The Hidden Costs of Offshore Manufacturing: A Cautionary Tale
Guest blog from Applied Interactive
A Seemingly Profitable Turn to Offshore Manufacturing
Recently, an international medical laser equipment OEM with distribution to over 80 countries worldwide needed to source a fairly simple component for a new device. The specs were manageable—an aluminum housing with multiple cavities milled through the center. They wanted to find a manufacturer who could meet their deadlines and specifications. Initially, they planned to collaborate with a US manufacturer, who was more than willing to take the job. The manufacturer offered the correct grade of aluminum, a solid record of accuracy, and terrific turnaround time. The only issue: cost. The US manufacturer was able to do the work, but at a price the medical laser equipment company thought they could beat. The customer decided to explore their options overseas. They had previously offshored other components to China and, in those instances, ended up cutting costs as predicted. They hoped to see similar savings with this project, and found a Chinese manufacturer willing to do the job at a fraction of the US price. Once an agreement was reached, the Chinese manufacturer sent over a sample product, which precisely matched the specs and manufacturing requirements. The customer approved the sample, giving the green light for the full 1,000-piece order. Why Offshoring Became an Issue When the Chinese manufacturers began producing the full order, they found they could further cut costs by casting the aluminum housing rather than milling solid blocks. It is common for offshore manufacturers to switch out materials in this fashion; typically any change that will reduce cost is considered worthwhile—especially if the manufacturer is able to avoid disclosing those cost reductions to the customer. Because this type of procedural change was routine for the Chinese manufacturer, they did not consider it necessary to inform the customer before completing the job. They produced the full order as requested and shipped the parts back to the United States. When the customer inspected the parts, everything appeared to be in good order—the offshore company had stayed on schedule, measured the part correctly, and used the agreed-upon grade of aluminum. However, they soon discovered a fatal flaw. The aluminum casting—despite being a cheaper, same-grade alternative—was far more porous than the solid block of aluminum. The “loosely knit” aluminum casting was an issue for this specific product because it required an airtight seal; this design feature was not considered when the manufacturer implemented their change in process without consulting the customer. A vacuum could not be achieved in the porous cast aluminum, rendering the housings useless. Unfortunately, this discovery was made after the majority of the batch had been introduced to the assembly, so disassembling and reworking the operation required costly labor. Management scrambled to find a solution. Why Did Things Go Wrong? The most serious issue was miscommunication. The offshore manufacturer modified their process without informing the medical laser equipment company. The manufacturer had a skewed sense of what was worth communicating to their client. Their cost-cutting tunnel vision prevented them from seeing the consequences of their decision. The medical laser equipment company reported having other communication issues with the offshore manufacturer (even before aluminum castings dilemma). The two companies struggled to overcome an enormous language gap. For example, one partner at the Chinese company spoke decent English, while the other—who was responsible for all shop operations—spoke no English at all. It was crucial that both partners knew the details of the project, but the language barrier challenged this process. China and the United States also follow different methods of measuring aluminum grades, resulting in a complicated unit conversion process for medical devices and other foreign-made components. Offshoring opens up space for errors in conversion as well as human errors—both of which can be detrimental for detailed projects like this one. How Working with a US Manufacturer Can (and Did) Solve the Issue If the medical laser equipment company went to a US manufacturer, they would have been able to avoid these issues. The two companies would have worked with the same language and the same grades for aluminum. Most importantly, in the context of this project, is that both organizations would have had similar demands for quality and the transparency of their communication. The products sent back to the medical device equipment company were unusable. To get the job done right, they turned again to US manufacturing, asking the Uxbridge, MA–based Lampin Corporation to provide what the offshore manufacturer could not. Lampin made sure to keep the customer informed of every step of the process. They took the time to evaluate the minute details of the project and find ways to save on production costs without sacrificing quality. Lampin was able to produce expertly crafted, American-made products for the client within the desired timeline. While offshoring the job seemed to be a good way to cut costs, it took just as much time and money to fix their errors. Using a US manufacturer like Lampin helped prevent unnecessary expenses and headaches for everyone. The Benefits of Offshoring Aren’t as Good as They Used to Be Over the last 30 years, OEMs have often turned to offshoring in search of cheaper manufacturing costs. However, over the past year, companies that send jobs to China have seen lower ROI than ever before. There are two reasons for this. First, Chinese wages have risen dramatically, which significantly reduces the savings on labor costs. Secondly, US manufacturers like Lampin have become more efficient at what they do—their processes are streamlined and efficient, they use state-of-the-art equipment, provide value-engineering services to evaluate a job for preventable problems and wasteful processes, and keep communication open from design phases through production and shipping. Lampin and other US manufacturers reduce margins for error, which means savings for OEMs. Small batches of complex parts are also better handled domestically due to the difficulty of manufacturing these parts correctly combined with rising international shipping costs. If you need critical component manufacturing and want seamless, American-made products that are Beyond Precision, contact Lampin to experience the benefits of reshoring today. ----------------------------------------------------------------------------------------------------------------------------The Reshoring Initiative will soon publish a new set of resources: Library of Related Categories. Visit the new pages to find out more about all of the Risks of Offshoring.