The Five Hidden Cost of Offshoring Eliminated by Onshoring

The Five Hidden Costs

of Offshoring Eliminated by Onshoring

Content Executive Summary 1 The Hidden Cost of Crossing Borders

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The Hidden Cost of Supplier Selection

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The Hidden Cost of Contract Management

8

The Hidden Cost of Time

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The Hidden Cost of Geopolitical Risk

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Cost Elimination Through a Domestic Approach

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Conclusion

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Executive Summary

Situation:

LABOR RATES

In the 1990’s worldwide electronics manufacturing market share migrated to low cost regions, China in particular. Today 84% of PCB manufacturing is done in Asia. But labor typically accounts for less than 5% of product cost, and Chinese labor costs are rising at a faster than expected rate of 15% per year, both factors contributing to a reassessment of offshoring.

“We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015,” said Boston Consulting Group’s Harold Sirkin. “As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

More companies have moved their supply chains back into U.S. borders due to low returns and the overwhelming complexity of offshore operations. A recent report by the Boston Consulting Group predicts rising wages in China -- along with a host of other factors, including an appreciating yuan and the logistical problems of doing business in China -- will usher in a “manufacturing renaissance” in the U.S. over the next five years.

Problem:

Costs

Hidden Costs

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When a company decides to offshore its supply chain, it is relatively easy to assess direct costs, which are typically 15-17% of product cost. But companies are often caught off guard by hidden costs, which typically add 5-7% to product cost. Moving a supply chain abroad complicates a company’s ability to manage its supply chain dynamically and increases risks, such as intellectual property theft, underperformance by a vendor, or a disparity between what is negotiated and delivered. Most OEM’s choose to ignore China’s willful environmental, labor and currency abuses. Accurate communication (including language and cultural barriers), an understanding of the host country’s laws and regulations, and setting up reliable management infrastructure are all costly operations. According to leading consulting firm Accenture:

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Executive Summary

Many manufacturing companies that shifted production offshore “likely did so without a complete understanding of the ‘total costs,’ and thus, the total cost of offshoring was considerably higher than initially thought.

Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise.”

Overlooking or underestimating hidden costs and associated risk leads to poor decisions. Where labor is a small portion of product cost, the hidden costs can actually be greater than the expected labor savings.

Solution: “Based on Total Cost of Ownership, 40% of American companies have a cost disadvantage importing goods from China instead of making them here.”

While a significant amount of literature dedicates itself to helping companies manage offshore operations, solutions are often vague and esoteric, and certainly do not guarantee cost savings or quality improvement. Sourcing domestically or locally, on the other hand, offers simple options that eliminate hidden costs completely, while granting a company easy power to fix problems and make changes.

Having surveyed 287 manufacturing companies, Accenture found that 61 percent are considering moving some of their manufacturing back to their home market. Ferreira and Heilala describe this as being a “secret shift” and a “quiet trend.”

This paper examines five key areas of hidden cost driving many companies to conclude that modern, efficient manufacturing and supply chain management are best conducted near the point of use.

- According to economist Alan Beaulieu, U.S. Labor costs have remained consistent since 2000, while China’s labor costs have risen 250%.

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To Be Continued

Learn the hidden factors driving increasing costs of offshore PCBA assembly:

“Re-shoring to double next 3 years” -Ernst & Young "U.S. Labor costs have remained consistent since 2000, while China’s labor costs have rise 250%" -Alan Beaulieu

 Hidden Costs Add 5-7%  Quality Issues Add 8%  Supplier Selection 1%  Geopolitical Risk  Contract Risk  19 pages, 3.3MB

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ITR Economics

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