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Is it worth the move? Examine the cost-benefit tradeoffs of shifting manufacturing to new regions.

On the surface, moving electronics production to new global manufacturing centers makes good sense for increasing profitability and competitiveness. After all, direct labor rates in developing countries can be one-fifth to one-tenth of those in which electronics has traditionally been manufactured. However, hidden categories of costs may negate the benefits of shifting manufacturing at all.

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.
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Title Annotation:ems Insight
Author:Gordon, Pamela J.
Publication:Circuits Assembly
Geographic Code:1USA
Date:Nov 1, 2003
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