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The true cost of offshore contract manufacturing
By: Bob Buchanan
I’m usually a pretty positive person, but this week I’m going to talk about something that really makes me mad. On the manufacturing side of our business, we work with people who put their heart and soul (and in many cases a lot of money) into creating a product only to see it fail because of a poorly chosen contract manufacturer. Even one bad part run can cause the demise of an entire product. I realize I may sound overly dramatic, but I’m tired of seeing bad things happen to good people with good ideas.
Whether you are working with a contract manufacturer in the U.S. or overseas, the old saying is true: “you get what you pay for.” But particularly for overseas production, it’s important to look past the cost per part. These issues could make things more costly than you planned for:
- Lack of control of your pipeline – Lead time is longer when you go overseas. This could put you in a pinch if you need to ramp up production quickly. And if there are any delivery delays (whether due to the manufacturer or getting through customs), lack of inventory can put the whole project at risk.
- Lower-quality materials – You’d be amazed how different the materials are overseas, especially when it comes to metal. The stainless steel I use and the stainless steel they use could be as different as filet mignon and hamburger meat. So as you compare prices, consider the quality of materials used. Also think about whether the product may need additional work (like extra paint prep or finishing) due to impurities.
- High minimums – We typically work with manufacturers in the $50,000 – $100,000 range. They’re not one-off jobs, but they’re not million-dollar operations. If you are just starting out, a contract manufacturer’s high minimums could force you to produce too much too fast. On the other hand, you don’t want someone too small, because they won’t be able to scale up. So look for the sweet spot: low minimums with the skill and capacity to grow with you.
- Duties – Even when you spend less on materials and labor, Uncle Sam has a way of evening things out. When you get a quote, make sure to account for any taxes you’ll need to pay when your items come to the U.S.
- Shipping costs – Typically goods are shipped to the U.S. “over air” (on a plane) or “over water” (on a container ship). The first option is faster, but pricey. The second option is more affordable, but slow. Either way, make sure your quote is for the “total landed cost” (meaning manufacturing plus shipping) so you have a true estimate.
- Shipping damage – Damage can occur whenever items are shipped, even if it’s just across town. That’s just the nature of the business. But longer trips and multiple handoffs increase your risk of damage. Also, specifically for metal, items must be protected during shipment over water or you’ll end up with a rusted mess on your hands.
- Trouble with returns – What would you do if a shipment is subpar? In the U.S., you call the manufacturer and you work it out. They’ll probably even cover the return shipping for you. Not so for contract manufacturers outside the U.S. If you get a bad batch, you’re stuck with it. Unless you want to pay to get it back to Mexico.
Like I said, I’m generally a positive person – and I have positive things to say about some overseas manufacturers. But there are a lot of bad apples. Especially when you are just starting out, it pays to do your research. Consider the true cost of manufacturing overseas and you’ll see just how attractive it is to stay closer to home.