June 27,
2007
Over
the past 15 to 20 years, we’ve grown accustomed to seeing North American
manufacturing move offshore. We equate outsourcing with overseas manufacturing,
particularly in China. We also see manufacturing going to other developing
economies such as Eastern Europe and Mexico. What is less talked about is the
outsourcing that stays in North America. Many OEMs are taking advantage of
contract manufacturing without shipping their manufacturing outside the
country.
The
reason for outsourcing is usually strategic – the company doesn’t want to own
and upgrade plants. Some companies want to produce products but don’t see a
need to become experts in manufacturing. “Some companies are not into manufacturing,”
says Gerry Fey, SVP for global and strategic accounts at Avnet Inc. in Phoenix,
Ariz. “They don’t want to make the investment in manufacturing when there are
contract manufacturers who have a better skill set.”
Fey
notes that many OEMs would rather keep their focus on designing and marketing
their products. “Generally the outsourcing starts with a new company that wants
to use its capital on marketing, and research and development,” says Fey. “They
don’t see manufacturing as a strategic differentiator, so they don’t want to
make an investment in manufacturing equipment.”
By
avoiding the investment in manufacturing plants and equipment, the company can
also keep a lighter balance sheet. This is particularly important for companies
that don’t have sufficient volume to keep a plant running around the clock.
“When you outsource, you take the expense of capital equipment off the balance
sheet,” says Bruce Rayner, director of research and consulting at Technology
Forecasters, a research firm in Alameda, Calif. that specializes in contract
manufacturing. He also notes that many OEMs wouldn’t be able to keep
manufacturing equipment busy enough to justify the investment. “The company may
not have enough business to run a plant, so it becomes a matter of capacity
utilization.”
The
reasons to outsource that manufacturing to a North American company instead of
a less expensive foreign contract manufacturer are varied. Some products are
too sensitive to go offshore, while other products are too heavy. Certain
industry sectors have traditionally kept manufacturing close by. “Segments such
as medical aerospace and capital equipment usually keep manufacturing in North
America,” says Rayner. In some segments such as medical equipment, the
manufacturing expertise lives in North America. For other segments such as
aerospace and the military, the expertise is in North America, and so is
security.
OEMs
that produce military equipment need to hold clearances, and so do their
contract manufacturers. That means everything has to stay in North America.
“Many of the companies that have military contracts stay in the United States,”
says Fey. “Sometimes it’s because the contract manufacturer needs to maintain
military clearance, and other times it’s because the parts needed in
manufacturing are of a sensitive nature and cannot be exported.”
Another
reason to keep manufacturing in North America is simply because the product
being manufactured is too heavy to go overseas, and thus the shipping costs are
pricey. “With some capital equipment, the transportation costs for moving big,
heavy pieces are too high, so there’s no real advantage to shipping that
manufacturing offshore,” says Rayner. In some cases, medium-size products such
as refrigerators and other “white box” products get outsourced to Mexico where
manufacturing is inexpensive and shipping costs are lower than Asia.
Sometimes
the decision to outsource to a North American company comes down to volume. For
products that are produced in small quantities and have custom aspects to the
product –low volume, high mix – keeping the manufacturing close by is the most
economical choice. “When the product is low volume, high mix, the cost of
taking manufacturing offshore doesn’t translate into savings,” says Rayner.
For
some OEMs, North America is the design and testing ground for new products.
Once the manufacturing bugs have been worked out, the high-volume production
moves offshore. “You tend to see more product introduction in North America,”
says Rayner. “Companies will manufacturer the product in North America until
they get the bugs out. Then they’ll ship it off to China or Mexico.”
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