offshoring

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THE CASE AGAINST OFFSHORING

and What to Replace it with
 

In a vain attempt to “save cost,” many companies have tried  offshoring — designing products here for sale here, but manufacturing them overseas — because their primitive cost systems make it appear that this will
save money.

 If all they quantify are parts and labor, like the top pie chart the  Total_cost article, then moving production to a “low labor rate” country will appear to lower labor cost. If no other costs are quantified, then  outsourcing could be be pursued based on an unrealistic back-of-the-envelope calculation.

 

However, manufacturing offshore for sale in the U.S. rarely results in a net cost savings when measured on a total cost basis as shown in the  Total_cost article, considering differences in labor efficiency and all the costs of shipping,
quality, inventory, communications, travel interruptions, extra training, transferring products, ramping up again with different local parts, support, and complete sets of equipment needed for any manufacture.  See the article on the hidden costs of   OffshorIng on at www.HalfCostProducts.com,which shows that  offshore manufacturing compromises six out of the eight cost reduction strategies that are presented on the home page.


Offshoring’s Devistating Effect on Product Development


As pointed out in the DFM article, Figure 1.1, 80% of a product’s lifetime cumulative cost is determined by product design. Unfortunately, offshoring production compromises all future design opportunities because it prevents Concurrent Engineering teamwork, which is the most promising opportunity for achieving truly low-cost products.

Offshoring prevents this teamwork because design engineers and manufacturing people are not in the same country and not even working at the same time. Without early manufacturing involvement, engineers will design products alone, throw them over the ocean, and get back parts that will only be as manufacturable as the individual engineer’s DFM expertise, who may not know all the design guidelines.

Further, dealing with all the problems of offshoring (see below) will be  a resource drain that, when combined with other counterproductive practices  can consume two thirds of product development resources!

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Offshoring’s Negative Effect on Lean Production and Quality


Further, offshore plants, especially contract manufacturers, amortize their setup charges by building in batches (mass production) and then shipping them across the ocean in batches. This makes it hard to respond to volatile market conditions when so much forecasted inventory is at the plant and in the long “pipeline” in ships traveling across the ocean.

Womack and Jones, writing in Lean Thinking, summarize it succinctly:


“Oceans and lean production are not compatible.”

They go on to say that smaller and less-automated plants close to engineers and markets will yield lower total costs, considering the cost of shipping and the inventory carrying costs when products built weeks ago no longer satisfy customers. Air freight may eliminate that problem, but would cost more and leave the OEM without products to sell after any production disruptions.

So the enormous potential cost savings from Lean Production (summarized in page 27 of Lean Thinking) will not be realized because products can not be pulled by customer demand across oceans, nor could they be  Built to-Order. The distance and remoteness will  prevent setting up flexible plants that could  Mass Customize products for niche markets or individual customers .

Without Lean Production and the design-for-quality contribution of good Concurrent Engineering teamwork,
quality and reliability will not be designed in or built in, so the home office will have to rely on strict, and expensive, testing of all products followed by repair costs or scrap costs followed by extra setup cost to build replacement  products and expedited shipping costs. Worse, if contract manufacturers are selected by low-bidding, quality will suffer even more for reasons cited in the   Low-bidding   article.


Offshoring Decisions Affecting Lean, BTO, and Platforms
 


Labor cost is actually a small percentage of the selling price, and yet offshoring decisions are usually based entirely on labor cost because it is the only processing cost that is quantified. But, any perceived “savings” for labor are usually exceeded by the all the  hidden  offshorIng costs. These costs would not be “hidden,” and decisions would be more relevant, if all overhead costs were quantified with Total_cost.

Here are some of the total cost considerations that should determine offshoring decisions: labor efficiency (which could cancel out labor cost savings); difficulty controlling operations that are not working at the same time; product introduction delays (usually months later because of the additional ramp); supply chain vulnerabilities; and shipping costs and delays, especially when expediting is used to compensate for the above problems.

Further, labor rates often rise and tax benefits only last so long, until the company “ups the ante” and increases the commitment, for instance, by moving engineering there too.

The most ironic reason to move production offshore is that the decisions are based on labor-intensive designs. However, implementing DFM  principles of this site can reduce labor content to the point where moving to low-labor-rate areas is no longer needed and can no longer be justified. “Hidden” costs, which should all be quantified by  Total_cost   would include: quality costs and the delays to fix them; training costs, which are higher than expected for hard-to-build products or where turnover is high; offshore setting up and administrative  costs and resource drains; transfer efforts and ongoing indirect support, which takes resources away from product development; travel costs, which are always more than estimated; and “other” local costs that may pose ethical and legal dilemmas.


Unfortunately for product development, the cost of setting up offshore manufacturing and dealing with these hidden costs is usually paid for by support people at the company headquarters — otherwise the business case for offshoring would collapse!   Ironically, these support costs make headquarters look even less efficient which, perversely, then "needs" yet more offshoring, thus resulting in a downward spiral.

Sadly, the final hidden cost of offshoring is the cost to move operations back to where the products are designed after realizing all the above costs or realizing how offshoring distracts from real cost opportunities in product development, operations, and quality programs.


Offshoring, the Bottom Line
 

Setting up and operating offshore manufacturing doesn’t save money on a total cost basis, but just trying compromises quality, delivery, and product development, which could otherwise provide real cost reduction and pursue new high-profit opportunities.  Rather than weakening operations with the burdens of offshoring, local operations could then pursue more effective cost reduction by helping to design low-cost products, eliminating waste through Lean Production, lowering the cost of quality, and setting up flexible  factories that could build standard products and mass-custom versions on-demand without the costs and risks of inventory.

Finally, the enormous cost saving potential presented herein will dwarf any offshoring
attempts.

If all of this does not make good financial sense, you need a better cost system, as presented in Chapter 7 of the DFM book.


What to do  that will benefit you much more than of  offshoring:


Do Concurrent Engineering,  which  won’t work when only half o multi-functional teams  are awake at the same time, resulting in designing alont, then "build-to-print"

  Designing for Lean Production but that won't matter when the CM sets up and then tears down each batch  without learning or the foundation of 6 Sigma: continuous improvement.

  Build Product Families to-Order,  but that is not possible in rigid  mass production far away and shipped to your inventory

   Designing in Quality but that won't survive changing all the parts to cheaper, local parts and missing out on  continuously improved lines.

 Design for Scalability and Growth , but that is not possible local parts when only last 18 months


C
ut 9 categories of cost from half to 1/10 of the usual cost  or miss that and pay all the hidden costs summarized at  Hidden Cost of ffshorIng article

Design labor cost out of products  instread of looking for low labor rates.

Design labor cost and high skill demands out of backward-compatible replacement subassemblies for near-term cost reduction.

The choice is yours.

 

Companion article on the  hidden  offshorIng costs

 

These are the general principles. Pass around this article or URL to educate and stimulate interest

In customized seminars and webinars, these principles are presented in the context of your company amongst designers implementers, and managers, who can all discuss feasibility and, at least, explore possible implementation steps

In customized workshops, brainstorming sessions apply these methodologies to your most relevant products, operations, and supply chains.

 

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Call or email aout how these principles can apply to your company:

Dr. David M. Anderson, P.E., CMC
fellow, American Society of Mechanical Engineers
www.design4manufacturability.com
phone: 1-805-924-0100
fax: 1-805-924-0200
e-mail:
anderson@build-to-order-consulting.com

copyright © 2020 by David M. Anderson

Book-length web-site on Half Cost Products: www.HalfCostProducts.com

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