12 Replies Latest reply on May 20, 2011 6:02 AM by janhusdal

    Can manufacturing in North America cost less than outsourcing overseas?

    fortiz@kinaxis.com Expert

      What variables do manufacturers have to consider when making a cost comparison between manufacturing products overseas versus manufacturing products domestically?

      What should be factored into the equation in addition to direct labor costs, shipping costs, raw material costs and lead times? Do some factors deserve more “weight” than others?

        • Re: Can manufacturing in North America cost less than outsourcing overseas?
          hfakh060@uottawa.ca Newbie

          there are some other indexes that have to be considered while we are deciding about oursourcing overseas.

          1. We have to consider the potential supply chain risks. For example, outsourcing the parts to other countries such as Japan, will increase the risk of natural disasters like what we are seeing right now.

          2. The stable economy of destination is really important. Countries with the low stability and reliability of their economy, are not good places to be chosen.

          3. The level of the supervision we can handle on the production process in that country is of a great importance. In some countries, it is not always possible to keep an eye on the production system all the time and if the quality culture in those countries are not stabilized, we will encounter quality problems even if the quality management system is very well defined for those manufacturing systems.

          4. The amount of trust we can have on the established systems on those countries are also very important.

            • Re: Can manufacturing in North America cost less than outsourcing overseas?
              Duncan Klett Elite

              Good question, good points.


              I can think of a few more considerations:

              • Related to quality and supervision: the rate of staff turnover.  In many "low cost" facilities, people move to another company for a small pay increase.  The result is that you frequently suffer quality reductions, reduced productivity and/or increased training costs.
              • Unfortunately, for North America (and Europe), component prices are also lower in other regions.  Thus, it is not just  labor cost that is less in Asia.
              • A less obvious cost, and potentially the biggest factor, is the cost of longer lead time and batch size.  More about that below.


              Now, a few comments on lead time and batch size.  Lean methodology has been pushing hard for 0 lead time and a lot size of 1.  Outsourcing production of porducts to be sold in North America invariably results in longer lead times and larger lot sizes.  Although the reporte cost of goods usually will be lower with outsourced production, the calculation misses some important factors:

              • extra inventory that needs to be carried in order to buffer demand and supply swings
              • extra inventory that needs to be carried to cover average (longer) replenishment time
              • risk of obsolete product or discounted prices due to longer times to change products to meet market requirements
              • risk of increased rework if a quality problem is discovered in the North American market (and all the supply in the supply chain needs to be fixed)
              • additional transportation costs (even higher if air freight is used in order to reduce the lead time)


              One of the best strategies I have seen is to produce a base level of supply (for stable products) in low cost regions.  Produce the remainder much closer to its intended market.  In addition, produce new products close to the market or the design center (that is another discussion...)  For example, produce a steady 75% of the product in the low cost region.  The actual percentage to produce overseas would depend upon the volatility of your demand and the transit time.  The higher the volatility and the longer the transit, the less you can afford to produce in the low cost region.

            • Re: Can manufacturing in North America cost less than outsourcing overseas?
              elspro Newbie

              Absolutely--if you consider the total costs of offshoring.  Many of these costs, such as travel, packaging, inventory, carrying costs (Asian suppliers are often paid prior to shipping), and IP risks, are not considered in the equation. Just the piece-part price.  I suggest you check out the Reshoring Initiative (www.reshoring.org) and its free total cost of ownership spreadsheet.  The organization was founded by Harry Moser, former president of machine tool supplier Agie Charmilles.  There's a good interview with Harry here: http://bit.ly/eMt3ZF.  You can hear a portion of that interview here: http://bit.ly/hgr5iN.

              • Re: Can manufacturing in North America cost less than outsourcing overseas?
                cirving Novice

                One of the negative impacts of current focus on considering only the cost of goods as key decision metric for offshoring, is the cost of unemployment in domestic and local communities.  I am not against offshoring, when it is intended precisely to give the opportunities for employment to other countries which show competitive advantages and the willingness to invest the profits gained back in their communities creating a virtuous cycle I would OK.  What is not reasonable is that we give away all jobs to foreign countries and left our countrymen with just burger turning and janitorial jobs and Wall Street Jobs.  One of the missed lines in corporate responsibility evaluations is the ability of businesses and towns and unions to keep healthy financials and competitive and even lesser costs compared to other countries.


                Our role as leaders is to work with towns and cities to create effective relationship models that maintain the capacity of each community to remain sustainable, competitive and financially prosperous and healthy.  Honoré de Balzac makes a very good description of the qualities that a good governor or major should have in his novel "Le Médicine de Campagne" (The Town Doctor) - where the doctor, a man in his 50´s coming from the city arrives to a town which is in deep poverty and lacking the escentials for a decent living.  Mr. Pierre-Joseph Genestas a man of resources and his own man, settles in a small town in the region of Saboya in France, he is the change agent which brings entrepreneurship and knowledge to the people of this town and makes it very prosperous.  He works basically with all the resources available and brings the knowledge lacking to exploit those resources. To make a story short, he brings prosperity to his people.


                What can we say of many corporations today in all parts of the world?

                The owners or shareholders may be doing allright but what about their countrymen?

                While we need to maintain the KPI of value creation at the top of the list, this value creation needs to be linked to the community which gave birth to those industries.  Look at Flint, Michigan - is sad to go there!


                SCOR Model is missing a very key KPI in its metrics, how the corporation is giving back to its maiden community the value it deserves - in employment and prosperity. As long as we keep looking at profits and short term gains and forget that people who buy our products need to keep their incomes to keep buying our products we will be missing the whole game.....thanks

                  • Re: Can manufacturing in North America cost less than outsourcing overseas?
                    janhusdal Apprentice

                    Perhaps a bit late for chiming into this particular reply, but very interesting thoughst indeed, bringing to mind Milton Friedman and his (perhaps in-)famous quote "The busines of business is business". Quite true, since shareholders care about ROI first, and community last, if at all. That said, in my personal opinion, "giving back to the community" should be part of every company's Corporate Social Responsibility (CSR). Unfortunately, CSR is mostly a long-term strategy with few or very little short-term effects. I'm not sure it's that easy to develop measurable KPIs for CSR, is it?


                    On an interesting side note, in Heads in the Sand by Alex Fullick, traditional business continuity  thinking is turned on the head, because what is business continuity really? The book states that it is the social responsibility to survive that your business has vis-a-vis  the customers it serves, the suppliers that rely on it, the community it  is located in, and most of all, vis-a-vis the people that work there.  So easy, and yet so far from reality for many businesses in today’s  world.

                  • Re: Can manufacturing in North America cost less than outsourcing overseas?
                    HarryMoser Newbie

                    All of the factors that make up the Total Cost of Ownership (TCO) should be considered.  All of the costs mentioned in the various comments and more (impact on innovation, IP risk, inventory carrying cost, impact on product differentiation, etc.) are included in the TCO Estimator, provided free by the non-profit Reshoring Initiative. Readers can download the software at: www.reshorenow.org .

                    We only ask that you provide feedback to further improve the software for the community and report results of using the software.  You can reach me at harry.moser@comcast.net.

                    • Re: Can manufacturing in North America cost less than outsourcing overseas?
                      dustinmattison1974 Elite

                      In my interview with Paula Rosenblum she discussed how companies need to become more self-sustaining and consider sourcing on a local or regional level. She believes that maintaining a sourcing base in one's own country is a sound business practice. Unless we are really willing to tear down our borders and be a true global village, she thinks we need to be somewhat self-sustaining. That means we need the capability to build cars and trucks, make clothes, and grow enogh food so that we can have enough to eat. Paula says we have become a debtor nation, and therefore do not control our own destiny anymore.


                      In my interview with Warlito Vincente he discussed that due to globalization, companies realize that it is not always about getting the cheapest widget from Timbuktu. You might have the cheapest widget from Timbuktu for 10 cents, but it will cost you an arm and a leg to get it from Timbuktu to New York. This wouldn’t make much sense.




                      • Re: Can manufacturing in North America cost less than outsourcing overseas?
                        Duncan Klett Elite

                        Here is a link to a Maufacturing Business Technology article about "Investing in US based manufacturing pays off". http://www.mbtmag.com/Content.aspx?id=2455