Have you really thought out your Offshoring decision?

Have you really thought out your Offshoring decision?

Have you really thought out your Offshoring decision?Simply by taking a quick look through our website you will find that a key competency of GBOS is facilitating the transfer of manufacture to offshore vendors. So then you might wonder why would we potentially discourage customers from using this service by asking them to think carefully before they proceed. 

Well I think it is about time we actually departed from the traditional bipartisan approach: Manufacture Onshore using Lean or automation vs. Manufacture Offshore. The reality is neither solution provides a cure all for your company ailments. 

I once worked for a company that was manufacturing onshore, we found out that an offshore competitor was actually selling a more advanced product for less than we could purchase components for manufacture. We were trying to trade on being Aussie made. We had a consultant with Lean expertise come in to advise us how to streamline our operation and reduce waste. But the reality of the matter lies in the initial fact. The competitor sale price (not manufacture price but the actual retail market price from an onshore reseller) was going to destroy the business no matter how Lean the factory became. Commercial clients were already aware of the competition and were quickly failing to see any benefit in paying significantly more for a local product which was generations behind the competition. 

The above is an extreme case. The Lean consultant should have looked into the pricing fact before taking the contract and advised the company that, in reality, his consultation will not provide sufficient benefit to fix the inherent pricing and product issues. Similarly had an offshoring consultant been contracted the same reality should have been revealed, there is no point in proceeding with this particular product because the company is too far behind in both design and costing to ever regain the ground. Sometimes honesty can be a bit brutal but it is better than pouring hundreds of thousands of dollars into a doomed enterprise.

Ok so now getting back to a resolvable situation. Let suppose your company manufactures products that either has some IP advantage over the competition or still has the ability to remain competitive on pricing with some tweaking. Knee-jerk reaction is to send it off to China to get made for less. (I'll discuss country options in a later blog - it's a BIG world out there and outsourcing to China may not be suitable for your business). The cost price quoted by the Chinese vendor is significantly less than what we are paying to make it offshore. You need to order 2 years worth of product in a single order and pay 100% before shipment and terms are EXW. 

The initial problem with the above is the customer is only considering the EXW (ex- works) price in their consideration. There is no consideration for the costs to transport your goods to the nearest port, customs clearance (China and Australia), shipping, warehousing, potential yield issues, scrap or obsolescence and the fact that you now have a significant amount of investment tied up in stock that will not likely be recovered for more than a year (supposing a 50% price markup). The EXW price looks fantastic at first glance, we make a direct comparison between this and our internal costs and say "Wow look at all the money we are saving here!" 2 years down the track we are then sitting trying to explain how such a great price from the offshore vendor resulted in the company being in the same financial position (or worse) after the program has been successfully run. 

IP risk issues aside, sometimes offshoring is simply not going to reap the rewards you are expecting. Sometimes you may benefit more from implementing Lean practices onsite. Sometimes the net cost of the product in your store when you add up all of the incidental (hidden) costs actually ends up being more than what you were paying locally and despite the attractive price quoted by the vendor, the move to offshoring actually has a net detrimental effect on your business.

Do your research, add everything into the pricing before you start to make comparisons to your current cost. There is a Build vs Buy online tool free on our website if you want to make a start.

Brian Le Mon

Founder & CEO at Ethical Outsourcing

Despite what most believe and practice, outsourcing is not primarily about cost! It is about finding a service that can offer the most benefit to your business. This may be a service or skillset or it could be the opportunity to free up your time to focus on areas that generate more income for your business. Get in touch for a chat if you want to discuss how outsourcing (done correctly) can help with your business.