To Manufacture in China or in the United States? Get Beyond Cost to Strategic Sourcing and Manufacturing of Products

When to source manufacturing offshore in a country like China, India, or Mexico?  When to keep manufacturing at home in the U.S.?  Don't start with cost:  start with strategy.

Lowering costs has been the most common and highly publicized impetus for companies to source and establish manufacturing operations offshore in a low-cost country like China.  But there are myriad reasons why a company might expand operations to an offshore country, or on the flipside, choose to maintain manufacturing at home.  Many of them have nothing to do with cost, but can be far more significant to a company's health than the cost of goods.

For many consumer product industries, seeking the cost-savings is a given.  To be competitive on the retail shelf, offshore manufacturing operations in low cost country sources is necessary.  But the strategic planning for sourcing and manufacturing often does not go beyond this perspective of thinking, a practice which often lands companies in trouble by sacrificing the most valuable aspects of their organization, or results in them missing a chance to maximize the value of their supply chain.  

First, consider a company's competitive advantage.  What aspects of the company are most important to the company's competitive position in the market?  Innovation and launch of new products?  Delivery of a consistent, high-quality customer experience with the company's products and services?  Lowest prices on the market?  There are many ways a company can differentiate itself and flourish in the market.  The question is–how will sourcing an offshore supplier in a country like China detract from or augment this competitive niche? 

Business case studies have shown that companies which have sought offshore suppliers to lower costs, at the expense of other important aspects of their company (such expenses were not clearly understood at the time), have ended up losing market share and value.  For example, companies which are leaders in innovation and technology often become so because they have nurtured a culture of strong, horizontal communication within.  Ideas, knowledge, and relationships are built across functional boudaries (meaning engineers eat lunch with marketing folk) which all contribute to the cross pollination of ideas  and the development of new, innovative products.  However, when a VP of operations decides to begin contracting out manufacturing an ocean away, without paying specific attention to developing the proper communication channels, the core strength of the company is sacrificed over time in the pursuit of short-term cost reductions.

A way in which the above technology company may have gone about this in a better way?  Keeping manufacturing operations at home may or may not have been the answer.  But they clearly could have prepared for their move offshore more effectively.  They could have sourced lower cost manufacturing suppliers and developed close partnerships to foster open dialogue.  Perhaps the company makes sure its design team goes over to visit their suppliers several times per year to visit manufacturing facilities, and vice versa.  A company seeking to optimize its supply chain in this fashion, by attaining a lower cost of goods, IN ADDITION to investing the resources to support its competitive advantages with outsourced service providers, can truly maximize value.  Apple computer could be considered a company that has done this very effectively.  Apple knows where to spend and where to save.  For more insight into how Apple does this on a product basis, check out Manufacturing the Ipod Shuffle: How Apple Produces Great Products at Great Prices.

As Dan Harris of ChinaLawBlog points out in his post Manufacturing in China.  Because There Are 1.3 Billion People There, gaining access to China's consumer market is now becoming a significant reason cited by companies for expansion of operations in China.  Following customers to support them in foreign countries might be another reason.  The fact is, there are numerous ways to drive value beyond lower cost goods.

Why keep manufacturing at home?  Some companies may find it more valuable in the long term to keep manufacturing operations at home, despite the opportunities for cost reduction elsewhere.  These companies know that paying more in the short-term to maintain whatever edge their domestic operations gives them, offers greater rewards in the long-term.  An example of this may be a fashion oriented company that creates new product lines several times annually, and has difficulty accurately forecasting which items will sell.  Thus, they may find that the cost of holding inventory for long periods of time and not being able to respond quickly to market trends is more expensive over the long haul than manufacturing their products domestically and gaining very short lead times.  An analysis of the supply chain at the product level may motivate a company like this to choose a hybrid model in which some of its products are manufactured abroad and some at home.  A fashion company like Zara, which can go from product concept to market in 18 days, is a great example of this.  It starts with strategy.

The bottomline is that companies, particularly smaller companies, that are now sourcing contract manufacturers in places like China, India, Vietnam, and elsewhere because of cost pressures, should consider how else manufacturing in these areas will impact their business.  They have the opportunity to advance to a higher level of strategic planning.  In a country like China, they may gain greater access to materials suppliers, they may be able to take advantage of low cost engineering and design talent, they may find an opportunity to sell into China as well.  If their competitive advantage rests upon delivering high quality product, or innovating products on the cutting-edge, they would do well to ensure that they source suppliers that can support these functions and invest the necessary level of resources to optimize them.  Some may find that not outsourcing, and staying at home, serves their purposes better in the long run.  Companies may find that smaller minimum quantities and faster turnaround are the key drivers in their business.  The point is to assess the strategic sourcing circumstances, make an educated decision, and execute it accordingly.