Early in 2021, a giant container ship got stuck in the Suez Canal. While the world watched the efforts to set it free many people wondered what was in all those thousands of containers piled high on its decks.
The answer was almost certainly, everything. TV’s, cuddly toys and electrical components. As a result, while waiting for parts to arrive, many businesses in Europe and the US started thinking more about the true costs of dealing with overseas suppliers.
Wells Engineered Products’ Perspective on Overseas Sourcing
Like many manufacturing companies, Wells Engineered Products sources some parts from overseas suppliers. At the same time, Wells services its customers from factories in North America. This combination gives Wells management a deep insight into the challenges, issues and costs of overseas sourcing.
The main reason businesses look at sourcing from overseas is to lower costs. As a blog post in Industry Week magazine points out though, while this might lower piece costs it may not yield savings overall.
The subject is a complex one. The most important issues to consider are:
- Overseas laborcosts
- Supply chainchallenges
- Quality concerns
- Communication and relationship-building
Overseas Labor Costs
There’s no dispute that factory workers in many Asian countries earn far less than those in the US. This is what primarily accounts for the lower piece costs. However:
- Thebenefit is only appreciable when products have significant labor content (which is not the case for those made on automated equipment).
- Labor rates are rising in China and elsewhere.
- Savings in labor costs can go up and down as currency exchange rates fluctuate.
Supply Chain Challenges
Shipping companies typically quote around 6 weeks to move a container from the factory in China to a warehouse in the US. However, as the Suez Canal incident showed, there are risks and uncertainty around this. Bad weather, port disputes and customs delays can easily add days or weeks to the delivery time.
Businesses counter this by holding more inventory. However, this creates more challenges. Engineering changes to the product take longer to work their way through the supply chain. It’s impossible to respond quickly to increases in demand, (air freight is a very expensive option,) and if any quality problems are detected there’s much more product to inspect and sort.
Quality issues relate to dimensional units and materials, the testing regimens employed and the processes used.
Most engineering teams around the world use the metric system when designing parts. However, in those countries with a legacy of “English” units this can lead to small but perhaps important differences in size. This comes about when material is processed on older equipment or with older tooling made to “English” sizes and subsequently converted to metric dimensions.
With materials, the main issue is that not all grades and types are available around the world, and those that appear the same may have subtle differences. Some engineered plastics for example are not produced in Asia and so must be imported. This can result in material costs higher than those in the US.
To counter this, and to give the US customer the lower prices they seek, the overseas manufacturer may resort to alternative materials with similar specifications and properties. This might work in some applications but for those where durability and safety are prime concerns this creates significant risks.
Thorough and effective testing regimens can help allay such problems, but only if implemented as dictated by engineering teams in the US. It’s possible that requirements aren’t always fully understood, and equipment may not always be available. Without eyes in the overseas factory though, it’s impossible to know for sure.
Manufacturing processes are subject to the same limitations. A supplier might be approved to make a part using specific processes, but these may subsequently be modified or drift over time. A customer visiting months after production startup might be unpleasantly surprised by the processes being used to make their product.
Communication and Relationship-Building
It’s incorrect to think email, texting and video meetings have solved every communication problem. Asian countries are 8 to 14 time zones ahead of the US, which creates communication delays and requires planning for any meetings. Language is also a problem because, while many younger Asians speak excellent English, their technical fluency is often limited.
Communication is eased through strong interpersonal relationships. Building these takes time though, and that’s expensive. Many companies have limited budgets for travel, and as is now widely understood, international travel can be disrupted at short notice.
When a US company decides to source from overseas suppliers it faces some substantial hurdles. The first of these is finding competent and reputable suppliers that can be relied upon. Then there’s the special expertise needed to organize imports and exports, which includes dealing with customs and completing documentation correctly. Mistakes in these areas can be very costly.
The Wells Approach to Working with Overseas Suppliers
It should now be clear there are many hidden or non-obvious costs associated to working with companies overseas. A recent report quoted in Plastics Today suggested the true cost of working with overseas suppliers could be 24% higher than anticipated when factors such as, freight, customs, homeland security, logistics, inventory carrying costs, and reduction in cash flow are taken into account.
This doesn’t mean US companies should avoid overseas suppliers, only that they should have their eyes wide open when engaging with them. Wells Engineered Products uses a lot of automated equipment, which largely removes labor costs from the equation and supports US manufacturing. Where overseas sourcing does make sense, Wells has a team in Asia to provide oversight and ensure effective communication. And, Wells has invested a great deal of time and effort in building relationships that facilitate the flow of correct information and quality products. Learn more by reaching out to the Wells team.