Manufacturing – Onshore or Offshore?

Business processes word cloudNot so long ago manufacturers in the developed world were off shoring, that is shifting production of their goods to places like India and China.

This was largely because labour and factory costs were so much cheaper there. But as the Chinese economy has matured Chinese labour costs have increased and this cost advantage is eroding.

The main considerations that influence the decision about where to base production are primarily costs, capacity, quality and delivery time with viable quantities being a key part of the cost factor.

Costs include labour, factory, energy, materials and equipment. Of these there are unlikely to be significant differences in the costs of materials and equipment wherever the goods are made.  Materials and equipment supply operates in a global market and therefore location is not going to affect costs.

While there is still likely to be a differential between labour and factory costs in different countries the labour portion in particular is gradually eroding and there is another factor to consider. This is the availability of the relevant skills in the workforce at home and elsewhere.

Germany and France, for example, have preserved their manufacturing bases, while the UK has not, making it more difficult for UK manufacturers to find enough skilled workers in some sectors to be able to manufacture goods onshore. Essentially this relates to the quality consideration.

What other factors affect manufacturing location?

Viable quantities, capacity and delivery time are likely to be significant issues in considering the costs and location of manufacturing.

The questions to ask are whether the offshore manufacturer is able to produce enough of the goods and how long it will take to both complete the manufacture and then to get the goods to where they are needed.

While the offshore manufacturer may have the capacity to produce bulk orders to the stated deadlines, and the length of time it takes to transport them and detailed stages of the supply chain may be significant in extending the delivery times and may adversely affect profit margins.

In this context there has been some reversal to the trend for off shoring, for example in the car industry, and moving to a model of smaller assembly units located closer to their eventual points of sale.

However, it is the interplay between all the above components that will eventually determine the best business model to use.

It may turn out to be more cost effective for a business to focus solely on the design and marketing of its products and to outsource the actual manufacture elsewhere, or focus on becoming a high quality factory knowing there is little competition and having a clear route to market.

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)

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