At DEVELOP LLC, we believe there’s value in ‘Made in America’ beyond the prestige of domestically manufactured product, and the market is awakening to our way of thinking. A recent study by the Capgemini Research Institute discovered 72% of executives planning major investment in reshoring their supply lines, manufacturing, and production infrastructure. This shift in market wisdom contradicts decades of business strategy centered around outsourcing manufacturing options from low-cost international manufacturers. We want to shed some light on this dramatic polar change sweeping through the market regardless of size, demographic, and competition.
Outsourcing Pros and Cons
Cost is compelling. Whether you’re a multinational corporation or a small family-owned business, the savings on your margins have a direct effect on investment liquidity, profit, employee compensation, and general ability to compete. Shaving pennies off the cost per product adds up in a production run of thousands, hundreds of thousands of pounds of raw material, or intricate mass production run parts assemblies. Less requirements for regulations, lower average wages, and lower material costs are incontrovertibly recognized money saving edges with international outsourcing. These costs were low enough that American companies could justify the tolls and complications associated with doing business outside of the country:
Distance
The largest shares of the opportunity costs associated with international outsourcing come from distance. Managing the logistics of delivery across railroads, multiple borders, and air or sea travel, means working long lead times and additional shipping expenses into the business plan. Travel expenses to negotiate, find a reputable manufacturer, or inspect quality are all magnified.
Language
Managing production in another country requires a translator from the initial negotiation, through establishing business ties, and then managing the business. Not every company has multiple multilingual managers on staff, and hiring someone with language proficiency and the business acumen to represent your interests is not automatic. The travel, training, and compensation for this specialized employee chips away at the margins of outsourced companies.
Business Etiquette
Depending on where you’re planning to move your production, establishing deals and communication can be a minefield of customs, formalities, and protocols. Some even drill down into specifics of how to accept a business card. America has its own business traditions to be sure, but having a team capable of managing those cultural nuances can be the difference between costly communication mistakes.
MOQ and MOV
Particularly in China, Minimum Order Quantity and Minimum Order Value represent common business practices that determine the smallest quantity of a product and the minimum contract price a supplier or manufacturer will require per order or per contract. This usually means American companies must pay for high volume to get those low per product margins on their production line.
Intellectual Property Protection and Enforcement
The United States affords consistent legal recourse and enforcement for protecting Patents, Trademarks, Copyrights, and Trade Secrets. According to the Data Privacy Framework program managed by the Department of Commerce, American Intellectual Property protections are only automatically authentic to countries the United States has free trade agreements with. Intellectual property agreements need to be made individually with non-free trade countries or you risk exposing your hard-won brand to another country’s First to File.
Ethics
There’s no denying that maintaining ethical standards in the United States costs American manufacturers. America has safety rules and regulations, wage and benefit expectations, environmental standards, and laws that cost money for compliance. It’s hard to appreciate the benefits of these rules and standards when the bills come due. But there is a moral responsibility to ask the questions of whether human rights are respected, whether the lower wages and benefits are fair, or whether there is an impact on the local environment. Vetting your outsourced manufacturing for potential PR disasters must be a part of the outsourcing strategy.
Until recently, tackling those outsourcing risks was less complicated. Managing distance just means paying more attention to supply lines, shipping vendors, and logistics. Language and business etiquette can be handled by a skilled business interpreter. Ethical and Intellectual Property concerns can be mitigated by improving vetting of partners. And in some ways, MOQ and MOV can be considered an asset. Why wouldn’t you want to tightly bind your investment to a low cost, quality manufacturer?
Supply Chain Assault
The risks of outsourcing haven’t changed, but the profile of the risks has elevated. A series of global catastrophes, unpredictable market shifts, and political decisions didn’t just increase the cost of outsourcing, they strangled the ability for internationally invested companies to keep their promises and stay in business. It’s no surprise that in that same Capegemini study, a staggering 92% of industrial manufacturing executives identified supply chain bottlenecks as the number one concern for future growth:
The Trade War with China
A series of tariffs on Chinese goods started by the Trump Administration in 2018 escalated into a full ban on certain technology transactions in a recent Biden Administration executive order. Businesses with heavy investments in microchips, semiconductors, and software, have found themselves dealing with unexpected price increases, shortages, and a need to seek technology markets close by.
Pandemic Supply Chain
The world is still recovering from consequences of the Covid 19 pandemic. The pandemic strangled supply lines, closed ports, and left manufacturers unable to get their parts, products, and services out of quarantine.
War and Sanctions
Examples like the invasion of Ukraine have ripple effects on the global supply chain through, sanctions, border closings, and diplomatic initiatives.
Natural Disasters
The United States is not immune. As global warming continues, extreme weather events are having an unexpected impact on the supply chain. The Washington Military Department revealed that Hurricane Maria’s devastation of Puerto Rico disrupted global medical supplies since Puerto Rico was one of the world’s main manufacturers of Saline IV bags.
The Argument for Reshoring Your Manufacturing
Reshoring your manufacturing comes with benefits that dwarf the marginal cost savings of outsourcing.
Supply Chain Control
Partially or completely reshoring your manufacturing mitigates a lot of the risks associated with international supply chain logistics. If a global event prevents you from keeping your promises to customers, meeting your financial goals, or receiving the necessary materials for your production, those losses trivialize the marginal financial gains from outsourced production. Having domestic suppliers and manufacturers limits the opportunities for a disrupted supply chain.
Intellectual Property Protection
The more companies, voices, and boundaries you need to cross to manufacture your product, the less control you have over your intellectual property. Having a different company for every stage of the development (Schematic, Hardware Design, Machine Design, Integration, etc.) exposes your trade secrets to risk. A single source, domestic, vertically integrated company ensures that all your intellectual property remains under one roof.
Manufacturing Contracts
If your business is already working with an MOQ and MOV strategy overseas, you can take those same long-term manufacturing contracts and negotiate for mass production pricing.
Communication
The costliest mistakes in product development come from communication issues. Keeping travel, discourse, and collaboration domestic provides savings in rework and the expenses that come with manufacturing partnerships.
Made in America
An American company doing business with American manufacturers isn’t just about reshoring, it’s an investment in your home country. Investing in long-term partners and collaborators is an investment in the longevity of your products.
At DEVELOP LLC, we were founded on the merits of Made in America. When other integrators and manufacturers were reactively reshoring their domestic supply lines, engineering capital, and in house development teams, we were living in our single source guarantee for over a decade. Our vertically integrated team of engineers, manufacturing experts, and project managers work from the heart of Verona Wisconsin. While other integrators seek the lowest cost through contracting international labor, international supply lines, and building facilities in other countries, we’ve strived to cultivate American supply lines, support shop reshoring, and build an architecture capable of competing with internationally invested integrators. Tell us more about your project, schedule a virtual meeting, or call (262)-622-6104 to learn how you can reshore your manufacturing.
Authors:
Sean McKittrick and Matt Moseman