Deciding where to manufacture isn’t as simple as it used to be. U.S. manufacturers who led the offshoring boom over the last 40 years based their decision on a simple delivered cost comparison. This just won’t work anymore. Market conditions have changed, manufacturers have learned, and many of those who led the move to offshore are bringing their operations home—they’re onshoring now.
If you’re in the middle of deciding whether or not you should offshore your manufacturing, check out my video at ExecSense. My goal is to help leaders avoid the expensive lessons that U.S. manufacturers learned during the offshoring days.
I start with a brief history of the major factors that led manufacturers to begin offshoring. I show you what has changed, what manufacturers have learned, and why you need to perform a more robust, customer-focused analysis to make a strong decision from the beginning.
Here are 6 crucial steps that will guide you in the right direction:
1. Model total cost to serve your customers.
Cost is still important but the delivered cost of your product isn’t the only one to consider. Look at a broader list of costs that are influenced by your decision including inventory carrying costs, the costs of operating staff organizations to support your supply chain, and the cost of supply disruptions.
2. Determine the availability of the skills you need in your target country.
If you manufacture a specialized product, consider the availability of labor required to make a quality product for your customers. Skill shortages could make it unattractive to manufacture in some countries.
3. Consider the impact of international distances on your innovation cycle.
Distance matters with innovation. If your product life cycle is measured in months and the lead time to ship your product is also measured in months, you could end up with excess inventory of obsolete product if you’re not careful. Expensive write-offs can be a disincentive to bring the next generation product to market.
4. Assess the impact of volatility in demand for your products.
If demand from your customers is unpredictable it can be difficult to keep service levels high without large investments in inventory. This gets significantly worse if you add international distances to the mix.
5. Learn the intellectual property risks.
Most countries have regulations to protect intellectual property from copycats but in many cases it is common practice for officials to look the other way. If IP is important to your business you’ll need to understand both regulations and enforcement practices in your target country.
6. Think about your brand image.
Global transportation is one of the top contributors to greenhouse gas emissions. If you’re company thrives on being seen as environmentally responsible you should consider the impact managing a global supply chain could have on your image. On the flip side, there are several reasons why manufacturing locally could boost your image.
The bottom line: deciding where to manufacture requires you to look at multiple risks and challenges. Whether or not offshoring makes sense, your goal should be to take a customer-focused point-of-view—and to avoid the four-decade learning experience from the offshoring boom.
Principal, Sketchbook Strategies
Expertise: Business Development & Operations
Steve Borengasser, founder of Sketchbook Strategies, has built a career out of finding creative ways to grow stagnant businesses.