THE CASE AGAINST OFFSHORING
and What to Replace it with
In a vain attempt to “save cost,” many companies have
tried offshoring — designing products here for sale here, but
manufacturing them overseas — because their primitive cost systems make it
appear that this will
If all they quantify are parts and labor, like the top pie chart
article, then moving production to a “low labor rate” country will
appear to lower labor cost. If no other costs are quantified, then
outsourcing could be be pursued based on an unrealistic back-of-the-envelope
However, manufacturing offshore for sale in the U.S. rarely results in a net
cost savings when measured on a total cost basis as shown in the
article, considering differences in labor efficiency and all the
costs of shipping,
quality, inventory, communications, travel interruptions, extra training,
transferring products, ramping up again with different local parts, support, and
complete sets of equipment needed for any manufacture. See the article on
the hidden costs of
OffshorIng on at
shows that offshore manufacturing compromises six out of the eight
cost reduction strategies that are presented on the home page.
Offshoring’s Devistating Effect on Product
As pointed out in the DFM article,
Figure 1.1, 80% of a product’s lifetime cumulative cost is determined by product
design. Unfortunately, offshoring production compromises all future design
opportunities because it prevents Concurrent Engineering teamwork, which
is the most promising opportunity for achieving truly low-cost products.
Offshoring prevents this teamwork because design engineers and manufacturing
people are not in the same country and not even working at the same time.
Without early manufacturing involvement, engineers will design products alone,
throw them over the ocean, and get back parts that will only be as
manufacturable as the individual engineer’s DFM expertise, who may not know all
the design guidelines.
Further, dealing with all the problems of offshoring (see below) will be a
resource drain that, when combined with other counterproductive
practices can consume two thirds of product development resources!
Offshoring’s Negative Effect on Lean
Production and Quality
Further, offshore plants, especially contract manufacturers, amortize
their setup charges by building in batches (mass production) and then shipping
them across the ocean in batches. This makes it hard to respond to volatile
market conditions when so much forecasted inventory is at the plant and in the
long “pipeline” in ships traveling across the ocean.
Womack and Jones, writing in Lean Thinking, summarize it succinctly:
“Oceans and lean production are not compatible.”
They go on to say that smaller and less-automated plants close to engineers
and markets will yield lower total costs, considering the cost of shipping and
the inventory carrying costs when products built weeks ago no longer satisfy
customers. Air freight may eliminate that problem, but would cost more and leave
the OEM without products to sell after any production disruptions.
So the enormous potential cost savings from Lean Production (summarized in
page 27 of Lean Thinking) will not be realized because products can not
be pulled by customer demand across oceans, nor could they be
The distance and remoteness will prevent setting up flexible plants that
products for niche markets or individual customers .
Without Lean Production and the design-for-quality
contribution of good Concurrent Engineering
quality and reliability will not be designed in or built in, so the home office
will have to rely on strict, and expensive, testing of all products followed by
repair costs or scrap costs followed by extra setup cost to build replacement
products and expedited shipping costs. Worse, if contract manufacturers are
selected by low-bidding, quality will suffer even more for reasons cited in the
Offshoring Decisions Affecting Lean, BTO, and
Labor cost is actually a small percentage of the selling price, and yet
offshoring decisions are usually based entirely on labor cost because it is the
only processing cost that is quantified. But, any perceived “savings” for labor
are usually exceeded by the all the hidden
offshorIng costs. These costs would not be “hidden,” and
decisions would be more relevant, if all overhead costs were quantified with Total_cost.
Here are some of the total cost considerations that should determine
offshoring decisions: labor efficiency (which could cancel out labor cost
savings); difficulty controlling operations that are not working at the same
time; product introduction delays (usually months later because of the
additional ramp); supply chain vulnerabilities; and shipping costs and delays,
especially when expediting is used to compensate for the above problems.
Further, labor rates often rise and tax benefits only last so long, until the
company “ups the ante” and increases the commitment, for instance, by moving
engineering there too.
The most ironic reason to move production offshore is that the decisions
are based on labor-intensive designs. However, implementing DFM
principles of this site can reduce labor content to the point where moving to
low-labor-rate areas is no longer needed and can no longer be justified.
“Hidden” costs, which should all be quantified by
would include: quality costs and the delays to fix them; training costs, which
are higher than expected for hard-to-build products or where turnover is high;
offshore setting up and administrative costs and resource drains; transfer
efforts and ongoing indirect support, which takes resources away from product
development; travel costs, which are always more than estimated; and “other”
local costs that may pose ethical and legal dilemmas.
Unfortunately for product development, the cost of setting up offshore
manufacturing and dealing with these hidden costs is usually paid for by support
people at the company headquarters — otherwise the business case for offshoring
would collapse! Ironically, these support costs make headquarters
look even less efficient which, perversely, then "needs" yet more
offshoring, thus resulting in a downward spiral.
Sadly, the final hidden cost of offshoring is the cost to move operations
back to where the products are designed after realizing all the above costs
or realizing how offshoring distracts from real cost opportunities in product
development, operations, and quality programs.
Offshoring, the Bottom Line
Setting up and operating offshore manufacturing
doesn’t save money on a total cost basis, but
just trying compromises quality, delivery, and product
development, which could otherwise provide real cost reduction and
pursue new high-profit opportunities. Rather than weakening operations
with the burdens of offshoring, local operations could then pursue more
effective cost reduction by helping to design low-cost products, eliminating
waste through Lean Production, lowering the cost of quality, and setting up
flexible factories that could build standard products and mass-custom
versions on-demand without the costs and risks of inventory.
Finally, the enormous cost saving potential presented herein
will dwarf any offshoring
If all of this does not make good financial sense, you need a better cost
system, as presented in Chapter 7 of the DFM book.
What to do that will benefit you much more than
Do Concurrent Engineering,
which won’t work when only half o multi-functional teams are
awake at the same time, resulting in designing alont,
Designing for Lean Production
but that won't matter when the CM sets up and then
tears down each batch without learning or the
foundation of 6 Sigma: continuous improvement.
Product Families to-Order, but that is not
possible in rigid mass production far away and shipped to your inventory
Designing in Quality
but that won't survive changing all the parts to cheaper, local
parts and missing out on continuously improved lines.
Design for Scalability
and Growth , but that is not possible
local parts when only last 18 months
Cut 9 categories of cost from half
to 1/10 of the usual cost or miss that and pay all the hidden costs summarized
at Hidden Cost of ffshorIng article
Design labor cost out of
of looking for low labor rates.
Design labor cost and high skill demands
out of backward-compatible
replacement subassemblies for near-term cost reduction.
The choice is yours.
on the hidden
These are the general principles. Pass
around this article or URL to educate and stimulate interest
In customized seminars and
webinars, these principles are presented in the context of your
company amongst designers implementers, and managers, who can all discuss
feasibility and, at least, explore possible implementation steps
In customized workshops, brainstorming sessions
apply these methodologies to your most relevant products, operations, and supply
If you want to discuss Offshoring by phone ot e-mail, fill out this form:
Call or email
aout how these principles can apply to your company:
David M. Anderson
Book-length web-site on Half Cost Products:
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