Is the growing trend of offshore manufacturing good or bad for Australian SMEs?
A survey of SME Association of Australia members shows 17% cite offshore manufacturing as a key trend for the next 5 years. (It's 2nd biggest, just behind globalisation at 18%.)
Hardly surprising given research by BCG shows Australian manufacturing cost among the world's highest, but is it good or bad for you? And what are Savvy SMEs doing in response? (I notice there's no manufacturing category on SavvySME!)
I think offshore manufacturing is a necessity in many industries.
We as consumers have been conditioned to expect the lowest price for items we buy while demanding the highest wage in the world. The ultimate outcome is that manufacturing suffers. We cannot afford to pay premium wages to our staff while being competitive with countries that pay less than 10% of our minimum wage to employees and have lower overheads and ongoing costs.
The Aussie dollar is not plummeting as per predictions earlier this year and has barely seen any time below 0.9 USD so there is no saving grace to be found there. In fact problems with the EURO actually threaten to push our dollar higher again.
We as business owners need to look at what our customers are demanding, not as a vocal outcry but what is actually happening with the purchasers of our products. If we are losing out to lower cost competition then time has come to make some hard choices and try to salvage some jobs and some degree of our company rather than go down with the sinking ship.
There is an opportunity to get lower cost quality products by offshore manufacturing but it is not a simple case of placing a purchase order and getting perfect products. There are many pitfalls and traps that you can encounter along the way.
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Hi Ilga. My company specialises in helping manufacturers adopt new technologies and practices to be more competitive. We've seen successes and failures in off-shoring manufacturing. The successful manufacturers are those that are familiar with the market as they know the intrinsic value of proximity to market and/or of the value of innovation in the supply chain. Manufacturing in low-cost locations just because it is cheap is fraught with danger and risk. Manufacturing in locations that are close to market or offering an innovative supply chain is less so. According to a new BCG report, there has even been a drift away from China as a global manufacturing heavyweight now towards Mexico, which offers low-cost and proximity to the US market. Unfortunately, Australia is the least cost competitive manufacturer across the 25 top manufacturers, but the area for opportunity is consumer electronics and precision medical manufacture.
Thanks for commenting Steve. I think we read the same BCG report! It explains why Australia not seeing a renewal of 'onshoring' even when the US and the UK are. Both are in the top half of the table for cost AND close to market, while we're stone bottom last and a long way away from most of the world. Of course 'cheap' isn't everything - and if you do opt for a cheaper manufacturing location you have to plan more carefully around issues like quality and length of supply chain. Looking after that is one of Hornet's key value-adds. Usually the overall cost still goes down, which is why clients do it! But not always. Separate question: why do you say consumer electronics and precision medical are areas of opportunity? Is this for companies selling to domestic or international markets?
Ilga, those two areas were segments identified as growing sectors in the BCG report. The link is: https://www.bcgperspectives.com/content/articles/lean_manufacturing_globalization_australia_manufacturing_cost_competitiveness/
Hi Ilga,
For all the people that say off shore manufacturing is bad and that it would be better to bring it back, you never actually hear of anyone who would be prepared to ditch their current job and salary for a chance of working on a factory production line.
Manufacturing is not where the money is made. Take any product and look at each component of getting it from the factory to the end consumer. Factory makes a small amount and the much larger slice of the pie goes to the logistics company, the company that advertises the product, the brand owner and the retailer. All theses are effectively service industries and that's where the higher incomes are.
It's only in relatively recent history that small Australian businesses have started venturing overseas themselves to buy their products. Previously they just bought from local wholesalers who offered limited stock in limited colours at sometimes considerably marked up prices.
If you are a small business with limited capacity for a three+ month turnaround of products and quantities are only small, it may still be better for you to buy locally.
But I think any business needs to be constantly looking at their model for supply of products, and looking at the options available, even to just see what are the best options for the business on an individual basis.
It's also not that long ago that buying offshore meant buying large quantities. That is not always the case now and there is more scope to buy in smaller lots, but whether you have the expertise and ability,and whether it will be worthwhile will still depend on individual circumstances.
Ilga Horvat, Operations Manager at Hornet Import and Export Group Pty Ltd
Hi Brian and thanks for your thoughts. I certainly agree manufacturers in Australia need to look at different ways of doing things, and offshore manufacturing is a good option. Another option we've seen at Hornet is manufacturers getting a mould made offshore far more cost-effectively than they could in China, which can cut overall costs and still keep production here. It depends on the case. But I'm also really interested in what the impact is for small businesses who aren't manufacturers. They still need physical goods, whether it's packaging, or crockery for a restaurant, or items they sell in retail or online, or spare parts for a repairs business, So if any of you out there are reading, please let me know. Are you finding that some of your suppliers have shut up shop? Are you finding it harder to get some items? Or that there's less choice? Do you have to source overseas and things take longer to get to you so you need more backup stock and planning? Or maybe it's all wonderful for you because now you just get things online, cheaper and they are all delivered with no hassle? Just interested in your overall experience!