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What Are The Real Costs of Outsourcing?

Posted By Jeff Moad, August 01, 2011 at 12:27 PM, in Category: Global Value Networks

Seven years ago, MIT instructor and design for manufacture engineering expert David Meeker co-authored a report which concluded that manufacturers were overlooking many of the costs associated with outsourcing production to low-labor countries such as China. Recently, Meeker and procurement and finance expert Jay P. Mortensen revisted Meeker's orginal findings. Their conclusion: Manufacturers continue to miss the hidden costs associated with outsourcing. And, in a new, updated report, Meeker and Mortensen say manufacturers could easily realize the cost savings they expected from outsourcing by applying design for manufacture (DFM) and related principles to designing their products and producing them domestically.

"Aside from unexpected events, hidden costs exist because complete costs are rarely allocated to the product and reside instead in corporate overhead budgets," the latest report states. "This distorts fair copmarison of domestic and offshore manufacturing, leaving labor rates as a comon, central metric."

Among the outsourcing costs often underestimated, Meeker and Mortensen say. are:

--Internal resources needed to select and manage contractors and suppliers

--Costs related to a wide range of risks such as natural disasters and loss of intellectual property

--Costs related to logistics and shipping (including in-transit inventory costs)

--Quality-related costs

--Costs related to resolving cultural and communications issues

Not only do many manfacturers tend to underestimate such outsourcing costs, they tend to overestimate the potential value of outsourcing by overestimating the labor component of their cost structures.

Underestimated outsourcing costs can end up adding 24% to the overall cost of landing a China-made product in the US, the report estimates.

The report says manufacturers can avoid such unforeseen costs by keeping keeping manufacturing domestic. At the same time, they can reduce material and quality-related costs by redesigning products with DFM principles in mind.

What do you think? Has your company come to a more complete understanding of total outsourcing costs? If so, are you taking a more complete approach to evaluating whether and when to outsource? Why shouldn't manufacturers apply DFM principles to products that are produced offshore? These approaches aren't mutually exclusive, are they?

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit


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