Before Offshoring, Consider Homegrown Options

Before Offshoring, Consider Homegrown Options

A software solution that can help determine whose factory you should be using -- your own or a facility in a low-cost labor country.

Boothroyd Dewhurst Inc. has a software solution that can help determine whose factory of the future you should be using -- your own or a facility in some low-cost labor country. The software, known as Design for Manufacture and Assembly (DFMA). operates on the premise that the cost of a product is fixed during the design step, and thus, the best time to find cost reductions is during the design stage, not during manufacturing.

In an interview with IndustryWeek, Nicholas Dewhurst, executive vice president of Boothroyd Dewhurst Inc., relates automated assembly to product design strategies:

IW: Do automation and offshoring share similar benefits and similar risks?

Dewhurst: Yes, the shared benefits relate to their potential for reducing labor cost. The risks that automation and offshoring strategies have in common stem from a misunderstanding by manufacturers of the actual costs associated with producing their designs. This is the first and foremost issue. Unless you know what the costs of your product are and where those costs are tied up in design, production and overhead, then you might be barking up the wrong tree using either strategy to stay competitive.

For instance, our data show that labor accounts for just 4% of product costs, overhead 24% and part manufacturing costs 72%. Rather than investing capital in automation or incurring the hidden costs of offshoring, manufacturers might want to further explore material selection and process choices first. In addition, they can improve labor costs by reducing assembly complexity in their designs. From our perspective, DFMA analysis is certainly the key to identifying labor and process cost reductions and for designing parts matched to the feeding and orientation requirements of automated assembly.

IW: Do market conditions make it easier to offshore production?

Offshoring decisions are too often driven by shortsighted focus on the next quarter, rather than sound business reasons, says Boothroyd Dewhurst's Nicholas Dewhurst.
Dewhurst: Yes, I think that's true. And it gets back to the shortsighted thinking that partially may be driven by the investment community. The stock market and other business incentives force people to look at what the next quarter's numbers are going to be and not at longer-term plans. Investment in long-term automation projects has a direct impact on next quarter's numbers.

In contrast, manufacturers who produce goods in Asia often have little or no investment in automation and also appear to be reducing labor costs. But maybe the long-term benefit of that strategy isn't anywhere near what they imagine. So I think that market conditions, i.e., people being adverse to capital investment primarily due to the impact on short-term gains, really are driving a lot of the offshoring decisions and potentially a lot of the automation decisions as well.

IW: Is it typically easier for a publicly traded manufacturer to justify offshoring?

Dewhurst: Yes, because the capital investment required to put in a new plant or a new automated assembly line in the United States is high. Those long-term issues seem hard to justify for companies focused primarily on reporting sequentially higher quarterly profits. But again, the central issue to automation and offshoring is whether or not manufacturers really understand their products' cost drivers. Many of them hide product decisions on total costs. When those costs are not properly measured, it is hard to create realistic strategies for improvement. There is an enormous historical disconnect, by the way, between business accounting and engineering accounting.

IW: When is the best time to consider offshoring production? When does it make more sense to invest in automation and keep production local/stateside?

Dewhurst: There are a couple answers to that question. If you understand the actual costs and offshoring and/or automation are still viable solutions to cost reduction, then obviously a mature product is the best candidate for either solution. Mature products face less of a threat from foreign companies regarding loss of intellectual capital, and their designs may be established enough to warrant investment in dedicated assembly equipment. New products are at risk for the very reason that mature products are at less risk. Debugging new automation equipment, ramping up production, solving assembly issues and dealing with lead times are better done right in the company's local market, wherever that is. Those tasks are difficult to accomplish from another part of the world.

IW: How do production volume (e.g., low-mix/high-volume) and time to market (i.e., flexibility) enter into the automation vs. offshoring equation?

Dewhurst: Low-mix/high-volume is the scenario manufacturers need to follow if they want to look to automation and it isn't a very flexible solution. Most automation equipment that does a good job of producing products at high speeds is, in fact, dedicated. If product demand changes significantly, or if the manufacturer needs to add new features to fuel demand, then dedicated equipment is probably not a good idea.

This condition is true for offshoring as well. If you get a line of unskilled labor working with a product that is changing or has a number of variations in its assembly, those circumstances have an underlying impact on quality. So, again, assuming that a sound understanding of the product cost has driven you toward either automation or offshoring, then you need to be in a high-volume/low-mix environment to make either one of those a justifiable solution.

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