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Avoid the
The China Syndrome....
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Many companies decide to move their manufacturing offshore for wrong reasons and others have the right idea but go about it the wrong way. The following scenario includes many classic mistakes made by companies as they try to lower costs by moving offshore. In subsequent newsletters, solutions for the mistakes will be provided as will suggestions for better methods to use in moving and operating overseas.
Mistake # 1 – No Strategic
Plan
The driving force behind most decisions to move offshore is
labor cost. There is nothing wrong with this – companies
are in business to make money and lower costs mean higher
profits. Unfortunately, the environment accompanying this
decision is often one of panic. Perhaps the competition is
winning on price or the latest product lines are losing
money. Panic sets in and the company begins to make
tactical changes without a strategic plan.
Mistake # 2 – No Value
Stream Analysis
Complementing the lack of a strategic plan is a lack of value
stream analysis. Often, the best opportunities for savings
through using low cost labor exist not in a manufacturer's plant
but elsewhere in the value stream. A major supplier, for
example, might be a much better candidate for offshore
manufacturing.
Mistake # 3 – No
Identification of Core Competencies
Offshore manufacturing can be viewed as a sub-set of
outsourcing. Even if the offshore location is going to be
owned and operated by the parent company, there is a loss of
expertise due to working long distance. Core competencies
need to be identified and kept close to the knowledge
base. If a core competency must be transferred offshore,
then sufficient resources must be invested either through local
support or through travel.
Mistake # 4 – Assuming
that Labor Costs are the Problem
Why are labor costs too high in the first place? Has the
company invested in a lean manufacturing program or in
automation? How about a design for manufacturability (DFM)
program? If these programs are not pursued, the company
will not remain competitive in the long run even with cheaper
labor.
Mistake # 5 – Making
Product Transfer Decisions Based Upon Margin
Often the product or process that is being viewed as a great
candidate for lower labor costs is fundamentally flawed.
It may be that the design is poor or that the manufacturing
process has not been debugged. In either case, moving the
manufacturing process thousands of miles away from it’s
engineering and process control people only compounds the
problem. This situation is further exacerbated by
accounting principles that encourage low margin products to be
first in line for transfer to the offshore location. At
the end of the year, it doesn’t matter if the bottom line is
increased by making the high margin product more profitable or
by making the low margin line more profitable. One hundred
jobs transferred to a low cost center will result in a
$2,000,000 savings either way. Therefore, the better
choice would be to transfer products that are mature and have a
stable process to the low cost center.
Mistake # 6 – Choosing the
Wrong Offshore Location
Low cost centers are not created equally. China, for
instance, has great materials prices but is an extreme road trip
for U.S. personnel. Mexico is right over the border but
has an unstable work force. The Caribbean speaks English,
but has very little local sourcing of raw materials. The
location of major customers and suppliers should impact the
decision.
Mistake # 7 – Lack of
Offshore Expertise
There are many programs that companies would not dream of
initiating without outside help. A merger needs to be
handled by experts. Lean manufacturing is a skill set that
requires consultancy either in-house or external. But
moving manufacturing to a location outside of the U.S. is just
doing the same thing somewhere else. Right? Well
maybe, except for the issues of product transfer, local culture
and labor laws, transportation issues and logistics.
Mistake # 8 – Lack of
Support
A related mistake is lack of support from the parent company’s
management and technical resources. Often there is less
support provided to the offshore facility then to the domestic
facility. This is true even during the critical start-up
phase.
Mistake # 9 – Quality by
Inspection
The final and most lethal mistake is concerning quality.
U.S. companies have long since learned that quality cannot be
screened in to a product. This lesson can evaporate when
setting up an offshore plant. The "logic" is
that labor is cheaper, so what does it cost to inspect
everything? Of course no 100% inspection is 100%
effective. Defects at the customer level lead to more
inspection and less focus upon problem solving and less focus
upon excellence in manufacturing. This can begin a
downward spiral that leads to a failure of the low cost site or
to the parent company itself.
Strategic Offshore Manufacturing - The Antidote to the
China Syndrome
Companies that rush into offshore manufacturing seeing it as an instant cure-all for cost problems risk falling prey to the China Syndrome. Paladin specializes in incorporating outsourcing in general and offshore outsourcing in particular into an overall strategy for success.
We view offshore manufacturing as a subset of outsourcing and apply those principles to developing an offshore outsourcing plan that will succeed.
Core Competency Analysis
We perform a core competency analysis which allows our clients to decide which processes are their strengths and which should be outsourced. This has the double advantage of freeing up resources to spend more time on strengths and taking advantage of core competencies elsewhere in the supply chain - low cost labor in the case of offshore manufacturing.
All companies have core competencies. Often asking the question “what makes our company unique or competitive helps to uncover them. A cross-functional analysis is needed to reach a consensus.
Value Stream Analysis
Another valuable tool that Paladin uses is value stream analysis. By examining the value stream a company can decide where to concentrate it's outsourcing efforts. In the example below, a purchased part contains the lion's share of the cost. Helping this supplier to develop a lower cost through offshore manufacturing might make a bigger impact than outsourcing internal operations.
Offshore Location Choices
Paladin Manufacturing Corp. can assist in making the right choices for using low cost labor within your companies' value stream. A recent census of manufacturers by Industry Week found six in ten of surveyed executives said some production would be done overseas to save costs. Companies are compelled to utilize offshore manufacturing by one or more of three factors - low cost labor, low cost materials or proximity to suppliers and/or customers. However, not all offshore locations are the same. The factors illustrated below should influence the location of the plant.
Product and Process Choices
Similarly, not all products are appropriate for offshore manufacture. Often, the lowest margin product line is considered the best candidate for transfer to a low cost center. The chart below shows some of the factors that might have a greater impact. This is just a sample. Different products will have different factors with different weights.
Involvement Spectrum
Offshore manufacturing typically takes one of three forms - captured manufacturing, subcontracting or shelter services. In captured manufacturing, the parent company owns and runs the offshore facility. Offshore subcontractors perform in the same way as domestic vendors except that very often the customer owns the inventory and equipment. Shelter service is a hybrid of subcontracting and captured manufacturing. A vendor provides the facility and administration services and the customer is responsible for all materials, training and wages.
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www.paladin-mfg.com