Offshore Manufacturing
Offshore manufacturing is a process that involves shifting manufacturing production setup to a foreign country to manufacture any types of products either consumer or industrial products. It is one of the vital operational strategies in any manufacturing setup.
Impact of offshore manufacturing
- Offshore manufacturing is acceptable for a products demand which is stable, those products involve low inventory costs and low labor cost in a low wage countries, then offshore manufacturing is very great attractive idea.
- Offshore manufacturing is not acceptable for a products demand which is unstable, those products are having shorter product life cycles, quick turn around delivery and requires high end technology, then offshore manufacturing is not the right operational strategy to opt for gaining market share or high sales revenues.
Offshore Manufacturing Strategies US Companies
Before venturing into offshore manufacturing, the companies have to take serious considerations in the following areas:
- Financial areas
- Supply chain and logistics areas
- Cultural aspects
- Regional aspects
- Legal aspects etc.,
Offshore manufacturing Business Model
The below diagram represents the offshore manufacturing approach through joint venture, outsourcing, mergers and acquisitions and factory relocation to manufacture different products involving manufacturing operation and process support facilities
Offshore manufacturing
Joint venture
Outsourcing
Mergers and AcquisitionRelocation
Process support When outsourcing the manufacturing facilities, re-engineering process has to be developed to meet the local consumers needs
Operations Identify the area of expertise to outsource the manufacturing to get cost-effective products from the low –wage countries
Product Choose the right product to opt for offshore manufacturing to meet the local and foreign customers needs and wants
Opting for offshore manufacturing US companies
Due to globalization and free market economy, offshore manufacturing is a viable option for cost reductions. There are the following reasons why US companies are opting for offshore manufacturing:
Financial considerations
- Low payroll costs in the countries like India, China, South Africa, Philippines, Mexico etc.,
- There is a significant reduction in product cost that ranges from 5-20% in labor intensive industries like textiles, automotive, consumer electronics and other industrial product companies
Due to above factors, US companies has the option to gain competitive advantage by means of offering customers with price advantages without any compromise on quality.
Vast labor pool
- In India and other low wage countries, the availability of manpower is abundant in both white collar and blue collar categories
- Cheap labor is the best option to do multiple assignments with lower wages
Competitive
- There is a huge and untapped market potential in low wage countries for US companies to market their products with the preferences suitable to local customers
- By creating offshore manufacturing facilities in developing economies, US companies are contributing to these economies by mean of providing employment opportunities and also increasing their market presence in a free global market economy
- By tapping these markets, make them to be highly competitive and pioneers to increase their global presence and product varieties
Current trends in offshore manufacturing
- Operational sustainability
- Manufacturing methods
- Increasing dominance of China in manufacturing set up
Offshore manufacturing Challenges
Supply chain and logistics
Supply chain and logistics highly difficult to manage the offshore supply chain process due to the following factors:
- Long transit times
- High inventory cost
- Increased sales cycle
- Disintegrated logistics facilities
- Non availability of high quality suppliers
- Lack of technology
Operational difficulties in Offshore manufacturing
These are the practical operational difficulties been faced by US companies to do businesses as a part of offshore manufacturing
- Inability to address legality loopholes and constraints
- Bureaucratic approach
- Lack of understanding tax structures and financial services issues
- Inability to address cultural imbalances
- Inability to foresee and address any political instability
Customer services issues
In order to be competitive in todays complex business environment, US companies have to set up a customer support centre to address their issues and concerns in a professional way.
There are few challenges in customers services operation in offshore countries:
- Differences in languages that leads to a communication problem
- Inefficient product knowledge and experience
- Lack of well qualified and well trained manpower to deliver exceptional service quality to the customers
- Inadequate and lack of technology focus on telecommunications infrastructure
Innovative product design and development
Even though, offshore manufacturing is a good option for the US companies to gain significant cost advantage but to design new products by using innovative and new technologies, they do prefer it in US due to
- Lack of sophisticated technology focus and infrastructure
- R& D opportunities are limited in product design
- Inability to source design materials and components
To establish a successful offshore operation in abroad, US companies have to
- Understand the local culture and traditions
- Create a strong contacts with local government bodies to understand relevant trade rules and procedures
- Establish a strong supplier network to enhance the distribution efficiencies
- Identify with the help of a consultancy firms, identify in depth details about the country of operation and its scope to opt for a offshore manufacturing
