Determining Where To Manufacture
November 7, 2017
Determining Where to Manufacture – A Guide
As a business, one of the most crucial decisions to make is where to locate manufacturing operations, as this can have a tremendous impact on the profitability of the enterprise. In recent years, there has been a seismic shift in how companies are doing business as more and more companies are choosing to offshore their manufacturing operations to other countries.
However, in order to make a decision about which geographical location is best to set up manufacturing operations, it is important for businesses to look at a number of factors that contribute to the decision, such as the wage rate of workers, shipping time and cost, the ability to manage manufacturing operations, and intellectual property considerations. There are many different options for where to manufacture goods, and to help you determine the best location for your business we have put together a comprehensive guide.
Domestic Manufacturing vs. Offshoring Manufacturing Operations
The first step for a business to take to find the right location to manufacture their goods is to decide whether or not they would like to manufacture their goods domestically or offshore their manufacturing operations to a different country. This can also sometimes be referred to as choosing to manufacture nearshore versus offshore.
While both options have their respective benefits and drawbacks, in recent years many more businesses are choosing to move their manufacturing operations to a different country due to the number of tremendous benefits it offers. To make an educated decision about which option is right for your company, it is necessary to analyze the pros and cons of both domestic manufacturing and offshoring manufacturing operations.
Domestic Manufacturing
Domestic manufacturing refers to businesses that choose to manufacture their goods in the same country in which their business is based out of. Looking at businesses specifically within the United States, this can prevent any type of language barrier from impeding the ease of manufacturing. It can also mean that shipping times are faster, allowing the product to get to the customer sooner and thereby improving the customer experience.
In addition, domestic manufacturing allows businesses to have complete oversight over their manufacturing operations and easily conduct on-site visits and inspections. Due to the geographical consolidation that often distinguishes domestic manufacturing, it is easy to have meetings regarding the manufacturing operations. In addition to these benefits, domestic manufacturing also allows businesses to experience higher intellectual property right protections due to the stricter requirements in the United States. Though domestic manufacturing does have a number of beneficial aspects, there are also several key drawbacks, as well.
Profitability is essential for a business to continue to grow and thrive in the competitive market landscape and one of the single largest determinants of a company’s profitability is the hourly wage rate of its workers. This overhead cost can significantly change how profitable the company is, and when the hourly wage rate of workers is high in relation to how much product is being sold, a business can begin to experience financial hardship as a result.
While domestic manufacturing within the United States does offer some key benefits, one of the biggest disadvantages of domestic manufacturing is that there is significantly higher manufacturing cost. In addition to this, as more and more companies choose to offshore their manufacturing operations to other countries, there is a much more limited supply chain. To stay competitive in the modern market, many companies must adapt to the times and offshore their manufacturing operations to a different country to remain profitable.
Offshoring Manufacturing
Offshoring refers to when a company chooses to move their production operations to be performed in a different country. Offshoring is a beneficial practice for both the home country and the country in which the manufacturing operations are based. Offshoring is capable of reducing risk for companies, thereby allowing businesses to be able to provide better and more comprehensive support to their clients.
This type of manufacturing creates new revenues for businesses by growing the demand in destination countries for products. One of the most significant benefits of offshoring manufacturing operations is the significant cost savings that it comes with. While manufacturing in the United States can endanger and inflate a business’ manufacturing budget, offshoring to a different country allows companies to capitalize on countries with significantly lower manufacturing costs and hourly wage rates for workers. This reason alone is why many companies consider offshore manufacturing.
The cost savings afforded by the reduction in employee overhead costs and overall manufacturing costs can tremendously improve the bottom line of a business. In addition to this, countries such as Mexico have an abundant and skilled workforce that is capable of ensuring the quality of the product is not compromised due to the switch in manufacturing location. Companies are beginning to realize that they do not need to pay a premium in overhead costs to produce a high-quality product, but can achieve the product they desire in a much more financially conscious manner by offshoring their manufacturing operations to a different country.
Offshoring manufacturing operations not only stimulates the economy in the country in which product operations are based, it also creates jobs in the United States for administrative and operational functions. However, there are a handful of disadvantages to offshoring manufacturing operations that are important to consider as well.
Offshoring manufacturing operations to a different country can sometimes come with several challenges. One of the most common difficulties businesses encounter is the presence of a language barrier, which may make it more arduous to communicate. However, this can be easily resolved by enlisting the help of an individual who speaks the dominant language of the country in which manufacturing operations are offshored as well as the home country.
In addition to the challenges of a language barrier, offshoring manufacturing operations may incur higher costs due to shipping and freight costs, as well as a lengthier timeline for shipping. It is important to keep in mind that this can vary significantly based on the country chosen to offshore production operations.
Offshoring manufacturing operations also means that conducting meetings will require more significant planning and coordination, particularly if manufacturing operations are offshored overseas. The final factor to consider is that when offshoring manufacturing operations businesses may have less intellectual property protections depending on the country in which they are manufacturing.
Though there are a number of advantages and disadvantages to both domestic manufacturing and offshoring manufacturing, many companies are moving towards offshoring manufacturing operations primarily because of its significant cost savings. For businesses that want to offshore their manufacturing operations, the next decision that needs to be made is which country they would like to offshore their production to. The two most commonly chosen countries are Mexico and China. A comparison of these two respective options will help companies to determine which country yields the greatest benefit to their business.
Offshoring Manufacturing Operations in Mexico vs. China
In prior years, it is was much more common for companies to choose to offshore their manufacturing operations to China, but recently many more companies have been looking to Mexico as the ideal location to base their manufacturing operations out of.
This is due to a number of different factors that contribute to determining which country is the best choice for offshoring manufacturing operations. Below is a comparison between the respective benefits and disadvantages of manufacturing in Mexico vs China.
- Shipping Time and Cost: One factor that companies must consider is how long it will take for their product to reach their customers, and how much it will cost them to get it there. Shipping items from China can often take several weeks when they are transported by boat, but can take as little as two days when carried by plane. While shipping can be sped up when utilizing air travel, it comes with a hefty price tag and is often unrealistic for regular use due to its high cost. In addition, depending on the governing tariff code, businesses can be responsible for paying significant duties when shipping from China. Conversely, shipping from Mexico to the Unites States often only takes one day, which eliminates the need for ocean freight and cuts down significantly on shipping cost. In addition, shipping product from Mexico often requires little to no duties, which is another cost savings for businesses.
- Hourly Wage Rate of Workers: Perhaps the most important factor for companies to consider when analyzing manufacturing costs is the hourly wage rate of workers. Part of the reason for companies moving their manufacturing operations to China in past years was the low hourly wage rate of workers. For many years, the hourly wage rate in China was significantly less than in Mexico. However, in recent years the hourly wage rate in China has risen quickly and in many cases in now higher than in Mexico. This reversal is due to a number of different factors, including the increasing demand for factory workers in China as the current population ages, as well as the low birth rate in China. Mexico also provides steadier wages, which is beneficial for budgeting and forecasting financial outcomes.
- Ability to Provide Oversight to Manufacturing Operations: When offshoring manufacturing operations to a different country, it is vital for companies to analyze the ease with which they will be able to oversee manufacturing operations. The geographic relation to the home country is the biggest determinant. For United States based companies, Mexico is just a short plane ride away and is relatively inexpensive to visit. Conversely, visiting China requires significantly more planning, cost, and time. China also has a large time difference from the United States. For companies that want to be able to monitor and manage operations easily, Mexico is a much more desirable option.
- Intellectual Property Rights: Prior to selecting an offshoring location, companies must research the intellectual property rights. Many companies have serious concerns regarding the intellectual property protections in place in China because roughly forty percent of the online products in China are counterfeit. It is important to note, however, that in recent years strides have been made to improve intellectual property rights for companies in China. Comparatively, in Mexico the North American Free Trade Agreement (NAFTA) protects certain intellectual property rights for businesses that have operations there. Mexico also displayed its commitment to intellectual property protection by becoming a member of the Trans-Pacific Partnership.
With these factors in mind, it is clear why many companies have begun offshoring their manufacturing operations in Mexico. Offshoring manufacturing operations to Mexico gives businesses the ability to oversee operations easily while also providing significant cost savings and a high-quality product.
Mexico gives companies access to a steady workforce of increasingly skilled workers and also offers numerous hubs for manufacturing to choose from within Mexico. It is important to keep in mind that choosing to manufacture products in a different country requires businesses to navigate various international laws and compliance processes. To do this, many companies look for an outside company to help them navigate the process of offshoring manufacturing operations to Mexico.
How NAPS Can Help
For companies that would like to offshore their manufacturing operations to Mexico but are concerned about the process, it is best to enlist the help of a company that is experienced in helping companies successfully offshore their manufacturing operations in Mexico. The North American Production Sharing, Inc. (NAPS) operating model helps companies to set up and manage manufacturing operations in Mexico by providing compliance management and administrative services.
This allows companies to focus on operations and product development without having to worry if they are compliant with international laws and regulations. NAPS provides companies with early stage support, including financial modeling and site selection, as well as the recruitment, screening, hiring, and supervision of personnel, accounting functions, compliance with customs, and compliance with all applicable environmental laws and regulations. NAPS takes care of navigating the complexities of Mexico and international business laws to maintain compliance, which gives businesses the opportunity to focus on production, quality control, and innovation.