Counting the Hidden Costs of Off Shoring

Hidden costs remain the biggest and scariest issue with having product manufactured offshore. These unseen costs suck out your profit margins.

Virtually every organization, large or small, underestimates these costs. Most often purchasing or marketing never factors these elements into the pricing model. Finance or cost accounting is (inadvertently)  left to flow the hidden costs into margin erosion…often never even recognizing what has happened. Nobody works at analyzing these expenses up front.

I will try.

Accountability. Every manufacturing operation has (or should have) a person or group responsible for quality verification. This is a process baked into the cost structure and when performed in house provides instant accountability (feedback) to the manufacturing group.

When managing products offshore often this accountability/feedback process is overlooked. No company time and effort is applied to commenting and correcting every little error on the products received.  If your Asia vendor does not hear about a problem in a timely fashion, then life goes on and your product continues to arrive slightly substandard.

If on the other hand, you watch them like a hawk, and hold them accountable for perfection, then product runs smoothly. So, incur the cost of personnel to monitor incoming product, or suffer the cost of yield loss. Either way, it is a cost that is most often overlooked.

Documentation errors.   Holy trade gap! This is a big hidden cost. By far the most frequent cause of manufacturing errors can be traced to mis-understood or out of date documentation. Again it comes down to either spend the money to have someone bird dog the documentation, and verify your vendors' understanding of the documentation, or spend even more money fixing, reworking, or re-building your product. Explain this to cost accounting.  It takes a team dedicated to and experienced with these issues, to prevent them from exploding on you.  Either way it impacts your margins. 

Communication with Asia. I have managed product builds in Japan, Taiwan, Singapore, Philippines, and China. The communication issues are all the same, differing in degree only. Hidden costs remain in several areas of communication.

  1. Translation errors. “Yes” does not always mean “I agree.” It could also just as easily mean “I am a very polite person and I do not understand what you want exactly, but I do not want to embarrass myself.” The poor grammar and incorrect wording often present in cross-cultural transactions can also result in added costs. For example, positives turned to negatives due to incorrect grammar, or poor understanding of the correct definition of a critical word. All this will slow your schedule by days, consume expensive employees' time, or worst case result in manufacturing errors.
  2. Time zone delays. Asia is 15 hours or so ahead of the United States.  Their work day is our evening and late night.  Unless you intend to stay up at night exchanging emails with your operatives, then costly delays happen when one piece of critical information misses either your time cut off or theirs.  One piece of late information can translate into manufacturing errors and/or time delays that impact schedules and customer delivery.
  3. Effort.   It just takes longer, and is a greater effort, to communicate with someone in another time zone and in a different language. Time and effort is money. However, every organization has to weigh the costs for themselves.

I know I have missed some of the hidden costs, so please let us know what's on your list in the comments section below. Also feel free to tweet your ideas to #ElectronicsOffshoringIssues. 

1 comment on “Counting the Hidden Costs of Off Shoring

  1. CarlS
    May 5, 2016

    Great insight.  Another large hidden cost is the pipeline fill.  Theis greatly affects flexibility with changes to product.  If it is a critical change, more expensive, expedited transportation may be necessary to cover until the regular pipeline is refilled.  This also may cause rework costs associate with modifying the product already in the pipeline.

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