An article in the June 17th issue of the Kiplinger Letter mentioned how many companies are starting to opt for "nearshoring" as their outsourcing strategy. Nearshoring is the movement just across borders… not necessarily to the other side of the world. Mexico and even Canada have long been nearshore locations for U.S. companies, while Hungary, Poland, and the Czech Republic are the same for industrialized Europe.
Even the India Times has noted how U.S. companies, manufacturing-oriented and otherwise, are taking a harder look at nearshoring… and how it could affect traditional outsourcing meccas like India and Malaysia. The reasons are many:
- Labor savings can be very similar
- Liberal visa policies
- Similar legal frameworks
- Strong government support
- Shorter supply chains
The last point is critical… especially from a lean manufacturing perspective. Assembly Magazine has an excellent article on the pros and cons of outsourcing, with considerable detail on the hidden dangers.
“While labor rates and material costs are easy to quantify, many other costs are not,” warns Kevin Keegan, lead director of the Atlantic region communications and electronics practice at Pittiglio Rabin Todd & McGrath (PRTM, Waltham, MA). “These include the somewhat intangible—but very real—costs associated with managing cultural and language barriers, overcoming limited supply chain expertise, and coping with a supply chain rendered far less flexible because of the physical distance between the company and its manufacturing partner. In fact, the savings associated with lower labor and materials costs in China may be offset by these incremental costs.”
When weighing the pros and cons of offshore production, “one needs to consider the effect on total system costs, not just the labor cost component,” says Granite Bay Consulting’s Penkala. “For high-volume, labor-intensive, commodity products, it is likely that offshore manufacturing will yield lower overall costs. But, this is often not the case for other types of products.”
Some specific issues to keep in mind:
- Inventories: will additional buffer stocks be necessary to accomodate supply chain complexity? How much inventory will be sitting on the high seas, and what is that effect on agility?
- What is the transportation, warehousing, and logistics costs for that extra inventory?
- What is the startup cost to create the new supply chain, train workers, acquire the facility, etc.? Typically this adds between 10% and 40% to the first year cost of the transfered products.
Lean manufacturing initiatives can sometimes more than offset the savings from outsourcing.
“On the surface, this looks like good news for those contemplating offshore manufacturing,” says Penkala. “But, for companies that embrace lean principles, 11 percent improvements are conservative. When a company successfully adopts lean principles, annualized gains of 10 percent to 25 percent are common. So the question that must be asked is ‘What is the benefit of offshore manufacturing vs. lean manufacturing here in the United States?’”
Some companies come to realize they’ve made a mistake, and actually relocate back to the U.S..
For instance, in 2001, Epson Portland Inc. laid off 75 percent of the workforce at its printer cartridge plant in Hillsboro, OR, and shifted production to China. But, after looking at total delivered cost, Epson determined that tariffs, currency fluctuation, freight charges and other costs often negated offshore labor savings. The company has ramped up production at its U.S. plant again. In fact, the facility is now producing five times as many cartridges per worker as its sister plant in China.
Before diving into outsourcing, be sure to analyze your total cost. Then determine if nearshoring is a more attractive option.