So you're looking around at domestic vendors. You get a few quotes back that seem pretty good. You do a cost analysis and crunch all the numbers and it turns out that you might be able to actually make this work. You might actually be able to use one of these US suppliers. Maybe the once far off prospect of having your product "Made in the USA" can actually become a reality. The question is, what is it worth to you? What is it worth getting your product made domestically as opposed to going overseas?
If you look at the numbers, on paper they seem to show that you'd be crazy to give up those type of margins all for the "luxury" of being able to say, "Made in the USA."
You see, after you have received all of your domestic quotes, you thought, "what the heck, let's see how much cheaper it really is going overseas as opposed to staying home." So you send out for a quote with an overseas manufacturer and they get back to you right away! The hunger is incredible. I mean, they seem like they really want this one. They tell you that they can do it all and that they have the best resources to make it happen. And the price? Well, that's where the real shocker comes in. 30% lower?! Are you kidding me? How can you not go with these guys? If you look at the numbers, on paper they seem to show that you'd be crazy to give up those type of margins all for the luxury of being able to say, "Made in the USA." However, there are some considerations that you have to take into account. In this article, we'll outline some of those considerations that might make you think a little more closely about some of the other costs associated with going elsewhere for your project.
1. The Risk
There are risks involved in every transaction regardless of where you buy. When purchasing overseas, however, the risk is inherently greater. Large companies who deal overseas on a regular basis have systems in place to help mitigate these risks, but smaller to midsize companies, who may not have the infrastructure in place to deal with these challenges, may be better off avoiding going overseas all together.
The biggest risk I see is not getting what you wanted and not being able to do anything about it! You go out of the country on a promise from the supplier to give you your product, on spec, and at a certain time. Who is going to keep them accountable for that delivery? I am personally aware of a customer that had his molds "misplaced" by his vendor in China. They are gone, missing, no longer there! That is quite an expense. Now, being thousands of miles away, with a culture and language barrier in his way, has no way of getting reimbursed for that loss. I mean, how do you recoup that loss? Do you sue them in court? I'm not sure how to hold someone like that accountable, are you?
"The biggest risk I see is not getting what you wanted and not being able to do anything about it!"
The bottom line is, how do you hold companies accountable when you're not really familiar with the legalities of everything? Larger companies may have legal teams in place who know these answers, but that doesn't mean that it is a safe path for everyone. If you are doing business internationally, it is in your best interest to think of the worst case scenario with your product, and study how to go about litigation should negligence arise; however, it might be worth avoiding the risk all together.
2. The Vetting
Typically before a buyer decides to do business with another organization a vetting process is implemented. Many supply chain managers want to know things about the company like: the quality standards and processes, project management system, frequency of project status reporting, reputability of the company, and so forth. Sure, technology has been a huge equalizer in the international market place, but technology can't always tell you whether or not the company that you are considering doing business with is a good one. In the states, you have the capability of easily visiting these sites. This is especially true if they are within driving distance.
Nearly every time before a customer decides to do business with us we have an on-site visit. This is where we get familiar with each other, and our capabilities and operations are made clear to the potential customer. Vetting in overseas dealings may be more of an undertaking than originally thought. This is why it might be better to stick closer to home if you're not quite geared up for a full scale international audit.
3. The Rising Costs
The recent figures suggest that labor costs in China are rising quickly. This is good news for many Chinese workers who are seeing themselves and their families now able to ascend out of poverty, but this could spell problems for the larger economy who has traditionally relied on their lower labor costs to give them the competitive edge in the international market place.
Some would argue that this sharp increase in labor costs is associated with something called the "Lewis Turning Point."This is essentially a predictable transition in economies of the developing world where the labor pool moving from rural farm areas to centers of industry begin to dry up. Industry in China has gained its competitive edge by offering low wages to a hugely poor labor force coming in from the farmlands. As the rural populations stop migrating into the cities for work, the available labor pool lessens, and the demand for workers causes wages to spike.
"Industry in China has gained its competitive edge by offering low wages to a hugely poor labor force coming in from the farmlands."
Some speculate that the "Lewis Turning Point"has been artificially created due to bad Chinese policy. In essence, the government does not allow farms to be privately owned, so this land must be farmed for revenue to be earned. These farmers cannot sell, rent, or expand into aggregate parcels for the purpose of higher productivity. This puts these workers into a position where they can either give up the land that they've farmed on for generations, or stay their and be poor. Many, because they cannot leave and keep the land at the same time, are choosing to stay.
Now that the dynamic is better understood, it is critical to understand for your company that prices are quickly equalizing and Chinese manufacturers are already trying to figure what they can do to maintain their competitive edge apart from cheap labor costs.
4. Intellectual Property
I'm sure that you have heard this one before, but it is still very relevant. Patent laws and the preservation of proprietary intellectual copyrights may not necessarily be a top priority to some overseas manufacturers. If many find that their is a market for your product that can be tapped into, then why not. Anyone can drive to LA and get knockoff brand names to everything from purses and watches, to electronics and smart phones. If this doesn't raise some concerns then I don't know what should. I mean, when you send over your part models and prints to get manufactured, what kind of assurances do you have that you are not going to see your exact product in some store 6 months down the road with a changed letter on your logo selling for half price?
For this reason, many medical device and defense manufacturers are still staying domestic for their manufacturing. Companies realize that certain technologies in the hands of foreign interests could mean big problems for their bottom lines and even security. This point goes back to the risk portion above. Maybe sending your product specifications overseas won't amount to any troubles, but can that be guaranteed? It all amounts to how much risk that your company is willing to spend time mitigating and eventually living with.
5. Long Term Customer Mentality
One of the driving forces in a free capitalistic economy is the duty of the business owner to maintain customer satisfaction. If enough customers feel that their supplier is not interested in their satisfaction, then that company will quickly become obsolete to others who fill that customer-service void. Traditionally, American businesses understand the necessity of customer satisfaction and repeat business. It is of the utmost importance for customer loyalty to be developed in order for companies to remain competitive.
It is debatable as to whether many Chinese manufacturers hold to this philosophy. It is hard to generalize the business practices of an entire country, but it is important to find those suppliers who are more interested in building long term business relationships, than delivering one-off parts and then moving on. Some manufacturers feel that the buyers are eventually going to go elsewhere at some point, so there really is no point in going above and beyond in order to maintain that long-term connection. As a plastic injection molder, our overseas mold suppliers have been thoroughly vetted, and understand that this is a long term business relationship that is built on trust and performance. These expectations have to be fully laid out before a deal is made.
"Some manufacturers feel that the buyers are eventually going to go elsewhere at some point, so there really is no point in going above and beyond in order to maintain that long-term connection."
6. Shipping Time and Cost
The time and cost for shipment of your goods back from overseas needs to be considered. How much more is this going to take away from my bottom line? Many times these costs are not factored in once the low quote has been received from the overseas supplier. You look at the price and think, "wow, what a great deal!" Only to discover later down the road that you forgot to factor in the huge cost of shipping, taxes, and customs.
This is not to mention the added time. And you know what they say, "time is money."
One more thing is to have a contingency plan should your product not be up to quality standards. Maybe something is bad with your products, or it's not the color you wanted, or the material is not correct, or everything is out of print. These are real issues that can and do happen. If this happens with a domestic company, typically a resolution can be reached fairly quickly, but with an overseas company, you could be looking at months or years, or maybe never before you see correct parts come across your desk. This is why geographic accessibility and thorough vetting are critical to mitigating potential product and shipping problems.
"It is just important to realize that the risk is greater for things to go wrong. Any time you trade peace of mind for lower costs, you re taking on risk."
Hopefully you're not totally freaked out about shifting business overseas because for as many horror stories, there are also success stories. Of course it isn't all bad, and many times you can make a killing by manufacturing overseas. It is just important to realize that the risk is greater for things to go wrong. Any time you trade peace of mind for lower costs, you are taking on risk. If you are a large company with mechanisms and departments solely devoted to managing this risk, then it might be worth it. Some large companies just have their own manufacturing centers in these low cost countries. This is another option to control risk, but in my opinion (and for what it's worth), for those without the resources necessary for fully vetting and managing an overseas vendor, it might be best to play it safe and deal domestically. With all of the added costs associated with dealing overseas, you might be surprised at how close the two costs come to one another.
For more information on plastic injection molding please visit us at www.accentplastics.com
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