Re-Evaluating Low-Cost Labor Sourcing

At the beginning of each New Year, I, like many others, like to take an inventory of my life — both personally and professionally. I think about which attitudes and behaviors have served me well in the previous year, and consider which didn't quite measure up to the standards and goals I have set for myself.

If I were an electronics OEM doing a similar exercise, I think that the practice of developing manufacturing strategies based exclusively on the availability of low-cost labor would definitely fall into the category of “things to change.”

Yes, labor is a huge chunk of the cost of producing a product. But factors such as transportation costs, quality and reliability issues, and extended cash-to-cash cycle times can quickly offset the cheap labor advantage. It's a lesson that many members of the electronics supply chain learned the hard way in recent years and one I hope that small and midsized OEMs will heed as they consider entering the global fray and expanding their operations outside of their home regions.

I am not suggesting that offshoring was or is a mistake. The practice has been a great boon for the electronics sector, and the opportunities it has created for populations in less-developed economies are truly remarkable. To capture the full benefit of an offshoring strategy, however, it is essential that these outsourcing decisions be made based on a careful analysis of the total landed cost of the venture. This includes cost of the bill of materials, labor cost, transportation costs, freight and logistics cost, and cash-to-cash cycle times.

This analysis is not intended to curb globalization; rather, it should prompt OEMs to simply be more selective in their choice of production locations. In fact, at Avnet, we have already seen this total-cost approach result in an increased interest in more regionalized or “in-region/for-region” production. By establishing manufacturing bases closer to the point of consumption, our customers have found they can reduce transportation costs, improve fulfillment rates, and respond more quickly to fluctuations in demand.

As a result, we are also seeing resurgence in the popularity of contract manufacturing in regions like Mexico and Eastern Europe, as well as increasing activity in areas such as Myanmar, Vietnam, and Cambodia. And, in addition to US-based manufacturers “reshoring” production to North America, Asian manufacturers like Lenovo are setting up shop in the Americas to serve Western market demand.

Still, given the tremendous growth forecasted for developing economies, these regions are likely to remain the primary locations for in-region/for-region production. In an article entitled “Winning the $30 Trillion Decathlon,” McKinsey & Co. estimated that by 2025, consumption in developing economies could account for nearly 70 percent of all global demand for manufactured goods.

And though you might expect that a multiregional structure would exponentially complicate the supply chain, we have found that the investments made to adapt the supply chain over the past decade to support design in one region, production in another, and marketing/sales in yet another have made this transition relatively smooth. However, for OEMs unfamiliar with the nuances of a global supply chain, it is advisable to partner with a provider like Avnet, one that has both the experience and global resources required to establish and maintain a reliable and efficient multinational supply chain. For example, Avnet can provide design support and pre-production in one region and transition the supply chain to support full production in another region. This strategy can reduce lead times, increase time to market, and reduce or eliminate excess inventory issues.

So, as members of the global supply chain continue to seek new prospects to lower cost and expand their market reach, let's bid the low-cost country sourcing strategy good riddance and say hello to a new world of sustainable opportunity.

1 comment on “Re-Evaluating Low-Cost Labor Sourcing

  1. Hailey Lynne McKeefry
    January 16, 2014

    It seems a human tendency to take something that works well and apply it as a panacea across a diverse set of issues. I think that you've hit the nail on the head in recognizing that off-shoring to reduce labor costs is not a one-size-fits all panacea. What questions should organizations be asking themselves to help develop sound strategies when reevaluating their labor sourcing strategies?

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