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How to Do On-Shoring Right

Avigilon is one of the fastest-growing electronics companies in North America.

The company makes surveillance cameras, some of which top the high-definition charts, and back that hardware up with a sophisticated software offering to manage file sizes and data. (Here is an interview we conducted during the Drive for Innovation at Avigilon's downtown Vancouver, B.C., headquarters).

So you'd think that that fast growth and profitability would be fueled by a savvy manufacturing strategy that leveraged offshore labor and machinery to keep overhead low.

You'd be wrong.

Turns out Avigilon's manufacturing is almost entirely on-shored, and its CEO, longtime manufacturing maven Alexander Fernandes, prides his company on that.

On-Shore Guru

Avigilon CEO Alex Fernandes says, 'There's  no cost advantage to going offshore.' He should know.

Avigilon CEO Alex Fernandes says, “There's
no cost advantage to going offshore.” He should know.

“There's no cost advantage to going offshore,” Fernandes says bluntly.

Here's his rationale for on-shoring manufacturing:

  • Better quality control
  • Quicker and lower-cost prototyping
  • Faster time-to-customer delivery
  • Nimbler retooling of assembly lines
  • Better control of IP (“How do you factor your BOM three years down the road when your design is stolen and being incorporated into other products?” he asks.)

Fernandes says the lure of offshoring is to access low-cost labor, but the rise of the machines — robotics in particular — is shrinking labor costs as a percentage of overall manufacturing costs. For Avigilon, labor is just 3 percent of its manufacturing costs, he said.

Fernandes notes that his company does source some subassemblies from China, specifically the clam-shell-like plastic enclosures for the company's surveillance cameras. Labor costs are a factor in that particular process.

Since the company's founding in 2004, it has relentlessly introduced and expanded robotics in its manufacturing assembly lines. Most of the robotics is used in the assembly of printed-circuit boards, and machine vision technology checks each board for soldering and placement defects, far more accurately and productively than the human eye.

But Fernandes is careful to note that his objective is not to eliminate humans entirely from the manufacturing process.

As the company ramped manufacturing, certain capacitors and connectors still were placed by hand.

Said Fernandes:

As our volumes went up, we added various pieces of equipment, including two stages of automated imaging inspection at mid line and at the end. We also added a selective soldering machine to replace hand placements of those odd components. It eliminated five jobs and does the work of 20 people. It's a $600,000 machine that pays for itself quickly. [But] those five people were redeployed to other jobs. We're more efficient. We can run a factory with 80 instead of 300.

Located just outside Vancouver proper, Avigilon's manufacturing line gets a weekly visit from the company's engineers who work with the folks on the line to optimize their processes and take back insights from the floor to the design shop.

Said Fernandes:

Product technology is an evolution. Things are never static. You'll find that certain components become obsolete or you'll find tolerance issues where engineers need to make design changes. When you outsource, things can be less stagnant. It's a closed loop.

9 comments on “How to Do On-Shoring Right

  1. Eldredge
    March 26, 2013

    Mr. Fernandes identified some excellent reasons for onshoring. In addiciton, I would add reduced shipping costs, and better control of raw material quality. The IP aspect is very significant – once that is lost, it is impossible to get back.

  2. hash.era
    March 26, 2013

    @Eldredge: Good one but does it have the option to ship to any part of the world currently ? Or is it limited to US ?

  3. Eldredge
    March 26, 2013

    @hash.era – good point – the shipping costs in the equation depend on where raw materials are located, where production occurs, and where the markplace is located. In the global marketplace, that becomes more complicated.

  4. Mr. Roques
    March 26, 2013

    So what are some of the bad reasons to onshore? More regulation? Higher taxes?

  5. Eldredge
    March 26, 2013

    @ Mr. Roques – good question. Beyond the usually touted inexpensive labor, one potential reason may include lack of available capacity, at least in the case of quick-turn manufacturing situations.

  6. HM
    March 27, 2013

    If the labor cost is only 3% of the manufacturing cost, then ofcourse it makes sense to do at on-shore.

  7. Brian Fuller
    March 28, 2013

    You've hit on two of the big ones. There's also the argument to be made that you should be manufacturing near your target markets for optimal feedback and distribution effiiencies.

     

  8. harpat949
    April 29, 2014

    One has to be careful interpreting “our labor cost is only 3%” The cost of acquiring and maintaining robots has to offset the labor cost saving. What if the robot cost is 10%. An offshore factory without robots may add “just for example 6% labor cost” and 0% robot cost.

    This is not very clear from the statement but certainly robots are not free. But if you are not in a business with cut throat competetion, there is lot of flexibility in labor costs.

    Automation has its risks. Some 40 years or so ago, a company started making computer modules in a fully automated factory, by the millions. There were practically no humans in the factory. A design glitch was discovered after a million modules came off the line. That required rework by humans. The company instantly folded. Robotics may have merit when you are making relatively high value products in moderate quantity or when there are no design glitches.

    We all see these 18 wheelers running around our highways, carrying goods rather efficiently. It makes sense when you pay a truck driver 40 doolars an hour or so. But now there is $300,000 overhead plus maintainence and insurance costs. Compare this to a Chinese guy carrying 50 computer boxes on a pedal powered rickshaw at perhaps 50 cents an hour. Of course, it maytake 10 or 20 of these guys to do the job. It will still cost less than 10% than with our truck drivers. Long distance moving they do by railroads. China may have changed since I saw that but the point is heavy machinery and automation often cannot compete with super cheap labor.

    Automation sometimes appears to dull the wits. I was visiting India, a few years ago and I saw something I could never forget. Miles of an old tar road were dug up manually by 3 or 4 skinny guys (who were probably paid 30 cents an hour). The only tools they had were long crowbars they inserted in a hole and used them as levers to pull up huge chunks (perhaps 2 ft chunks. Here in the USA, I often see a road worker with huge rig(which perhaps cost 100 grand or more) pounding the road for hours to dig a hole for something. 

  9. Hailey Lynne McKeefry
    April 29, 2014

    Thanks for weighing in on the conversation, Harpat949. We just published the last installment of a six part series on ON-shoring that may be of interest to you. Check it out:

     

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