to be produced.
What are the offshoring costs that companies often overlook? He says there are several. Offshoring calculations are generally based on differences in labor cost and equipment costs, along with an idealized expectation of the cost of shipping. The reality is that various other expenses figure in as well. For example:
● Inventory costs will necessarily be higher for a supply chain that stretches across an ocean. OEMs typically carry three months more inventory of goods shipped from China versus goods shipped domestically, he says. For high-value products, storing and tracking all of this extra stock can amount to a significant expense.
● Prototyping costs will be higher for a product that is to be manufactured far away. That prototyping will almost always be performed in the U.S., close to the OEM. If the prototyping shop cannot amortize its costs by manufacturing the part in full production, then the price of the prototype will be higher.
● Shipping is more expensive than the nominal estimate, because the OEM will occasionally need to expedite emergency orders, shipping them by air.
● Material costs will be at least slightly higher, to the extent that the scrap rate is higher for the overseas shop.
● Quality management can only be more expensive when manufacturing is far away. Parts have to be inspected and sometimes reworked upon arrival, and the challenges of communication make quality problems difficult to convey. Quality process changes also get implemented more slowly.
● End-of-life-cycle costs are an offshoot of the inventory costs above. So long as manufacturing occurs close to the OEM, the life of a product can end with little inventory left over. But when manufacturing is far away, the OEM that changes its design or shifts its focus to a different manufactured product might see months’ worth of inventory go to waste.