Nearshoring vs. Offshoring

Despite an unsettling trend over the last two decades of U.S. product manufacturing shifting offshore, Tennessee-based Mills Products has continued to prosper. Drawing on over 60 years of manufacturing success in its North American operations, Mills has continued a legacy of innovation in processes and products that foreign competitors simply haven’t matched.

Rising Offshore Costs

Today, most of our competition is offshore, but the costs of doing business in faraway lands have been steadily increasing, largely due to currency fluctuations and labor force demands. The Wall Street Journal recently reported: “Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies.” According to the BBC, the average minimum wage in China rose by over 21 percent in the first nine months of 2011.

An actual letter from one supplier in February 2012 attempted to explain the situation to a customer:

          Labor shortage

As our talking previously, the maker requests to adjust price due to labor cost raised too much (FYI – raising about 19% compared with Dec/2011, and keeping raising now as labor shortage problem is continued) the labor issues usually happen before and after of one month on each Chinese New Year. This is challenging time every year as lots of workers will leave earlier before CNY or never returned after CNY. Just like this moment, most of labors do not return to work to cause labor shortage problem everywhere. We have to raise salary to hire workers and spend time training them.

A similar rising costs trend is beginning to affect crucial freight rates. A report by UBM Global Trade earlier this year said that ocean carriers have plans to raise import rates on trans-Pacific shipments by as much as $800 per 40-foot container, which could put a considerable dent in profit margins from offshore manufacturing.

According to Archstone Consulting , 60% of manufacturers they surveyed in 2009 were using “rudimentary total cost models” and ignoring as much as 20% of the costs of offshoring. If you are not accounting for 20% of your costs to offshore, then offshoring may not be the most economical decision. In times of a tough economy and tougher competition, no one can afford that.

Bringing It All Back Home

As the once large lure of low-cost labor and freight shrinks, the liabilities and complications of offshore production become magnified. Any company seeking manufacturing facilities and capabilities today should carefully weigh the financial and logistical benefits of nearshoring vs. very real potential problems with long-arm efforts to control offshore production. Compare these factors:

 

 

OFFSHORING NEARSHORING—NORTH AMERICA

Lead times typically 20 weeks

Lead times 4 to 6 weeks

Warehousing against demand fluctuations or unpredictable delivery ties up cash and adds costs

Low warehousing needs and costs

On-ocean products typically 4 to 5 weeks

Domestic shipping is fast and reliable

Product revisions difficult and slow because of warehousing, lead times, and on-ocean product

Rapid revisions, fast supply chain

High travel expenses and red tape, often requiring visas

Fast, inexpensive and easy domestic travel, when needed

Time zones complicate collaboration

Always within 3 hours or less time zone difference

Language barriers can compromise final product quality and require costly overseas travel for clarification and correction

No language barriers

In some cases, offshore manufacturers will not admit to manufacturing problems

We proudly stand behind our products and adhere to our customers needs for high quality standards

Intellectual property nightmares; U.S. laws don’t apply, so difficult to impossible to take legal action against manufacturers or protect against copycat products

Full protection of U.S. commerce and intellectual property laws; full access to U.S. courts and legal system

 

In addition to the complications and rising costs of offshore production, another troubling trend is quality fade. A recent Forbes magazine article, “Dealing with China’s Quality Fade,” stated that Chinese manufacturers will often reduce the quality of their materials to increase profit margins. This growing problem can compromise product safety, increase recall frequency, and tarnish brand perception.

Mills Products stands ready to deliver high quality products, quick to market, at a competitive price, with all the benefits—both tangible and intangible—of working with a North American company.


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