The gamble of overseas manufacturing… understanding the odds

It is widely believed that going overseas is much less expensive than manufacturing domestically. It is generally understood that there is an added element of risk, but the expected profit makes it worth the gamble.

But when you are gambling your dream product’s successful launch, not to mention your investors’ money, it is important to fully understand the odds. The COVID -19 pandemic revealed the volatility in global supply chains and led to borders closing overnight. As we move to the “new normal”, now is a good time to examine what those odds really are.

The importance of a US-based supply chain

The 2020 FM Global Resiliency Index compared 14 countries. They were scored on a scale of 1 to 100, with 100 indicating the most resilient. Not surprisingly, China (61.8), Mexico (50.5) and Vietnam (49.1) scored poorly, while the US (85.2) triumphed handsomely.

But what’s the cost of this resiliency? A recent analysis by Boston Consulting Group compares the Manufacturing Cost Index of the US to other countries, assessing cost of labor, energy and other inputs. The US scored a respectable 100. Surprisingly to some, China (95-97), Vietnam (94) and Mexico (86) were not such bargains.

It’s not all about product unit cost

When companies make the decision to manufacture in a low-cost region, they often base it on the product unit cost. But it is more nuanced than that. Manufacturing far from the customer base means long transit times. An extra month of shipping time will require a company to hold an additional month of inventory at all times. This makes it difficult to respond quickly to changes in customer demand and results in more scrap and excess inventory when changes do occur. Of course, manufacturing across time zones can be very frustrating and having engineers on site is a necessity. This can increase a company’s overhead costs significantly. These costs are difficult to predict and are usually not factored in to the equation when deciding where to manufacture.

Less obvious, but much more important is time to market and response time. It is common for my company, Evolve Manufacturing, to host engineers and product managers on site several days a week so they can be close to their manufacturing lines and teams. We find that when you integrate manufacturing and engineering on site and close to the customer it is a powerful competitive advantage.