The Hidden Costs of Offshore Manufacturing

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Transcript of The Hidden Costs of Offshore Manufacturing

  • by: Duane Benson, Marketing Manager at Screaming Circuits

    The Hidden Costs of Offshore Manufacturing

    Q&A with Joe Grand

  • The limited regulation and abundance of lowcost labor in emerging economies, like China, created an environment where not offshoring looked to be financial suicide. Though their early reputation implied cheap, and poorly made consumer goods, China has developed worldclass volume manufacturing for highend products, such as the iPhone. The whole of their industry hasnt made that transition and there are still many challenges with lower volume manufacturing. A designer either needs to maintain close supervision from start to finish, or rely on plain luck, to ensure a quality product.

    Over the past few decades, offshore manufacturing has been seen as one of the quickest routes to a competitive cost structure.

    The Hidden Costs of Offshore Manufacturing

  • With high volumes, you can afford to adequately manage the process, communications and logistics issues that come with offshore manufacturing. Once you get below a certain point, the hidden cost of offshore manufacturing can make U.S. manufacturing a far better choice.

    We recently spoke with Joe Grand, an accomplished engineer and recognized industry expert, about these hidden costs and how they have affected his sourcing decisions. Joe has his own product development firm, Grand Idea Studio, has testified before congress on Internet security and was the electrical engineer on the Discovery Channels Prototype This television show. Heres our conversation with Joe:

    The Hidden Costs of Offshore Manufacturing

    When making the offshore vs. onshore decision, its important to consider the type of manufacturing that you need.

  • What are your thoughts on the current state of U.S. manufacturing compared to offshore alternatives?

    Its to the point where there are so many options in the U.S. now. People always think those options are so much more expensive. But I feel that the quality in the U.S. is great and the pricing is not as high as it used to be. While the main benefit of using offshore manufacturing in the past was cost savings, the benefits of time and quality you get with U.S. manufacturing outweigh it. Even offshore facilities in China and Mexico, historically low cost venues, are getting expensive. I dont think people realize that manufacturing isnt only about price its all these other, hidden things you dont think about until you have an emergency. For example, a quality issue, a problem on the manufacturing line, or a misunderstanding due to the language barrier could force you to send people halfway around the world to try and fix the problem in person. Responding to an offshore emergency could end up costing tens of thousands of dollars, if not more, and thats usually not factored into the product development budget

    The Hidden Costs of Offshore Manufacturing

  • With offshore manufacturing, what is risk?

    Risk ends up being a loss of time, loss of money, or loss of reputation with your customer base. Many of the builds I do now are small runs and Ive moved a lot of my product manufacturing onshore because I dont want to take those risks. Unless you have people on the ground offshore that work directly for you, youre eventually going to run into problems. There ends up being a balance you just have to think of worstcase scenarios and figure out if you have the wiggle room in your project, schedule or budget to deal with them. For example, if I have a flexible schedule and just want the lowest cost with no frills, Ill sometimes still send offshore. But if Im working on a project thats more important to me and more complex, Ill usually keep that onshore, even if its more expensive. The justification is that if theres ever a problem, I wont have a large hidden cost of dealing with the offshore facility

    The Hidden Costs of Offshore Manufacturing

  • You said youve had problems with parts getting held up in China. Was it in customs or some other issue?

    Ive had many occasions over the years where components going into China have been held in customs. Sometimes for a few days, sometimes for a few months and sometimes derailing our schedule to the point where Ive needed to do an emergency U.S. manufacturing run in order to save the project. All the paperwork was correct and it seems like theres no rhyme or reason for parts to be held up. Its sort of a crapshoot and Ive started to ask myself if its worth it.

    The Hidden Costs of Offshore Manufacturing

  • How does quality come into the mix with onshore and offshore manufacturing? One of the concerns Ive always had is with quality. If my

    name is on something, I want to make sure that the product is good quality across the board whether its ensuring that components are purchased from authorized distributors, validating that the assembly and testing processes are done properly or checking final assembly of the product. I feel like theres a better paper trail if the manufacturing is done in the U.S. Youre always taking a risk if you dont have a direct relationship with the company, or if you cant easily and quickly visit them or get in touch with them. The problems with supply chain and counterfeit parts are getting worse and worse, which makes things even more difficult. If you put your faith into a company that you dont really have a solid relationship with and theyre on the other side of the planet, youre taking a risk. Theyll have relationships of their own and those may be with vendors that distribute grey market products. I always source and purchase parts in the U.S. through my own contacts at authorized distributors. That way, I can know for sure that the parts are coming through the appropriate channels. Then Ill ship them to the offshore facility. If you rely on offshore companies to purchase your components, they may end up buying from sources where you just cant verify the quality and that can lead to major quality and reliability issues down the line.

    The Hidden Costs of Offshore Manufacturing

  • What do you tell startups that ask you about offshore manufacturing?

    I tell them that China is not going to do everything for you. Even if you are able to get the parts through customs, there are still all sorts of reasons why I would recommend staying onshore. Often startups dont think of the language barrier, having to physically go over there to deal with he setup, and the challenges of working through problems that will undoubtedly arise. Chinese customs was really the catalyst that got me thinking that maybe going offshore isnt always the best solution. For high volumes and with enough upfront work, you can find reputable manufacturers and it still might make sense, but for most startups Id recommend looking in the U.S. for manufacturing.

    The Hidden Costs of Offshore Manufacturing

  • Whats the current mindset in the maker/DIY/kickstarter community in regards to offshore manufacturing?

    They still have this feeling that going offshore is the way to go and things will just magically get done. I was an advisor for a company that had moved over to China to start manufacturing a product and it basically ran into the ground, because they were putting so much trust into a factory that they were convinced they had to use. The factory didnt truly understand what the company wanted to build and tried to shoehorn their existing manufacturing processes into the project, which just didnt work. In the U.S., I feel like its easier to make sure the facility you choose is a good fit before getting too far down the process. A lot of offshore factories will say yes to every project just to get the job, and it turns out that they overpromise and underdeliver. People put too much faith into offshore companies when they should really be exercising their options in the U.S. first and forging relationships with companies here.

    The Hidden Costs of Offshore Manufacturing

  • As facilities enable more agile manufacturing and prototype builds, does that change your recommendation on whether or not you or a client should stay onshore or offshore?

    Definitely. Using local, regional or domestic options gives you much more flexibility during the development process. You can iterate more quickly and usually save time and money. If things go wrong, its often easier to work together to find a solution. If you make the effort to form relationships with local companies, it will make your process run more smoothly. Thats why I like dealing with U.S. distributors and service providers Ive spent time forming relationships and I know that Ill get good, consistent quality with minimal hassle. To give you an example, I once used Screaming Circuits when I was working on the Prototype This TV show. We had a project where we needed to get boards assembled by the start of filming the next day. There was no room for error. We would have lost hundreds of thousands of dollars if the boards didnt arrive on time, since the production and film crews still get paid even if we, the engineers, werent ready. You guys did a 24 hour turnaround for us and we had fully assembled boards ready to go when we needed them. You simply wouldnt be able to pull off something like that using offshore facilities.

    The Hidden Costs of Offshore Manufacturing

  • What are your thoughts on intellectual property getting ripped off onshore or offshore?

    Intellectual property is definitely an important factor to consider, and youll want to compartmentalize your information whether youre dealing with onshore or offshore facilities. For example, if youre working with a facility and youre getting PCB fab