The tide is starting to turn and we’re actually beginning to see some manufacturing being “reshored”–it’s coming back from having been “offshored.” There are a number of disadvantages to offshoring that it has taken hard-won experience for many customers to realize. Shouldn’t you be aware of where the sweet spot for offshoring is and make sure your business is attractive to customers who have manufacturing needs that fall outside the sweet spot?
Here are 14 different ways to strengthen your business so it will be much more competitive against offshore manufacturing.
Find a product where COGS is less critical
The number one reason customers seek offshore manufacturing is to reduce their Cost of Goods Sold–COGS in other words. They’re willing to make a lot of sacrifices if they can get their parts made more cheaply. It’s very hard to compete head to head against offshore manufacturing to make the same part more cheaply because their labor is so much cheaper–about $4 an hour last I heard. Now that is rising about 20% a year, and the currency exchange rate is also improving (the Chinese currency was kept artificially devalued), but there’s still a long ways to bridge that gap.
The answer is to look at products where the COGS is less important to the overall equation. There are a lot of possibilities that fit the bill. For applications such as medical and aerospace, they don’t want to waste money on the cost of a part, but other factors such as quality are often far more important.
Find a product where quality is crucial
Recently, I was watching a video on manufacturing offshore and the question was asked, “What’s the hardest thing to manage in offshore manufacturing?” The answer that came back was, “Quality.” And indeed, it is a constant problem. This particular video was about the experiences of Roomba in offshore manufacturing and their conclusion was that they had to have boots on the ground in China to manage things. No other solution would work.
The counter to that is to make quality a huge part of your offering and to seek customers that particularly value that emphasis. ISO and Six Sigma certifications may be important signals to potential customers that you value quality. Having a clean, well-lit, and well laid out shop that you’re happy to show them is another. Investing in high quality inspection gear such as CMM or investing in climate control to hold better tolerances are other approaches.
You’ve got to talk the talk and walk the walk where quality is concerned. Be ready to provide references that are very quality-conscious and prepared to sing your praises where quality is concerned. Be all over Lean Manufacturing and other methodologies to improve quality. It’s interesting to note that a lot of these strategies have worked well for the Top Shops that are more profitable and growing faster than average shops do.
Target products that sell much less than 10,000 units a year
This is another tidbit from that same manufacturing video from some of the Roomba people that set up their manufacturing. In the video, they recommend looking to domestic manufacturers for quantities of less than 10,000 per year. Their view is you won’t be able to get the best Chinese manufacturers to look at your product if they don’t see enough volume to make it worth your while. It’s no wonder that so many domestic manufacturers specialize in Low Volume/High Mix manufacturing.
Increase your automation levels to reduce the advantage of lower labor costs
Interestingly, that same video suggests that if volumes are high enough to maximize automation, then it makes sense to do it domestically. A great example they gave was shampoo. Very few products like shampoo are manufactured offshore because quality matters and it is easy to automate the production–we’re just mixing liquids and filling bottles.
If you can increase your automation to reduce labor costs, you will be moving the line where it makes more sense to have you manufacture a product than to offshore it.
Target products where MOQ is very low and help customers manage JIT inventory
Just in Time Inventory (JIT)–it’s related to volume, but is different. You may be selling a huge volume, but you may require your suppliers to deal with the inventory. Walmart is famous for this. They aren’t paying for anything that isn’t going to be sold very shortly. They expect their suppliers to finance their inventory for them in this way.
MOQ is an acronym for “Minimum Order Quantity.” The lower it is, the greater the advantage domestic suppliers have. Another interesting tidbit from our Top Shops article is that many of the Top Shops help their customers manage inventory. They’re actively collaborating with customers on it.
There are a myriad of things you can do to help your customers out in this way. The trick is to be able to quickly setup to cheaply manufacture small lots. You’ll also have to master things like having the first couple of lots be unprofitable to pay for fixtures and specialized tooling that may be needed to make future lots more profitable.
Target products that require exotic manufacturing tech
Get some cutting edge manufacturing tech into your shop and then be on the lookout for jobs that require it. The Roomba videos tell the story of Laser Welding plastics. They specified it because it gave their products certain advantages, but it turned out to be problematic in China. They had no experience with the technology. It took a tremendous amount of time and money to get them set up to run it, and once that was done, the supply chain was vulnerable to the machine going out.
We mentioned before that having machines on your Shop Floor with unusual capabilities can be a real advantage. It’s doubly true when competing against offshore manufacturing.
Target products that need to have a fast supply chain
A fast supply chain is one that responds quickly to change. Perhaps there are frequent change orders in the design of a particular part. Perhaps quantities ordered change quickly. Changes in materials or sub-components would be other examples.
For a typical offshore manufacturer, it will be at least 6 weeks before a change can be introduced and inventory returns to our shores with the change in place. Often it is much longer. Being extremely agile and able to deal with change on a very short turnaround is an important advantage when competing against offshore manufacturing.
Look for relatively new companies and relatively new products that are still undergoing lots of changes and are not yet commodities. Look for companies that want to build on demand and not keep much inventory.
Offer amazing DFM help to customers cheaply or free of charge
One thing the Chinese are very good at is helping you with manufacturing knowledge in many cases. The Roomba video suggests that for injection molding, don’t even bother putting drafts into the design. It’s faster to model a very straightforward design and let the Chinese use their expertise to help with things like draft.
Some of this can be too labor intensive to participate in, but that doesn’t mean you can’t be extremely helpful to your customers when it comes to helping them reduce their cost to manufacture. You’re in a position to help them with Design For Manufacture tips, which is what DFM stands for. Tell them if there are aspects of the design that are making it unusually costly to manufacture.
Another area is being transparent about the costs in a way that helps the customer target areas in their designs that they can change to make the part more cheaply. The videos suggest focusing on a margin-driven negotiation. Figure out what margin you need to make on your part and then push to get there. Having a manufacturer that’s willing to work on those terms is very helpful.
One thing that is hard for the Chinese to do is to close the loop over time on communicating ideas for DFM changes back to the customer. Once they get set up to start cranking out product, they typically get quiet. You want to never stop pushing helpful suggestions back to your customers.
Target products where IP protection is critical or where IP is hard to protect
Offshore has the reputation of being risky for your IP (Intellectual Property). There is a lot of concern about IP theft and copycat products turning up. You can respond to this in a couple of ways. First, be extremely scrupulous about how you handle your customer’s IP. Never show a visitor anything that could be construed to be another customer’s IP. In fact, if you’re offering tours, make it a point during the tour to turn them away from some areas so they see you are proactive about protecting their IP. In Silicon Valley, employees all sign non-disclosure agreements that ensure they will respect the IP they come into contact with.
Second, look for products where IP is hard to protect or where the customer is particularly concerned that the IP be protected. Purely mechanical products are a good example. Products that involve software or complex sub-assemblies are easier to protect, but they will consider protection to be more critical too.
Lastly, make sure your potential customers know you’re keen on protecting their IP and that this is one of the core values of your business.
Be easy to communicate and collaborate with
Are you easy to communicate and collaborate with? Everyone thinks they are, but what special lengths are you going to put in place to make sure it is true for your manufacturing business?
Something the Top Shops do that others are much less likely to do are Shop Tours–71% of Top Shops do it while only 44% of the rest do. When was the last time you brought the designers of a part you’re going to be making onto the Shop Floor to meet the people who’d be making the parts? The opportunity to really excel at communication is much easier for domestic shops that are right in the neighborhood of their customers.
In this age of the Internet, there are many online tools to facilitate communication and collaboration too. Consider tools like Basecamp, which is collaborative project management or Slack, which is a chat system. Even just making it easy to coordinate via email can really help.
When you’re actually in the same time zone and speak the same language as your partner/customers, do everything you can to emphasize that contrast by going above and beyond the call of duty to facilitate communication and collaboration.
Have great references
Nothing sells like another happy customer. Make sure you’ve got great references who are on board and available to serve as references.
Host some Open Houses for your Customers and put on a good feed that makes it fun. Invite prospects to join in and meet your customers at the Open House.
Target high shipping cost products or products that don’t travel well in containers
The most efficient way for most products to be shipped from offshore manufacturers is in a container. If you can target larger heavier products, or perhaps extremely delicate products, these may be harder to ship via container. Look for things that will have much higher shipping costs as it will be less attractive to manufacture these overseas.
Show them you are a long-term partner
Turnover in China is about 20% every year. What is the turnover at your shop? Stability is valuable. It’s costly to transfer all the knowledge needed to manufacture a product and it doesn’t help if that knowledge is too perishable.
Always be cordial even if you lose
This goes without saying in business, regardless of who you compete against: always be cordial when you lose. You never know when that customer might be back. Perhaps things won’t work out so well with the first supplier they choose and if you were their second you may get the nod. Perhaps they want to diversify to multiple suppliers. Perhaps they’ll include you on the next part they need to have bid and you’ll get a chance to win there.
It’s especially helpful in the latter case to follow up and try to learn why you didn’t get the business. Reach out to them with a little delay after you learn the business is lost. You want to be clear that you’re not going to try to talk them into changing their mind, but that you just want some help understanding what you could’ve done differently for the next time. Not everyone will help, but many will, and you’ll learn a lot from the interactions.
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Bob is responsible for the development and implementation of the popular G-Wizard CNC Software. Bob is also the founder of CNCCookbook, the largest CNC-related blog on the Internet.
Great article, thanks!