Tuesday, October 23, 2007

Cycle time is undervalued in offshore manufacturing decisions

Raul Pupo wrote an article over at EMSNow regarding the hidden costs of offshore outsourcing. He brings up many valid points: the increasing cost of logistics, increased cycle times, cultural barriers, and increasing wages in so-called low-cost geographies.

The item that appears to be least understood by OEMs, from my perspective, are increased cycle times. Unfortunately, current financial practices require only that inventories are measured while in the legal possession of the OEM. So, each company is optimizing around their local process. If OEMs considered throughput and turns for the entire supply chain, if there was a true partnership between these companies to optimize the entire supply chain, I believe the geographical solutions would be vastly different.

Ironically, many of these same companies tout their operations as being "Lean". The increased cycle time associated with offshore manufacturing is the exact opposite of the Lean mantra. Unfortunately, the elements affecting decision-making go much deeper than the dollars-and-cents; there are cultural and compensation issues in play as well.

As long as OEM supply chain, finance, and program managers receive incentives to provide year-over-year labor savings, they will chase wages around the globe. OEMs chase low wages from the US, where they may do prototyping, to Mexico, to China, to India, to Russia. Each year, the product moves to a cheaper country, and the OEM manager receives a 5% labor reduction for each of the five years, but his supply chain and cycle time grows. However, the manager has achieved his objective: he reduced labor costs, and earned his bonus.

Unless enlighted managers "dollar-ize" the effect of the integrated cycle time - and there are hard- and soft-dollar impacts associated with going from one week to four weeks, or one month to three months - manufacturing will continue to be performed where wages are lowest. It is the challenge of the regional contract manufacturer to educate and inform the customer, and develop financial models to highlight the true bottom-line impact of offshore manufacturing. Global contract manufacturers provide geographic migration plans as a standard piece of their proposals. Regional contract manufacturers must not be afraid to aggressively present these models and make the case for domestic manufacturing.

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