Thinking of re-shoring manufacturing electronics? Read this

Updated March 2013

By Mark Zetter

Re-shoring, near-shoring, outsourcing, offshoring have all become more popular topics of discussion among technology OEM decision makers these days.

With regards to near-shoring and outsourcing, it can be argued by some that many of the offshoring, and outsourcing, decisions made the past several years occurred because companies only looked at wages or prices, and not total cost. Read through a visual explanation of a cost-benefit analysis for a partnership between an electronics OEM that outsources with a vertically-integrated EMS provider, complete with changes in cost structures for both parties, right here.

With companies today competing supply chain v. supply chain executives are allowed increased granularity into managing sales and operations planning (S&OP) because more and more attention is being focused on corporate profitability.

Furthermore, global manufacturing operations and supply chain decision makers not considering total cost of ownership (TCO) are quickly let go.

Some studies claim OEM executives can save up to 25% when re-shoring if true TCO is considered. It would be interesting to see this type of information broken into end-product silos (e.g., wood furniture, rubber, electronics products…). Savings of 25% incurred through re-shoring might be true for some product markets, yet may not be achieved in others.

Meanwhile, I’ve seen many technology companies save considerably more than 25% when outsourcing simply because the company relieves itself of the financial burden carrying a factory / plant, property and equipment on its books.

 

 

ROIC, Net Profit for Electronics Contract Manufacturing

 

If you’re already outsourcing, try our Outsourcing Calculator for OEMs to locate where you might be leaving money on the table. You can change variables to see outcomes for different scenarios.

The ROIC equation above is similar in scope to activity-based costing (ABC) practices in one of the four types of service agreements preferred by contract manufacturers. The ROIC model is designed around the equation as it pertains to the outsource provider’s net profits. The ROIC model is also the most dynamic and the best choice for financially savvy OEM-EMS partners to work together for mutual benefit.

 

Fixed v. variable assets
In the comparison below, two companies in similar markets offer competing products. On the left is a company performing activities in-house.

At right is a competing company that outsources its none-core competencies. Variable costs (VC) and revenues (R) are equivalent for both organizations.

 

 

The competing company at right does not have the overhead operating costs associated with performing activities in-house. Therefore, the competing company also has lower fixed costs (FC) and an overall lower total cost (TC) of doing business, where:

VC + FC = TC

 

Whether in the United States, India, China, or some other geography, in most instances, companies that offshore and outsource achieve a greater return on invested capital; greater return on equity, and greater return on assets than companies that do not outsource.

 

READ:
Re-shoring electronics manufacturing hype v. volume production
Here is 90% of EMS program management success
Everything to know about EMS contract agreements
Top tech procurement, purchasing concerns for executives

EMS Providers: List your company in our directory

 

Manufacturing companies that use outsourcing services also reach break even (BE) sooner, where profits begin, against less revenues and lower volume. (Search provider in our EMS Resources Directory Marketplace)

Unfortunately, many OEMs do not engage a contract manufacturing partner early enough. OEM executives considering outsourcing should take a core competency litmus test consisting of three questions:

  1. If starting from scratch today, would we build capability inside?
  2. Are we so good others would pay us to do it?
  3. Is this an area of our business from which future leaders will come?

 

If an executive answers yes to one of these question, there’s a good chance he or she may not want to outsource — for strategic reasons. Otherwise, it usually makes sense to outsource and engage the contract manufacturer as soon as possible.

The earlier the contract manufacturer is brought into the decision-making process, the sooner he can provide insight into design-for-manufacturing (DFM) requirements based on his years of experience and incorporate this knowledge into the OEM’s product to help minimize costly OEM design iterations that may otherwise disrupt the OEM’s time-to-market (TTM) strategy and, ultimately, could result in loss of market share in some instances.

 

READ:
Ways OEMs can reduce costs in their EMS partnerships
Checklist for evaluating EMS providers

 

In spite of all of this, many executives are still reluctant to embrace contract manufacturing. One obstacle has been executives are often required to assign value to business units—including outsourced functions—according to the contribution to their company’s bottom line.

The difficulty of properly deciding how these functions affect the value of a company’s fixed assets can sometimes prevent original equipment manufacturing executives from acknowledging the comparative value of outsourcing manufacturing or design activities.

 

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  1. Scott Mauldin
    Posted at 5:17 am on March 20, 2013

    As always great points Mark. It is an interesting point that sometimes company’s may have some key metric that may actually work against an outsourcing model. Particularly in the scenario you mentioned when OEM’s don’t engage early in the process. ROIC might be one. In the long run a company is likely to have a higher ROIC when outsourcing, but in the short run, during the process of outsourcing they may likely see a dip in that measure. As a business leader I think one has to be constantly reviewing key metrics against the long term direction of the company. Long term vision will likely in-source innovation, and strategically outsource parts of the business that can have a high fixed cost.

  2. Mark Zetter

    Mark Zetter    
    Silicon Valley | North America
    Posted at 3:28 pm on March 20, 2013

    Thanks Scott. Your comments are spot on, yes It comes down to companies needing to become or remain competitive. And re-shoring, near-shoring, outsourcing can be sensitive words for some very good reasons.

    Every situation is different. Some feel keeping a company on home turf is the right thing to do. Or, they feel the company owes them or the community or, jobs are at stake… This thinking is necessary but can be myopic and lead to even greater problems beyond the company or larger, region if an entire business base on home turf is no longer competitive.

    In the past, I’ve released dozens of employees so that hundreds more could keep their jobs. This is the nature of business. Add to this, sometimes going against perceived ways or rules can be the right thing to do.

    Outsourcing is not for every company. And in many instances, keeping a company local is best.

  3. Bret Stauffer
    Posted at 7:04 pm on March 20, 2013

    I believe that it is EXTREMELY myopic to send work overseas. in the locals discussed, like China, there is ZERO protection of intellectual property. If you make it over there, the technology will be stolen, and what you’ll do is create a competitor who will put you out of business.

    There is also the concept of actually knowing how to make the product. If nobody in the US knows how to make it, soon you’ll be displaced, and will be out of business.

    It is very foolish to make ANYTHING in China. Aside from losing the intellectual property and know how, you are also by killing jobs in the US slowly killing your customers. It is myopic in extreme to make anything in China. You may shrink your overhead, but you are raising risks with losing IP and know how. Ultimately, those are the things that matter.

  4. Sharon Starr
    Posted at 10:58 am on March 22, 2013

    Clear terminology would really help clarify the messages on these topics. Off-shoring and outsourcing are not the same thing. Off-shoring refers to the placement of operations overseas in relation to the company’s home base. Outsourcing is about using outside contractors for operations that could be, or used to be, handled in-house.

    These relate to two very different strategic issues for companies: geographic strategy (off-shoring versus on-shoring) and sourcing strategy (in-house versus outsourcing). TCO is a critical measurement that must be considered in both types of decisions.

  5. Mark Zetter

    Mark Zetter    
    Silicon Valley | North America
    Posted at 10:13 am on March 24, 2013

    A company building a manufacturing facility overseas, with its name on the building, and hiring local workers to staff it can still be outsourcing in that scenario. Some definitions can be too rigid.

    Understanding the manufacturing infrastructure cost companies face (P,P&E) and how ‘outsourcing’ this infrastructure can translate to better bottom line results for companies is important for decision makers to make sound decisions. Depending on the industry/product, even when TCO is added in (e.g. freight, internal functions to support an outsourcing infrastructure, travel…) outsourcing can still remain a cheaper option than manufacturing in-house.

    https://www.ventureoutsource.com/contract-manufacturing/outsourcing-offshoring/when-outsourcing-is-not-the-answer

    https://www.ventureoutsource.com/contract-manufacturing/benchmarks-best-practices/electronics-assembly/outsourcing-cost-reductions-and-benefits

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