Make no mistake about it, offshoring can be beneficial in cutting costs in the right circumstances when effectively strategized and managed. But also make no mistake about the hidden costs or forgotten expenses that lead many organizations to reshoring.
It’s not news to most of you that quality control is a potential pitfall when offshoring manufacturing. The countries where we offshore do not have the tight controls and programs in place (like ISO 9001:2008) to measure up to a typical U.S-based manufacturing facility. The consistency of quality is another factor to consider as these certifications typically yield a more predictive outcome.
So where’s the hidden cost here? Returned product for repair can lead to double billing—building it wrong in the first place and charging to fix it. Add onto that the delay in time-to-market that can delay revenue recognition.
Intellectual property theft is a well-known threat factor when offshoring manufacturing. American copyright, trademark, patent, industrial design rights and trade secrets don’t translate to foreign soil, so know that it is a risk to send product to countries that blatantly disrespect those U.S.-based protections.
Pirates aren’t a children’s book fantasy. Studies carried out by RAND Institute and the IMB have estimated piracy costs to range between US$1 and US$16 billion per year, according to the latest UNCTAD report on maritime piracy. While the risk may seem remote, there is the possibility of theft of valuable cargo.
Again, there is also a ripple effect from an incident of theft that results not only in the loss of the actual product, but then the time and money needed to replace the product.
Take into account the differences in cultures and be mindful and respectful of them. Be sure all individuals traveling to that location are well versed as well. There are companies that will do training to help you accomplish this portion of your strategy, like Cultural Awareness International, which will help navigate the nuances of a different culture. As an example, in Japan it is a terrible insult not to hand your business card over in a very particular way and you never put someone’s card in your back pocket.
Depending on the region, communication barriers can be an exposure to the business. A lot can be lost in translation for expectations, strategies and controls. To help mitigate that risk, translators are often used, which incurs additional expense, and often doesn’t ensure accuracy.
In addition to the items above that have costs associated with them, there are a multitude of additional expenses to consider when comparing TCO of a product produced domestically or offshore. Additional areas to consider include:
- Freight, including unplanned expedited shipping
- Market volatility which can affect wages and exchange rates
- Vendor selection which can cost 0.2 percent to 2 percent in addition to the annual cost of the deal according to CIO
- Cash flow can also be affected when companies overseas require a 50% prepay
While there are many benefits to offshoring manufacturing, be sure to evaluate the expenses and other operational impacts on deliverability, quality and the bottom line.