What to Look for when Outsourcing to Low-Cost Countries Within Regulated Environments
In today’s work environment manufacturers, OEM’s, ODM’s are looking at every possible way to be more cost competitive, grow profits, and find new market entry points. Traditionally the more flexible industries (automotive, industrial products, consumer goods) have used the outsourcing tool to gain a financial benefit. Whether it is starting an internal facility or growing their supply base and finding new opportunities in the local market. Although how companies in do regulated markets use outsourcing to their benefit while complying with regulations? We will analyze this from four different perspectives:
This is the most traditional reason why companies outsource to low cost environments. Often when you look at the financials of a firm or a factory, indirect and direct labor are the largest % of cost associated with manufacturing a product or service. Companies ask themselves “is there a core competency in a low-cost country, which can make a product or service better than our current manufacturer”? People understand this and have generally been able to see the progress companies have made in the past 20 or 30 years. Whether it is China, Vietnam, Malaysia, or India there is a market for all types of companies to set up in their country. Often companies look for reductions in the range of 30-50% of their labor cost or piece price to make the switch and validate the new environment.
Regulated environments are now coming under increased price pressure (aerospace, healthcare, biotechnology) due to increased competition and new market entrants that need a different price point. In order for these regulated environments to outsource properly they re-think the way they manufacture today in the United States. Often to manufacture an aerospace or medical product there are control limits when trying to manufacture. Companies must focus on a significant amount of training and bringing the new workforce up to the level that the traditional manufacturer is at.
By entering a new market and starting to manufacture products, can companies find new sales avenues in that country? In some deeply regulated environments, there are “offset” agreements in which companies must manufacture a certain amount in a country in order to sell products. This is very prevalent in the aerospace and military hardware environment which will guarantee the purchasing country some production, employment, and training in their country. Per Exhibit 1 you can see that the top four countries for outsourcing are US, China, India, and Poland. Outside of Poland, there are major economies in the other three markets. Each with tax schemes allowing multi-national companies to enter market grows the local demand, and produce products for a lower cost. The size and type of market must be taken into consideration when trying to outsource.
Exhibit 1. % of Respondents in Deloitte Survey on where they have outsourced
Quality of Products
In today’s world quality has to be guaranteed. Whether it is an outsourcing telecom company in Bangalore India or toy manufacturer in Shanghai China the quality must be consistent with the host country. When looking at the regulated market, this is what is a severe focus for this part of the economy. Specifically, in the biotech or medical device field, one recall can cost the company millions of dollars if the service or manufacturing isn’t transferred properly.
Full Supply Chain View
Now companies are looking at the full supply chain of their products and how can we make the product streamlined from a customer perspective. Taking a look at what Amazon has done, how can companies deliver their products in a fast and effective way to their customers? This becomes difficult in regulated environments because sometimes raw material or certain processes are regulated to purchase from unique suppliers. When manufacturing companies are looking to outsource they need to consider where the inbound raw material is coming from, the logistics associated with that, and where their customers are. This will allow the company to fully maximize the savings benefits of the outsourcing transaction.
So with those four sections highlighted you can see that regulated environments have a lot to consider when looking to outsource versus internally manufacture. Companies need to understand the pros and cons of each area highlighted and whether the transaction makes sense to move forward.