Manufacturing in low cost countries (LCC) has been around for decades. The reason seems obvious: on the face of it, the lower cost of labor appears to allow competitive pricing of a company's products.
But in evaluating whether or not to manufacture your product or its components overseas, there are important considerations to weigh, including hidden costs that occur with LCC manufacturing.
The Recent Move to LCC Manufacturing
The movement toward overseas manufacturing caught a strong head of steam after the start of the millennium. Many large manufacturers strongly suggested vendors consider overseas manufacturing if they wanted to receive preferred supplier status. Some went as far as requiring suppliers have a plan in place to supply from overseas in order to quote projects.
The manufacturing world became a much smaller place, and competing against places like China, Mexico, and India was quickly becoming the norm.
Prior to the LCC movement, quality was the key factor in being awarded new business, and cost was a close second. Ford capitalized on their slogan “Quality Is Job 1,” and other companies embraced similar messages.
All that began to change when global competition began heating up. In order to reduce costs, large manufacturers began moving oversees. Following in their footsteps, direct suppliers began doing the same, and it wasn’t long before most small manufacturers in the supply chain were following the trend. Cost was now king.
Experience Proves LCC Not the Golden Egg
Now, after decades of trial and error, manufacturers are beginning to realize producing in LCCs is not the golden egg they believed. Direct labor rates have been slowly creeping upwards in China, Mexico, and India. Where the hourly rate in Mexico was $0.35 per hour, a decade or so after NAFTA began, it soon increased to over $2.00 per hour.
Still, when looking to reduce costs, $2.00 per hour for direct labor seems like a good deal. But the hidden costs of doing business in LCCs can quickly add up. These include:
Taken together, these expenses can cause a significant increase in per unit cost.
Aside from cost, when quality issues arise, businesses are finding that dealing with a manufacturer overseas complicates an already negative situation. Solving these problems adds expenses such as:
Travel costs to send support personnel from US corporate headquarters overseas
A Movement Toward US Production
Manufacturers are starting to open their eyes to the real costs of doing business in LCCs, and a new movement is slowly evolving. In-sourcing, bringing production back to the USA, has started. Although it is in its infancy, manufactures are seeing a benefit to bringing business back to US factories.
When determining if overseas manufacturing is right for any given business or project, every business opportunity needs to be looked at case by case. There may be times when building in LCC countries is the best option, and there are times that producing in the US is best.
The ultimate goal is for businesses is to sell their product, and for that to occur manufacturers must be competitive—and they must be able to ensure quality in every product they manufacture. Doing upfront analysis, and not just following the crowd, is more important than ever in being a global supplier in a very competitive market.