Is it worth the move? Examine the cost-benefit tradeoffs of shifting manufacturing to new regions.
By understanding the costs incurred by a contract manufacturer (CM) shifting production of an original equipment manufacturer (OEM) customer's product from one region to another (Table 1), decision makers can make strategic choices for reducing costs.
Old Strategy, New Economic Climate
Moving manufacturing to low-cost regions dates at least as far back as colonialism. In the last decades of the 20th Century, electronics CMs moved manufacturing from Silicon Valley to the Southwest U.S., from the U.S. and Canada to Latin America, from Western Europe to Eastern Europe and from just about anywhere to Asia/Pacific countries. Until recently, most distant-from-customer, low-cost manufacturing regions were used for high-volume, low-mix products. Manufacturing strategies for low-volume, high-mix products hinged on proximity to end-user location. Or, companies designed manufacturing stages according to regional strengths and customer proximity; for example, printed circuit boards assembled overseas were shipped in bulk to North America or Europe for configuration and customization nearer to customers.
According to Technology Forecasters senior consultant Charlie Barnhart, "This time some are taking everything to China--even products with volumes of six units and no forecasts. It's digressed to 'take everything to China.'"
Also, the timing of the recent migration to China has been during an economic downturn. Barnhart says, "So there is not only surplus capacity in the U.S., Mexico and Europe, but also a spiraling effect on the financials. The remaining customers fear higher costs and say, 'Take me to China, too.'"
III-Suited Regions Can Cost
Many OEMs have chosen CM facilities in low-cost regions, only to be surprised at unexpected costs, time, quality levels and customization obstacles; they then move manufacturing to better--suited regions. Beneficiaries have been CMs in other Asian/Pacific low-cost regions, North America and Europe. For example, Australia-based GPC serves OEMs who originally chose China manufacturing, but who now prefer to take advantage of Australia's language and business culture similarities, inexpensive shipping and low labor rates.
Another OEM's high-mix, high-complexity products manufactured in Singapore are being brought back to the U.S. to be manufactured by a CM specializing in this product mix in a relatively low-cost region. In such cases, many of the transfer costs are incurred twice: once to the low-cost region and again back to the better--suited region.
Choosing Right the First Time
Labor is generally a smaller percentage of a CM's total pricing than most OEMs realize. Are the savings in labor worth the risk of incurring additional costs and time from shifting manufacturing? Calculate the total costs of manufacturing in regions around the world by learning from an objective source.
CMs have undoubtedly received pressure from OEMs to move manufacturing to low-cost regions. Before moving for them, consider each customer's product type and locations; if you predict that overall cost savings will be negligible, convince the OEM to choose a better--suited region. Consider bolstering your case with objective, third-party analyses.
Additional Costs for the CM Costs Paid by OEM * Increasing overhead costs to transfer * Shipping to customers and/or the products final-configuration facilities far from the Supply chain management low-cost manufacturing location can also take more Tools and fixtures time Program management changes, * Increasing logistics costs resulting in tribal knowledge gaps * Paying duties, if applicable * Selling at aggressive rates to quickly backfill the original plant * Paying more for CM services owing to the CM's additional * Reassigning employees in the original costs listed to the left plants if other business is not forthcoming Even though the contractor often makes these costs * Absorbing more overhead per hour transparent to the OEM into the original plant's remaining customer labor hours; this reduces profit and asset margins on remaining business * Facing reduction in overall revenue and margins, owing to price reductions on the products manufactured in the new location and increased linkage costs TABLE 1: Costs of shifting electronics manufacturing from one region to another.
Pamela J. Gordon is president of Technology Forecasters, Inc., Alameda, CA; www. techforecasters.com
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|Title Annotation:||ems Insight|
|Author:||Gordon, Pamela J.|
|Date:||Nov 1, 2003|
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