Why You Should Consider Offshore Manufacturing
August 29, 2017
Offshoring manufacturing is an option many companies consider in order to reduce operating expenses, while maintaining a high-quality end product. If you are considering manufacturing offshore, you may be wondering what offshoring is, where the best place is for offshore manufacturing, and the pros of offshoring. Below is a comprehensive guide to why you should consider offshore manufacturing and the tremendous offshoring benefits that you can garner if you choose to move manufacturing operations to another country.
An Introduction to Offshoring
If you are considering offshoring manufacturing operations, the first element to understand is what exactly offshoring is and why it is a beneficial choice for businesses. Offshoring is when production operations are performed in another country. In recent years, offshoring manufacturing operations have sometimes been perceived negatively as some believe this practice moves jobs to another country, thereby increasing unemployment in the home country. However, it can be extremely beneficial for companies and can ultimately improve the economies of both countries. Offshoring reduces the risk for companies, which allows businesses to be able to provide more comprehensive and beneficial support to their clients when the need arises.
Offshoring allows companies to maintain complete control over the operation and production of the business. Offshoring creates new revenues by fostering a demand in destination countries for products, particularly high-tech items. In addition to this, offshoring manufacturing operations allows businesses to capitalize on the lower hourly wage rates of skilled workers, which results in a significant reduction in overhead costs, while maintaining the quality of the product. In Mexico, for example, the hourly labor rate is only a fraction of the minimum wage in the United States. For a company to offshore manufacturing to Mexico, they will accumulate a significant cost savings from just labor alone. In addition to saving money on manufacturing costs, offshoring manufacturing strengthens the foundation of the company and often creates more skilled employment opportunities in administrative and operational roles within the United States.
One of the most common misconceptions when companies begin to research offshoring manufacturing operations is the difference between offshoring and outsourcing. Before you can decide where to offshore manufacture, it is important to understand the vital differences between these two terms. Outsourcing is another effective means by which a company can reduce overhead costs and increase profits, but the method and practices are distinctly different than offshoring. Offshoring moves production operations to another country but the company remains in complete control of all aspects of the operation. Outsourcing occurs when a business selects a third-party vendor to control some or all aspects of the operation on a contract basis.
Outsourcing allows companies to strictly focus on sales and marketing, while entrusting a specialized third-party firm to take control over production, quality control and all the administration. Some companies use a hybrid model by outsourcing only part of the operation but remaining in control of certain aspects. For instance, a business may outsource their recruiting operations to a third-party vendor so that they can focus on producing the highest quality, most innovative product possible without having to worry about finding qualified personnel to backfill vacancies. In other cases, companies may choose to outsource 100% of their administration, including Human Resources, Accounting, Import/Export and Environmental Health & Safety, as well as government compliance, so they can focus on production and quality control. This is a quite common structure in Mexico under the IMMEX (maquiladora) program, for example.
The question then becomes, does outsourcing save money? The simple answer is yes. Outsourcing is often a successful method by which a business can accomplish the same task for less money, which results in cost savings. It is important to keep in mind that though outsourcing carries a cost savings, it does not mean that the quality of the final product will diminish in any way. Outsourcing can increase efficiency by entrusting business and or manufacturing processes to third-party vendors that specialize in a specific area of the operations. Outsourcing allows business to focus on the core areas of their business and improve their brand by freeing up time, energy and resources.
Which Country is Best for Offshoring Manufacturing Operations?
As you begin considering offshore manufacturing as an option to enhance your business model and increase profits, the first step you must take is determining the best country for you to do offshore manufacturing. In the past, China was the stronghold of offshored manufacturing operations but in recent years, Mexico has gained a significant foothold due to the passage of the North American Free Trade Agreement and the rise of Maquiladoras.
Both countries possess a high-volume environment with a much lower production cost. For any business, the economics of making the move to offshored manufacturing operations must be efficient in order to reduce potential risk and increase profit margins. Since China and Mexico are the two most widely utilized locations for offshoring manufacturing operations, it is important to compare their environments and economic conditions in order to choose the right country for your business and company structure.
One of the most important factors to consider when analyzing manufacturing costs is the wage rate of workers. In China, the average hourly wage was significantly lower than Mexico for many years. Recently, however, hourly wages in Mexico have fallen considerably and are now lower than China’s hourly wages. When compared to the United States dollar, hourly wages in Mexico are forty percent lower than in China. This reversal is due in part to the low birth rate in China and a growing demand for factory workers as the current population ages. In addition to this, Mexico’s wages are much steadier, which assists companies in accurately forecasting operating expenses.
One concern businesses may have regarding offshoring manufacturing operations is the process by which they will be able to manage and oversee operations. The biggest determinant in the level of involvement available is the geographic location of the country in which manufacturing operations are being offshored. For United States based companies outsourcing production, Mexico is a much better option because of its close proximity.
Mexico operates in the same time zones as the United States and can be reached with a quick flight (or even a short drive). Additionally, flights to Mexico are relatively inexpensive and can be arranged last minute. This makes scheduling a technical, customer, or training visit much less expensive and more logistically simple.
In contrast to this, China has a very large time difference from the United States and requires a significant travel time to reach it. Because of this, any visits to oversee production or monitor operations require extensive planning, expense and time. For many companies, this aspect makes Mexico a much more attractive manufacturing offshore location. In addition to considering the ease of entry and management, it is important to consider the potential shipping costs and considerations in each country. Shipping items from China often takes several weeks by boat and within two days by air. However, shipping items from China by air can be quite costly and is generally not the best option economically. Additionally, duties can sometimes be significant depending upon the governing tariff code.
On the other hand, shipping from Mexico often takes only one day, does not require ocean freight and is much cheaper to ship. When shipping items from Mexico, especially under NAFTA, there is generally little to no duties required, making it more cost effective.
The Benefits of Offshoring Manufacturing Operations
Offshoring your manufacturing operations may seem like a daunting endeavor at first but choosing to move manufacturing operations offshore carries with it several vital benefits that can be transformative for your business. Running any business requires consideration to be given to the best options available and a constant mindfulness of changes to the market and economic environment. The passage of the North American Free Trade Agreement and the rise of Maquiladoras have given way to a new era of manufacturing and an innovative approach to running a business. Below are a few of the most common benefits of offshoring manufacturing operations to Mexico.
Offshore Manufacturing & Cost Savings
When analyzing your business model and attempting to find the most efficient means by which to increase your cost savings and profit, offshoring is a huge boost in the right direction. Manufacturing in Mexico offers a significant cost savings to businesses. The skilled labor force in Mexico maintains the quality of the product but at labor rates that are often 75% less than the United States.
While labor is the primary cost savings in Mexico, there could be other areas where companies can save, such as real estate, freight and raw materials.
Specialized & Skilled: Offshore Manufacturing & the Available Workforce
The availability and skill-set of the workforce is a tremendous consideration for businesses when selecting a country to offshore manufacturing operations. In Mexico, the demographics of the community and the workforce make it an ideal choice for companies looking to offshore manufacturing operations. The median age of the population in Mexico is mid-twenties, making it roughly a decade younger than the equivalent workforce in the United States. The available labor force in Mexico is also extremely vast at approximately forty-seven million in the total labor force.
Though age and availability of the labor force are important factors to consider, the single most important factor businesses must consider is whether or not the workforce is capable of maintaining the quality of the product. Fortunately, as the Maquiladora program has expanded and become increasingly utilized for sophisticated manufacturing, the workforce in Mexico has become increasingly skilled and qualified. When companies offshore their manufacturing operations to Mexico, they not only experience a tremendous cost savings, but there is typically not a decline in the quality of the product because of the skilled, available workforce in Mexico.
Proximity
Offshoring manufacturing can be an extremely beneficial financial choice, particularly when the country in which you offshore manufacturing is close by. For United States based companies in particular, offshoring manufacturing in Mexico is an extremely favorable choice due to the close proximity of Mexico to the United States. This easily traveled distance, and the ease of entry to Mexico, make it simple to exercise oversight over the manufacturing operations, attend in-person meetings with management and personnel and establish a strong connection throughout the company.
In addition to these management benefits, the close proximity of Mexico to the United States provides a sharp decrease in shipping costs and lead times. While shipping from China may take weeks and cost a significant amount of money, shipping from Mexico is often a much cheaper and faster option. This means businesses can deploy just-in-time production strategies and distribute to their customers much faster, which cannot be duplicated in Asia.
Offshoring Reduced Energy Costs
Mexico possesses an abundance of natural gas, which provides it with a significant advantage when analyzing energy costs. Mexico has energy costs that are comparable to those in the United States, which are quite low when considered on an international scale. When compared to industrial natural gas costs in China, Mexico is significantly cheaper, which leads to a lower production cost and tremendous additional cost savings over time.
Manufacturing Economies
For businesses operating their manufacturing operations within Mexico, there is access to a large pool of customers within different manufacturing industries. Many businesses have made the move to offshore their manufacturing, which has led to the creation of manufacturing economies within Mexico and a diversified market and business landscape. Since the passage of the North American Free Trade Agreement, the economy within Mexico has diversified due to the influx of new business. This economic stability and environment allows businesses to offshore manufacturing operations, while effectively balancing potential risk.
Increase in Skilled Labor Positions in the United States
For United States based companies looking to offshore manufacturing operations to another country, one of the best benefits to making this business decision is that it will create additional need for a skilled workforce in the United States. With manufacturing operations being run out of a different country, businesses must invest in additional skilled personnel in administrative and professional roles to keep all processes running smoothly and at optimal efficiency.