Viability of Offshore Manufacturing

Issue raised on LinkedIn:

I am working on my Research Project as a part of MBA Curriculum. Title of my research project is “DOES OFFSHORE MANUFACTURING STILL MAKE CENTS?” The purpose of this project is to research and document the continued viability of off-shore manufacturing to primarily Asian countries and evaluate if time has come to return back to the United States or North America. I have come up with some questions for my project. I would appreciate if anyone can comment on some of my below questions:

1. What are the real costs components of off-shore manufacturing?

Costs that are often missed are the engineering and administrative costs associated with supporting sub-contract manufacturers. Traditional cost accounting distorts cost and potential savings as significant non-manufacturing costs aren’t included in cost accounting metrics. What a company should really concern itself with is total cost associated with getting a product into and sustaining it in the marketplace. Activity-based costing is a better approach for looking at total cost and the performance of a product or product line.

2. As companies have moved their production off-shore, have they realized all the costs savings they expected? If not, why?

I submit this is a bit like the estimated mileage sticker on a new car–the savings is never quite as good as it appears to be after you’ve purchased.

3. Can United States become a manufacturing power house again?

The U.S. is a power house today in manufacturing! No need for doom and gloom. Not all manufacturing segments are moving off-shore. Those that have moved likely will not come back. There is greater growth potential for higher-end, personalized or customized products to begin to expand with the U.S.

4. How can companies keep their manufacturing operations at home and still compete with the competitors who absorb the overseas risks?

It depends on the segment as I’ve written above. Dell, for example, has moved a lot of manufacturing out of Round Rock, Texas, to other parts of the U.S. and the world. But, as I will write in a Fast Company article in a few weeks, Dell has not reduced its office footprint in Round Rock and actually continues to create more, higher-paying jobs for knowledge workers in Round Rock than it previously paid manufacturing employees. I recently interviewed the Vice President of Corporate Social Responsibility, Trisa Thompson, about this and other issues. Dell has just announced that it is expanding in Silicon Valley, again with product development and knowledge workers. [Note: I am member of Dell’s Customer Advisory Panel, a position for which I receive no compensation.]

5. Do you think that government needs to provide some type of incentives to improve manufacturing competitiveness in North America and encourage companies to return manufacturing on-shore?

As we have seen with “green” industries, investors are loathe to invest in industries where the U.S. government offers incentives. The fear is that the market dries up when the incentives are pulled. So, we need to be careful about how the government participates. The U.S., state and local governments as well as foreign governments offer incentives to lure companies to create jobs in their area–this is routine and expected. This also allows companies to shelter profits outside the U.S. in many instances.

What do you think?

Dave Gardner, Gardner & Associates Consulting

© 2011 Gardner & Associates Consulting  All Rights Reserved


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