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Manufacturing in China? The true cost may surprise you

Boothroyd Dewhurst : 29 September, 2006  (Company News)
Examining realistic estimates of the cost of outsourcing puts the magic bullet of Chinese manufacturing into question. Nick Dewhurst of Boothroyd Dewhurst has some eye-opening data on what it may actually cost you to move manufacturing of a product overseas. In the chart above, part costs represent 72% of a product, overhead is 24%, and labor only 4%.
It’s rare to see an OEM in the U.S. today questioning the presumed logic of lower-cost manufacturing in China. “Can’t beat those labor rates,” they say. “My competitors are all doing it, and I have to stay competitive.” The fervor is a bit similar to those in the stock market shortly before the dot-com bubble burst.

A few voices have risen above the cacophony, however, pointing out that perhaps this lemming-like exodus to China has not been fully examined from a cost perspective. Business analysts such as Boston Consulting Group and Aberdeen Group are uncovering both the risks of outsourcing and the limited view most U.S. manufacturers have about what it costs them to produce their products.

Nicholas P. Dewhurst, executive VP for Boothroyd Dewhurst Inc., and David Meeker, a consultant with Neoteric Product Development, published a study recently (“Improved Product Design Practices Would Make U.S. Manufacturing More Cost Effective, A Case to Consider Before Outsourcing to China”) that examines some of the hidden costs of outsourcing that U.S. manufacturers may not be taking into account.

Boothroyd Dewhurst develops and implements design for manufacturing and assembly software. Dewhurst, an experienced project engineer, spends most of his time working with U.S. companies to make DFMA part of their product development process. “I ran into several clients who wanted to eliminate domestic manufacturing entirely in favor of outsourcing to China,” he says. “But when I asked them about the real cost of producing, shipping, and distributing the products, they didn’t have an answer. It was clear they hadn’t done the math or thought it through.”

Dewhurst also saw that companies were not taking the time to understand the potential for cost savings during the design of their products. “OEMs are drawn to China by the lure of reduced manufacturing costs via extremely low labor rates. But it is a given that most of the cost of a product is fixed during design, so the best time to find cost reductions is during the design stage, not during manufacturing. Yet most products are moved offshore without any such considerations.”

The question Dewhurst and Meeker sought to answer in the study is at the heart of the outsourcing debate: Is sending a product overseas for manufacture really the cost-effective solution, or would U.S. companies benefit from taking the time to redesign products and keep manufacturing here?

They found that a cost-benefit analysis examining the question of moving manufacturing offshore sometimes shows a compelling case for keeping manufacturing in the U.S., based on two fundamental assumptions that U.S. companies may have overlooked: that it is possible to redesign products to reduce part count and cost; and that it’s necessary to account for all the additional costs associated with offshore manufacturing and to apply them to the product.
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