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Are your off-shore facilitates really less expensive? It all depends on how you are calculating your Total Cost of Ownership (TCO). Your TCO calculation should include all the hidden costs your new off-shore manufacturing strategy will experience over the life of the project. Your complete TCO will show you that lower wage labor costs are not the whole story. What should your off-shore manufacturing costs include?
Hidden Costs of Off-Shore Manufacturing
- Extra inventory needed while you wait for your restocking order that is in transit from your chosen low-wage manufacturer. Remember, it is travelling slowly over the ocean, a long distance away
- Extra “safety stock” inventory to protect you from supply chain interruptions caused by a host of unknown transit risks (pirates, weather, port delays, power disruptions, etc).
- Unplanned expediting costs (overnight, overseas delivery) of critical parts that will definitely happen but will not be proposed in the initial cost justification for going overseas.
- Extra long travel by management and engineers to fix problems, perform supplier audits, and develop business relationships within your supply chain.
- Communication and time delays caused be managing information hand-offs, feedback, and the overall flow of information. Time is money…
- Reallocation of overhead to the remaining assets or cost structures that are left behind, which raises those costs and makes the remaining operations the target of the next outsourcing project.
- Warranty claims, scrapped product and lost business due to quality problems, delivery of different goods than what was ordered, and customers growing impatient with off-shore goods.
- Lost market share (in the low wage country and later worldwide) due to your new supplier learning your business, your products (including manufacturing), and ultimately competing with you in the market (regardless of what you think your legal agreement may say to the contrary).
- Currency volatility or rising prices (inflation) in the low wage country, which means your low wage choice will not be low wage forever.
- Political risk, government laws and regulation changes, or tariffs and duties imposed because of unemployment, trade deficits, or increasing nationalism in either the low wage country or your own.
Total Off-Shore Manufacturing Costs
I think that once you calculate all of your hidden costs associated with your Total Cost of Ownership you may find that lower wage labor costs are not the whole story. You may want to rethink your strategy of moving your manufacturing operations off-shore.
All points are OK about hidden cost
Great article! All of the listed costs, and more, are included in the Reshoring Initiative’s free Total Cost of Ownership software which helps corporations calculate the real P&L impact of reshoring or offshoring. Current research shows many companies can reshore about 25% of what they have offshored and improve their profitability.
About 10% of the approx. 500,000 manufacturing job growth since the low in January 2010 is due to reshoring. Based on the 300+ published reshoring articles in our Reshoring Library http://www.reshorenow.org/resources/library.cfm, we calculate that at least 50,000 manufacturing jobs have been reshored.
You can reach me at harry.moser@reshorenow.org for help using our tools for sourcing decisions and when selling.