A number of people who attended the Dallas ACG meeting, where the topic was “Made in China”, commented they were glad they were not involved in manufacturing as it looks as though everything will be made in China very soon!

The decision to outsource overseas is not quite that simple. For example ever wonder why, when the politicians are telling us all the good jobs are being sent overseas, does Toyota make cars and trucks in Silicon Valley? Why is Texas Instruments building its new chip factory in Richardson, Texas rather than somewhere in Asia? Why does Dell make all of its computers for the North American market in Round Rock, Texas?

The answer is almost always in the supply chain or the market. A long supply chain adds to the cost of any product. It is always better to be close to your customers if you can.

I believe that many put too much weight on the low cost of labor and not enough attention to other factors such as:

I ran a company in Silicon Valley that had most of its software engineers in India. It was cheaper, they were a very smart lot, on the down side I had problems getting Product Marketing and Hardware Engineering on the same page when they were in the same building much less having to work with a third of our team in India. Low cost in one piece of the work chain does not mean the total cost will be lower.

The importance of direct labor expense to most manufacturing is decreasing rapidly. In most high tech companies manufacturing labor is less than 7% of cost. Even in the hard goods sector the labor cost number is in the 10 to 15% range.

Speed in manufacturing is probably the most important factor, you will not have speed if your plant is half a world away. I know one local manufacture of Telecom equipment with a lot of product in the VoIP market, who is in the process of moving manufacturing from Asia back to North America, because of inventory and speed issues (their market is moving to fast to have 90 days of inventory in the supply chain).

It makes sense to move off shore if your labor cost is 50%. It makes more sense to try and reduce the cost by lean manufacturing or automation. You should also look at making gains by designing products for lower manufacturing cost and faster change.

If your main competitive advantages are things like Customer response time, speed of new products to market, etc., then off shore may not be the place for you.

Last but not least, do not forget your intellectual property. You may find it difficult to keep the competition from stealing your IP here in the US, think how hard it will be when you are manufacturing overseas.

Ralph Muse
Muse Consulting