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Identifying the Total Cost of Outsourcing

If all electronics OEMs had the same supply chain needs, my job would be fairly simple: Map out a standard process and take a nice long lunch. But, there is no “one-size-fits-all” strategy for managing the global electronics supply chain.

One customer may barely break $1 million in sales in a year, while another is topping $10 billion. A customer may source, manufacture, and market its product within a single defined region, while another may design in one region, source and produce in another, and market in several separate locations across the globe. Supporting each of these different customers clearly requires very specific and distinct methods.

Given this reality, I must say that I am somewhat surprised by the seemingly ubiquitous pursuit of offshore manufacturing, particularly in low-cost regions like China. From the very beginning, {complink 577|Avnet Inc.} has counseled our customers to carefully consider their needs and the pros and cons of offshoring. As tremendous an opportunity as this may be for some — those with high volume, predictable manufacturing requirements — to lower production cost and gain access to indigenous markets, it can be an equally expensive move for others.

There are significant costs associated with migrating a supply chain to a foreign region. Unless the intent is to sell your product in the manufacturing region, the greatest expense is logistics. Shipping finished product from Asia to intended markets in the United States, Canada, or Latin America can be very costly. You must consider the impact of rising fuel costs, complicated import/export procedures, and, of course, time — depending on the shipping lanes, it can take weeks to move product. For some, the labor cost savings may still far outweigh the additional expense, but unless you understand these costs in detail, the competitive advantage can be somewhat elusive.

I have heard a number of OEMs express their disappointment with this strategy, yet many are reluctant to consider alternatives. The prospect of another major supply chain movement so soon after settling in overseas is daunting, to say the least. These OEMs should consider, however, that there is a big difference between moving a supply chain to a region that is 6,000 miles from headquarters and to a region that is a short flight away.

For example, Mexico has been talked about a lot in the past as an increasingly attractive low-cost manufacturing option for North American OEMs. The relative proximity, the low-cost labor, and the quality of providers in the region are definitely worth considering. I know that for many, the topic of Mexico automatically conjures images of cartel violence. There is no denying that this exists, but this has generally not affected the manufacturing hubs. When I visit Avnet's facilities in the region, I honestly do not feel in danger. In fact, there are some ultra-urban areas in the states that have much higher crime rates.

I say this not to try to convince anyone to transfer their business to Mexico, but to encourage OEMs who are not satisfied with their current offshoring strategy to review their options, including their total cost of outsourcing, and consider the alternatives. Understanding the key advantages that China and Mexico offers can uncover significant savings opportunities.

For companies whose end market is the Americas, Mexico offers an excellent choice for outsourcing when considering increased competition for air freight space and the landed cost from China, which includes insurance, potential lead time issues, and time–to-market.

I would gladly discuss the options with anyone who is interested in learning more about the ins and outs of outsourcing in Mexico. Please feel free to contact me.

26 comments on “Identifying the Total Cost of Outsourcing

  1. Barbara Jorgensen
    December 13, 2011

    @Gerry–for some of us, you are preaching to the choir. Others seem to be catching on. The following article talks in-depth about US companies that have moved operations to China and are becoming disillusioned:

    http://www.msnbc.msn.com/id/45614308/ns/business-world_business/

    You are also not alone in recommending Mexico–Texas A&M did a study some years ago about many of the advantages. I also am told that QC out of Mexico has improved a lot. Let's hope people are listening (or reading)

  2. itguyphil
    December 13, 2011

    Barbara,

    After experiencing the pains of outsourcing East, I would like the idea of outsourcing to our neighbors to the south simply because of the lessened time differential.

  3. AnalyzeThis
    December 13, 2011

    As you say, “The prospect of another major supply chain movement so soon after settling in overseas is daunting, to say the least.” And that's a huge factor. If you already have operations running in China or elsewhere in the region going somewhat smoothly, it is highly unlikely you'll even casually consider starting all over again elsewhere: the start-up costs and research time involved is absolutely massive, in most cases.

    But that being said, for companies that have yet to outsource… it would be very unwise to think of China as your only option. You've got to seriously consider your options south of the border given the current economic conditions, in my opinion.

  4. stochastic excursion
    December 14, 2011

    When assessing the pragmatic needs of a business, it's sometimes worth reflecting on the major qualms people have about involving their business with an offshore or foreign operation.  One of these is that the concept of justice in many countries is shaped more by a legacy of violence than a spirit of cooperation.

    It may very well be that Mexican labor costs are low because during strikes in Mexico people get killed.  Knowing something about police tactics south of the border, it isn't surprising to learn that police use snipers with live fire to contain demonstrations (there is video footage of this).

    My thinking on this is that when we enter into business with a foreign country living under an authoritarian shadow, we are bringing more than a purchase order to the table.  We are coming from a place where class mobility, and other values we cherish, lead to prosperity.  That way we encourage people away from violence and toward a more refined social contract, rather than a race to the bottom line.

  5. Anand
    December 14, 2011

    @barbara, thanks for sharing the link. Very informative. Just curious to know if this attitude toward's China is short lived because its election year or are we seeing larger shift in the American policies?

  6. Anand
    December 14, 2011

    I would gladly discuss the options with anyone who is interested in learning more about the ins and outs of outsourcing in Mexico.

    @Gerry, thanks for the post. I would to know what has changed in mexico that is attracting the investors now ? Is Mexican government making efforts to invite the investor's to its country ?

  7. Anand
    December 14, 2011

    But that being said, for companies that have yet to outsource… it would be very unwise to think of China as your only option.

    @DennisQ, very true. Moreover its very risky to outsource to chinese companies. For example House Intelligence Committee is already examining if Huawei's and ZTE's expansion into the U.S. market will give the Chinese government an opportunity to hijack the nation's infrastructure to conduct espionage.

  8. chipmonk
    December 14, 2011

    Technically & economically it is absolutely feasible to automate all low level electronics assembly jobs done by an assembly worker ( $ 15 / hr in the US and $ 2 / hr in China ) with precision vision-based robots at a cap cost of $ 150 k / per which would also create at least 0.07 well paid ( $ 30 per hr ) Programmer / Tech jobs per Robot to build and run it. We had done it in the US nearly 15 years ago for Cell Phones. But since then Wall St. has pushed all assembly jobs out of the US and stopped development in Advanced Robotics. The same goes for clean processing of chemicals and materials ( e,g. PCB s ) required for electronics. Bringing materials & assembly operations back to the US would leverage our unique strength in software and at the very least enhance tax revenue even if all the lost jobs are not restored. IP xfer / theft will be stopped so will the asymmetricc power of Wall St. who use the billions from outsourcing to buy Congress and manipulate / mislead half the general population against its own interest !

    Simpler assembly jobs could of course always be sent down to Old Mexico or even Vietnam. The most significant benefit of stopping this wanton outsourcing to China would be that it will stop the sapping of US morale and restore US economy even if it takes about $ 500 billion public investment to revive US competitiveness in manufacture of high end of consumer electonics.

    Considering the ROI that would be chump change.

  9. bolaji ojo
    December 14, 2011

    Chipmonk, The original comment you posted to Gerry Fay's article was edited to make it more relevant to the topic and also to comply with EBN standards. On this site, we focus on ideas, subjects and issues of relevance to the electronics industry and its supply chain with the objective of learning from each other and sharing best practices. We also realize that we are unlikely to agree on issues discussed here but respect the rights of everyone to put forward their ideas without being subjected to abuse or having their integrity questioned.

    We look forward to your continued participation.

  10. mfbertozzi
    December 14, 2011

    Well said anandvy, but if we would like to adopt that perspective, we could say similar approach was (potentially) used at the time of West coming to East bringing there its technology. Am I really wrong?

  11. itguyphil
    December 14, 2011

    That is an excellent point. I completely agree with your point. It is tough to know whether the organization you are working with is as socially stout as you but you can only hope they are. I would do my due diligence and keep an on the regulations for the region before inking a deal.

  12. Mr. Roques
    December 15, 2011

    What other countries are competing in the outsourcing market? (in the western hemisphere)

    What do you look at when deciding where to go?

  13. itguyphil
    December 16, 2011

    I ask myself, “Would I go there and do business face to face…?”

    Although most of my bias is based on U.S.-based media coverage of other parts of the world, I would hope that my judgement would be sound enough to answer the question appropriately.

  14. t.alex
    December 16, 2011

    The simple question is: what can be outsourced to Mexico? Just pure manufacturing?

  15. Barbara Jorgensen
    December 16, 2011

    I think we can see by the dialog here there are a lot of factors to consider regarding outsourcing. I would hope compnaies learned some lessons from their expereinces in the Far East. It's not just location and cost; it is now environmental compliance, labor practices, risk of natural disaster, concentration of supply; proximity to end-markets and dozens of other things that should be measured. I think whether the decision is Mexico, Brazil (considered an alternative to Mexico, BTW) depends on the market you are trying to reach and the type of rpoduct you are manufacturing for starters.

  16. Taimoor Zubar
    December 17, 2011

    I think every company would consider shipping and logistic costs when they do a cost-benefit analysis before considering to outsource their manufacturing. What they may fail to include are the overheads associated with it. This would include frequent travels to offshore site to meet with partners and communication expenses related to it. This would surely not be minor costs that can be neglected.

  17. mario8a
    December 18, 2011

    Honestly i'm glad an article was post to talk and recommend Mexico for investment, if you will like to read about story of success, google Plantronics in Mexico

  18. mario8a
    December 18, 2011

    Please do, you will not regret visiting Mexico, every country has internal issues. If you are not related to those issues, you'll be fine

  19. mario8a
    December 18, 2011

    Hi, I work in Mexico in a design center for communication devices. Just like my company there are about 500 in Tijuana Mexico, please give yourself the opportunity to learn about what Mexico is exporting to the wold and why Mexico export more than all LA together

  20. mario8a
    December 18, 2011

    Do you know, some of the best doctors in the world to perform open heart surgery are from Mexico ? In regards to the electronic industry, I strongly recommend that you take a better look at it's been designed and manufactured in Mexico

  21. itguyphil
    December 18, 2011

    mario8a,

    I have been actually. I thouhgt it was funny when I read a book and some commentary was made about how residents of South & Central America were afraid to come to NY due to the 9/11 atacks and all of the heightened security concenrs. Imagine that shift?

  22. mario8a
    December 30, 2011

    Hi Porchale unfortunately the media can influence on people's mind more than we can imagine, yesterday i had a dinner with the secretary of tourism and he's point of view is the economy is affected, it's always feasible to show the difference between reality and perception when people is willing to travel and see it with their own eyes I have friends that moved to Canada after sept 11, they still don't want to come back to the US

  23. Kunmi
    December 31, 2011

    Mario8a, “Do you know, some of the best doctors in the world to perform open heart surgery are from Mexico ?” How does this apply to the electronic industry?

  24. Kunmi
    December 31, 2011

    The same thing applies to many of us who thought that Africa is a country. The shit you are talking about is not just the examples you have sited but the same pressure and concern runs through the heart of multi-Millions of people across the globe

  25. itguyphil
    January 3, 2012

    Ignorance is bliss. And if you do not go out of your way to pickup new knowledge, there is a larger opportunity to be blinded by the media.

  26. Mr. Roques
    January 19, 2012

    There are soooo many things to take into account that its simpler to go with the flow and go where everyone else is. It takes a lot to change from say: China, India to Mexico… the conditions could/might be better but everyone will doubt it, at least at first.

    Maybe companies choose to not even ask the question of it's better or not, and avoid stakeholders from doubting their decision.

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