What Are the Benefits of Outsourcing to an International Contract Manufacturer?
A major issue that companies face when doing business internationally is whether or not to outsource some of their manufacturing needs to a third party.
More and more businesses, including Apple, Adidas, Hewlett-Packard, and Shell, are outsourcing manufacturing to third-party companies. Moving operations overseas is an enormous undertaking, and outsourcing can remove the bulk of this burden from manufacturers. However, such a significant decision requires careful consideration of several important factors.
Why do Companies Choose to Outsource Manufacturing Internationally?
Many factors contribute to a decision to move operations overseas. The primary consideration is that labor is cheaper in some countries than in others.
To remain viable and add shareholder value, businesses have to maintain healthy profit margins. Next to the cost of goods sold (COGS), wages and compensation are one of the biggest expenses for manufacturers. Cutting or reducing these costs is always a major priority for employers.
For example, some businesses outsource manufacturing to Malaysia to save on operating costs and maximize profit margins by utilizing a cost-effective labor pool. Malaysian cities have a lower cost of living and lower average employee income than most U.S. and European cities.
According to Salary Explorer, the average annual salary in Malaysia is $19,004, compared to $94,700 in the U.S. This discrepancy allows U.S. or European employers to save significantly on wages or to offload the high overhead of functions driven by human capital.
Whether you are a startup planning to scale or a thriving business, outsourcing your manufacturing operations to Malaysia could save a substantial amount of money. Malaysia is not the only country that offers these benefits; countries like China, Mexico, India, and Central America have affordable outsourcing options when compared to labor costs in the United States. Other workforce cost reductions include:
Lower payroll taxes because wages are lower.
Fewer unions and organized labor means less risk of a strike.
Less employment regulations like required increases in overtime pay rates.
The benefits of outsourcing manufacturing go beyond lower labor costs, and include better economic opportunities for local workers, simpler supply chains, reduced shipping times, and more. In the following sections we will review 9 key benefits that companies can realize by outsourcing their manufacturing operations overseas.
Proximity to the End Customer
Did you know that products are crossing the ocean less now than they were 20 years ago? Emerging markets have actually reduced the international movement of goods, according to a McKinsey report on the future of trade. The same McKinsey report predicts that “developing countries are projected to account for more than half of all global consumption” by 2030. This trend means that products manufactured overseas are increasingly likely to stay there, either for use by another manufacturer or purchase by a consumer.
Semiconductor chips are great example of this trend (which has been growing steadily over the past 15-20 years). Asia (China, in particular) is home to a majority of semiconductor original equipment manufacturers (OEMs). These manufacturers provide their products to clients that are also in China. This close proximity to the end buyer or user offers substantial advantages, including lower shiping costs, shorter lead times, reduced climate impacts, and much more.
Close or Scale Down Existing Plants To Save Money
Companies that have decided to outsource manufacturing internationally do not need to have a fully operational manufacturing plant in their country. Instead, domestic operations can be transitioned to focus on R&D, specific parts of the manufacturing process, fulfillment, or customer service. If the company had a running plant before outsourcing, they would probably choose to close it or scale down to save money on operations and real estate costs.
For example, you can choose to scale down operations in your local market and outsource certain processes offshore, and then ship the finished product back to the local plant for final assembly. Obviously, this will increase margins. In addition, it alleviates operational headaches from managing staffing, equipment maintenance, and other day-to-day requirements of running domestic facilities.
Access to Less Expensive Raw Materials
A contract manufacturer's proximity to raw material sources may also lower overall costs. This is an advantage for companies that need a complex variety of raw materials, such as semiconductor manufacturers. If they can get high-quality materials at a low cost, it makes sense to partner with international manufacturers who have access to local sources.
It's also possible to process the raw materials off-shore and ship them back to a domestic facility for final assembly.
Easier Access to Specialized Suppliers
As a result of the larger number of specialized suppliers in manufacturing countries like Asia, it is easier to locate precision equipment and cutting-edge technology while also saving money. This equipment is often manufactured in the country where it’s purchased, which lowers the overall price as there's no need for costly overseas shipping.
Product Development Knowledge & Scale
Certain countries have developed significant proficiency in a particular manufacturing segment (e.g., computer chips in China), so manufacturers will outsource internationally to benefit from the scale and experience a country can offer. It would be reasonable to outsource production if a company's products can be manufactured more efficiently in a particular country. For example, Malaysian manufacturers have expertise in electronics components for globally-recognized companies like GE, Siemens, and Panasonic – which have all established Malaysian manufacturing operations.
Specialized Personnel and Equipment
Offshore manufacturing can help you overcome two of the most common challenges in manufacturing: limited-run or trial projects with access to specialized machinery, and skilled production staff. Outsourcing helps quickly and cost-effectively complete short-term projects without having to do the short-term staffing yourself. Even if the equipment is only needed for a short period of time, it can be prohibitively expensive to acquire on your own, so outsourcing is the only cost-effective option.
Provide Economic Opportunities and Bolster Brand Reputation
Today, consumers and customers care about more than price points. While costs and shipping times matter, the mission, vision, and impacts a company has (e.g., environmental, social, etc.) can also make or break their brand. As companies try to cultivate a more mission-centric brand, they may go so far as to realign their supplier networks to prioritize things like carbon-neutrality, partnership with local organizations, and fair pay for workers.
Patagonia is an excellent example of how companies can embrace the need to support a living wage for employees at manufacturing facilities around the world. In fact, Patagonia publishes transparency reports on the progress toward ensuring that a living wage is supported throughout their supply chain.
International manufacturing companies have the ability to offer significant earning potential in countries that might otherwise have a high income disparity and few opportunities for employment. In turn, these higher wages often spur growth in a local economy as employees spend money at restaurants, service-providers, and retailers. Keeping things “local” can be a massive driver of brand preference.
Leverage a Workforce with Specialized Skills
Finding employees with specialized skills can be incredibly difficult. For manufacturing companies in the U.S. and Europe, attracting and keeping employees who are trained to use specialized equipment or perform skilled production tasks is one of the top barriers to growth. It's easier to take advantage of the large and small scale production capabilities that contract manufacturing can offer.
Ease of Product Movement Across Countries
Outsourcing your manufacturing to international companies can reduce concerns about international laws and regulations. Most contract manufacturers are experts with international trade regulations and processes (e.g., customs), which makes it easier to move your products across borders without worrying about violating international trade laws and incurring fines and levies.
Selecting an International Contract Manufacturer: What to Consider
The benefits of working with an international contract manufacturer are clear, but picking the right partner is critical for long-term success. What matters most when selecting an overseas manufacturing partner? We recommend taking a close look at 4 areas before finalizing your decision:
Capabilities. Does the manufacturer have the expertise and ability (e.g., machinery, resources, engineering talent, labor, etc.) to handle sophisticated production requirements? This is especially important for highly-regulated or technical products which require precision components or a sanitary production environment.
Capacity. Making products in limited quantities might demonstrate expertise from an engineering perspective, but large-scale production is a completely different challenge. Can your provider uphold quality standards even at a high volume? Warehousing constraints, inventory, labor force shortages, infrastructure instability, and other factors all present challenges for international manufacturers that aren’t equipped to scale production.
Cost. Are there significant reductions in per-unit costs, employment costs, simplified shipping, shortened lead times, or overall risk that will measurably affect the bottom line when compared to domestic manufacturing?
Clarity. Your manufacturer should have a strategic, comprehensive view of gobal outsourcing strategies. Can your contract manufacturer serve as a true partner – helping you discern the right timing and approach for using international manufacturing options?
With the help of a quality, reliable offshore manufacturer, projects can be completed on time and on budget. In addition, the time and cost savings will allow you to focus on key aspects of business, like marketing, distribution, and R&D.
The end result is a high-quality product for your company at the scale needed to meet market demand. Companies that outsource their manufacturing have access to both local and international markets. As a result, they can sell their products at lower prices while competitors struggle with high production costs.
Are you deciding whether to start outsourcing your manufacturing? Do you want to see results from companies that have already made this transition? Let's talk. Contact us today and we’ll show you how contract manufacturing can help bring your business goals within reach.