In a growing competitive, competitive global market, manufacturers need to continually strive to reduce costs to maintain or increase market share. This is one of the most important factors in deciding whether to make in-house parts, outsource domestic suppliers, or outsource offshore.
Even if a company chooses to outsource a supplier, most people do not look beyond that price when deciding which supplier to choose. This is especially true when comparing domestic and offshore suppliers with quotes. Some companies choose to outsource offshore because the price is cheaper than a domestic carrier. They do not increase shipping costs, much less "other hidden costs" with all offshore suppliers.
In order to make the right decision for outsourcing, the company must understand the term "total cost of ownership" of outsourcing of production.
What is "Total Ownership Cost?" Estimating the direct and indirect costs and benefits of purchasing parts, assemblies, assemblies or products. The Gartner Group started the concept of (TCO) several years ago, and there are a number of different methodologies and software tools for calculating TCO for different industries, products and services.
The total operating cost includes more than the purchase price of the goods paid to the supplier. Purchase takes into account the type of products we manufacture, including all other costs associated with the purchase of the product, for example:
· Geographical location
· Traffic alternatives
· Inventory costs and control
· Quality assurance
· Technology Depth
Low-cost manufacturing areas are not new. Fifty years ago, the North and New England companies started manufacturing in the southern countries. Twenty-five years ago, many Western-style producers launched large-scale production in Hong Kong, Singapore and the Philippines. The next cheaper area was Mexican with the appearance of Mexican Maquiladoras.
"Offshoring": Moving one or more processes or functions to a foreign location. Over the past 15 years, many manufacturers have bought to cut costs by outsourcing all or part of their manufacturing processes to China. Over the last decade, offshore outsourcing has evolved from a little-used practice into a mature industry. Even conservative companies are willing to experiment with starting offshore to gain competitive advantage. The concept of globalization has become part of today's business alliance.
Many times, the decision on offshore outsourcing is based on erroneous statements that may have unpleasant consequences. In some cases, the decision is based on good intentions, such as winning new customers with the customer's approach.
But it is assumed about any business decision, and more often than not, the related assumptions are false. Here is a list of well-intentioned but often erroneous assumptions:
· Long lead times do not greatly affect our cost calculations.
· The overseas suppliers have the same ethical and ethical ethics as we do.
· Overseas legislation protects proprietary information.
· We introduce our suppliers to achieve our high quality requirements and to build our products efficiently and effectively.
· Communication is not a problem with daily conference calls, the Internet, and the fact that the supplier speaks English.
· Evaluation and travel costs do not change our cost calculations.
· Increase in shipping and quality costs will not be significantly different from cost calculations.
· We recommend Lean manufacturing and Six Sigma methods to suppliers before we end up with our ultimate line of business.
In fact, many case studies have shown that these assumptions were magnitudes of reality. These assumptions are:
· Does not contain a reasonable amount of variation. Each batch takes more time than it would take to reach the United States or the customer's site for a review every week.
· The main methods of producing a product or service are becoming more and more complex, not less. In general, costs are complex.
· The company does not know which of the hidden costs (ie process stability, process capacity over time, future potential deviations from the current process).
· The company loses full control over rapid changes to respond to hidden costs. It's like trying to control production by remote control.
· The company deals with bad assumptions.
Hidden costs grow geometrically
Accountants handle hard costs such as material costs, material overhead costs, labor costs, labor costs, quality costs, external services, sales, general and accounting costs, profits, etc. they do not measure intangible costs related to the business, such as delays, errors and deviations from standard or anticipated processes (the three D values).
These costs are often called concealed factories because they occupy everyone and do not generate any tangible or open measured value. Another way to understand these costs is to bring results that no one, especially the customer, wants to pay. Indirect direct costs, such as additional meetings, travel and engineering time, are hidden in the factories that indirectly result in a variety of "soft" costs, such as loss of goodwill, loss of competence, extended warranty costs and legal costs.
When outsourcing is needed, more attention has to be paid than quotation. Some outsourcing costs are less visible – or hidden. Here are the highest hidden costs of offshore outsourcing:
· Currency fluctuations – last year's $ 100,000 bill today could be $ 140,000.
· Absence of an offshore contract management – underestimating the people, processes and technology needed to handle the outsourcing contract.
· Design changes – language barriers make it difficult to acquire understood and realized changes in the design
· Quality Problems – Frequent Issue of Lower Degree or Substitution of Substances
· Legal Obligations – Participate in Product Warranties or Warranties
· Travel costs – one or more visits to an offshore manufacturer can cost savings
· Cost of transition – given the time and effort to make things a new way. It takes three months to complete a transition to the offshore manufacturer.
· Incomplete communication – communication is extremely complex and burdensome.
· Intellectual Property – Foreign Companies, Particularly Chinese, Notorious Without Violating IP Rights Without US Complaints
In the past, my experience was that when the industry started off the US,. However, over the past two years, we have seen several companies returning from China. The most important problems encountered by these companies were the following:
· Substitution of materials
· Insufficient quality
· Deduction of shipments
· Communication problems
· Ineffective simple and rapid modification of plans Quality / Replacement of Materials: At the end of 2007, SeaBotix Inc., a San Diego-based miniaturized underwater vehicle manufacturer, told me that 10% glazed ABS instead of the Chinese casting equipment (injection molding plastic) for 30% glazed ABS. The seller claimed that the parts were made in the specified material, but an independent laboratory test confirmed it was not. Due to the 10 percent glass-encapsulated material, the parts shrunk much during molding, so the parts were smaller, not fit properly in the even parts and were not strong enough. After the Chinese manufacturer refused to recover the parts or give defective components, SeaBotix decided to return its assets to the United States and came from a South California owner.
Don Rodocker, President of SeaBotix, said: "One third of the Chinese device was the cost of tool manufacturing in the United States, delivery was one-third of the time quoted by US companies, and the share was one-third of the quoted US price but every time when we rearranged the parts, Chinese casting increased the price until we could pick up three times as much price in San Diego, and we will probably get a Chinese tool maker in the future.
In 2002, the manufacturer of dental devices in Fallbrook, CA Vaniman Manufacturing has relocated most of the metal networks in China to China to save money (a 50 percent reduction in cost per piece). However, Vaniman Manufacturing had to buy a large amount of parts, which would cost bigger than the larger inventory. In addition, overseas transport costs were higher. These additional costs and other "soft" costs, such as travel costs for travelers, depend on suppliers and the cost of communication, so-called Total Ownership Costs.
After recognizing that these additional costs have fueled cost savings in the piece price, this company bought a disk for a local supplier in the fourth quarter of 2007. Don Vaniman, head of the company, cited several reasons for his move: shipping delays, security issues, and poor quality control. "If you order four thousand pieces for a thousand devices, then three ships will be ok, but the fourth may be totally wrong." Vaniman said, "In the US, a supplier jumped on wheels to solve this problem, but China could take up to six months.
Vaniman said local suppliers are approaching China's costs by developing more efficient and more creative manufacturing techniques, recyclable packaging for the delivery of spare parts and the use of larger volumes of commercial vehicles Vaniman was able to significantly reduce inventory and inventory space as smaller item numbers were delivered in time
In addition, rising costs in China have largely offset the price difference Vaniman said that six years ago the production of parts in the United States was 50 percent higher than in China, now only five percent higher – a premium that he is happy to pay.
These San Diego County stories are just a microcosm
Intellectual Property Theft
Senior executives of companies have a growing precautionary approach in China, especially regarding the purchase of all parts and / or subassemblies of products, as China does not respect American patents. You have heard about the companies that have acquired products from China just to make the product the same on the market that a Chinese company made at a much lower price. Companies that did not pay attention to this danger and produced all their products in China suffered the consequences.
Furthermore, they increasingly recognize that the location and the quality of the site are the best guarantee for everyone. Hard, it is very difficult to outsource quality, especially on a remote land, many miles and time zones away. Many companies are returning their customer service centers to the United States and I believe that more and more manufacturers will recognize that "the sums you pay" are received from offshore suppliers. The use of high quality payers requires money, education and experience, many of which are incomplete in low-wage countries, which nowadays occupy most of the offshoring dollar.
Made in China is undesirable:
Since games, electronics, medicines and other products manufactured in China have been recalled and contaminated monthly for months and / or toxic, loss of consumer confidence in all Chinese products means an alert call for every company in China. Damaged, defective, and low-quality products have forced many consumers to buy goods in China and have caused people to experience the seriousness of the offshore manufacturing problem.
Advantages of Home Purchasing
More and more companies realize that it is worth taking advantage of purchasing in the United States. The most important are:
· Easy communication in the same language
· Same or near time zones
· Flexible delivery – Just-in-time or Kan Ban
· Fast cutting for tools or prototypes
· Highest quality materials and sizes
· Lower travel costs
· High quality materials and sizes
· Lowest cost of ownership
There is no question that "offshore outsourcing" will continue for the next ten to twenty years, especially in multinationals that do not have a "offshore outsourcing" whose products are sold to them z countries where production operations have been set up. Indeed, local production for consumption abroad is critical to profitability as transport costs continue to grow.
The "desirable" locations of cheaper outsourcing will change over time over the past fifty years. The purely financial advantages of lower pricing are deteriorating over time. For America, the challenge is to grow and flourish as many businesses within the United States as possible. A true understanding of the true cost of outsourcing production will help to bring more production back to and from the United States.
Source by sbobet