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 hasn’t 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 Channel’s “Prototype This” television show. Here’s our conversation with Joe:

The Hidden Costs of Offshore Manufacturing

When making the offshore vs. onshore decision, it’s 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?

It’s 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 don’t think people realize that manufacturing isn’t only about price – it’s all these other, hidden things you don’t 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 that’s 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 I’ve moved a lot of my product manufacturing onshore because I don’t want to take those risks. Unless you have people on the ground offshore that work directly for you, you’re 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, I’ll sometimes still send offshore. But if I’m working on a project that’s more important to me and more complex, I’ll usually keep that onshore, even if it’s more expensive. The justification is that if there’s ever a problem, I won’t have a large hidden cost of dealing with the offshore facility

The Hidden Costs of Offshore Manufacturing

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

I’ve 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 I’ve needed to do an emergency U.S. manufacturing run in order to save the project. All the paperwork was correct and it seems like there’s no rhyme or reason for parts to be held up. It’s sort of a crapshoot and I’ve started to ask myself if it’s worth it.

The Hidden Costs of Offshore Manufacturing

How does quality come into the mix with onshore and offshore manufacturing? One of the concerns I’ve 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 it’s 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 there’s a better paper trail if the manufacturing is done in the U.S. You’re always taking a risk if you don’t have a direct relationship with the company, or if you can’t 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 don’t really have a solid relationship with and they’re on the other side of the planet, you’re taking a risk. They’ll 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 I’ll 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 can’t 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 don’t 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 isn’t 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 I’d recommend looking in the U.S. for manufacturing.

The Hidden Costs of Offshore Manufacturing

What’s 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 didn’t truly understand what the company wanted to build and tried to shoehorn their existing manufacturing processes into the project, which just didn’t work. In the U.S., I feel like it’s 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, it’s 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. That’s why I like dealing with U.S. distributors and service providers – I’ve spent time forming relationships and I know that I’ll 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 didn’t arrive on time, since the production and film crews still get paid even if we, the engineers, weren’t 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 wouldn’t 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 you’ll want to compartmentalize your information whether you’re dealing with onshore or offshore facilities. For example, if you’re working with a facility and you’re getting PCB fabs from them, there’s no reason for you to give them your native design files. Or if you’re doing assembly, they don’t necessarily need your firmware, unless they’re programming. It’s just important to compartmentalize the information that goes out to different places. I feel like if there were ever an issue or dispute regarding the theft or misuse of intellectual property, it would be easier to deal with in the U.S. If I were working on a project that I wanted to protect, I would do it locally with companies that I have solid, vetted relationships with. Here’s another Screaming Circuits example: During one of my recent visits, you were doing some military work in a portion of the manufacturing area. There were “Do Not Enter” signs posted all around the area and the employees made sure that we didn’t breach that barrier. I saw that as a testament to your integrity and know that you’d go to those same lengths for me if I told you something was confidential and had to be kept private. I don’t know if offshore factories would conform to those same requirements. It’s important that the trust is there. And I would trust that Screaming Circuits, or the other companies I deal with locally, would do that.

The Hidden Costs of Offshore Manufacturing

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The Hidden Costs of Offshore Manufacturing