Wednesday, February 20, 2008
The Hidden Costs in Offshore Outsourcing - A Case Study
One company that staunchly opposes offshore outsourcing is Hesperia, California, based Mer-Mar; oddly enough, Mer-Mar is a contract manufacturing and assembly company and is, by definition, an outsource manufacturer. With over 30 years experience specializing in circuit board assembly, Mer-Mar is an outsource provider to other businesses that do not consider circuit board assembly a core competency and/or do not wish to invest their resources in their manufacture.
The company assembles circuit boards for the medical electronics, aerospace, automotive, entertainment and leisure, and homeland security industries. Mer-Mar is an ISO-9001 certified company consisting of 50 highly skilled employees who abide by industrial quality standards. The company is a regional service provider and supplier delivering high quality manufacturing primarily in the southwest United States.
As an end service provider, Mer-Mar does not outsource offshore. The company’s leadership also has a fundamental philosophy that views offshore outsourcing as impractical for their customers, which are in industries with high quality standards and just-in-time delivery requirements. While some of its larger competitors have commenced offshore outsourcing of various services, Mer-Mar has resisted.
Mer-Mar’s customers rely upon the quality of the products, history of dedicated customer service, and dependability of receiving orders when promised. Mer-Mar is also frequently asked to quickly complete orders for customers within a matter of days. In order to be flexible and responsive to its customers’ requests and to provide adequate support, Mer-Mar is required to remain close to its customers and its suppliers to keep its supply chain accessible and lead times brief. Each of these characteristics is perceived to be vital to Mer-Mar’s success and would be compromised if Mer-Mar were to outsource its manufacturing operations offshore.
Despite Mer-Mar’s favorable reputation, several customers have recently outsourced their circuit board assembly operations offshore. As with other industries, the attraction to offshore outsourcing is the promised cost savings. However, Mer-Mar cautions that many companies fail to recognize the increased soft costs frequently associated with offshore outsourcing.
These soft costs include additional personnel to monitor operations in foreign factories; time and money associated with shipping and customs inspections; costs to rework faulty products; the lack of easily accessible spares, and the challenges of working in a foreign country including communication challenges, low-skilled workforce, unfamiliar laws and regulations, and infrastructure constraints. Mer-Mar believes these additional soft costs frequently exceed the promised hard cost savings that initially lure the company offshore.
Mer-Mar agrees that some lower-level technology or lower-end priced products may be outsourced offshore, highly complex assembly, and/or products for which price is not a major obstacle, often remains in the United States. But, customers that rely on high quality, advanced technology, and skilled labor will need to keep their assembly manufacturers close to home.
For example, customers requiring circuit board assemblies for critical care medical equipment may not be comfortable with the risk level that offshore outsourcing firms represent. Instead, they may depend on local contract manufacturers such as Mer-Mar to do the job. Mer-Mar’s focus is on those customers in specific industries where the need for reliability, accessibility, and repeatability outweigh the cost advantages of going offshore.
Management at Mer-Mar does acknowledge that it makes sense for high volume consumer goods, such as low-level electronics including toys and video games, to be outsourced offshore. In these cases, the cost savings are frequently realized, despite the rework and failure rates of these types of products. The also believe it is acceptable to offshore outsource services when the talent cannot be found domestically. In these situations, a company has no other alternative but to outsource.
Yet, offshore outsourcing is not an option for Mer-Mar. However, due to Mer-Mar’s niche market positioning and reputation for excellence in assembling highly technological and advanced circuit boards, customers continue to rely upon them for these services. With its plant located in the lower-cost, high desert community of Hesperia, and its focus on quality, reliability, and offering service to its customers, Mer-Mar continues to maintain its competitive edge.
Dr. Joe Greco is Director for the Center for the Study of Emerging Markets (CSEM) located in Fullerton, California. As part of the College of Business and Economics at California State University, Fullerton, CSEM was established to promote the flow of global information and technology between the academic and business communities. In particular, CSEM studies offshore outsourcing and it economic and cultural impact on US based emerging markets.
The company assembles circuit boards for the medical electronics, aerospace, automotive, entertainment and leisure, and homeland security industries. Mer-Mar is an ISO-9001 certified company consisting of 50 highly skilled employees who abide by industrial quality standards. The company is a regional service provider and supplier delivering high quality manufacturing primarily in the southwest United States.
As an end service provider, Mer-Mar does not outsource offshore. The company’s leadership also has a fundamental philosophy that views offshore outsourcing as impractical for their customers, which are in industries with high quality standards and just-in-time delivery requirements. While some of its larger competitors have commenced offshore outsourcing of various services, Mer-Mar has resisted.
Mer-Mar’s customers rely upon the quality of the products, history of dedicated customer service, and dependability of receiving orders when promised. Mer-Mar is also frequently asked to quickly complete orders for customers within a matter of days. In order to be flexible and responsive to its customers’ requests and to provide adequate support, Mer-Mar is required to remain close to its customers and its suppliers to keep its supply chain accessible and lead times brief. Each of these characteristics is perceived to be vital to Mer-Mar’s success and would be compromised if Mer-Mar were to outsource its manufacturing operations offshore.
Despite Mer-Mar’s favorable reputation, several customers have recently outsourced their circuit board assembly operations offshore. As with other industries, the attraction to offshore outsourcing is the promised cost savings. However, Mer-Mar cautions that many companies fail to recognize the increased soft costs frequently associated with offshore outsourcing.
These soft costs include additional personnel to monitor operations in foreign factories; time and money associated with shipping and customs inspections; costs to rework faulty products; the lack of easily accessible spares, and the challenges of working in a foreign country including communication challenges, low-skilled workforce, unfamiliar laws and regulations, and infrastructure constraints. Mer-Mar believes these additional soft costs frequently exceed the promised hard cost savings that initially lure the company offshore.
Mer-Mar agrees that some lower-level technology or lower-end priced products may be outsourced offshore, highly complex assembly, and/or products for which price is not a major obstacle, often remains in the United States. But, customers that rely on high quality, advanced technology, and skilled labor will need to keep their assembly manufacturers close to home.
For example, customers requiring circuit board assemblies for critical care medical equipment may not be comfortable with the risk level that offshore outsourcing firms represent. Instead, they may depend on local contract manufacturers such as Mer-Mar to do the job. Mer-Mar’s focus is on those customers in specific industries where the need for reliability, accessibility, and repeatability outweigh the cost advantages of going offshore.
Management at Mer-Mar does acknowledge that it makes sense for high volume consumer goods, such as low-level electronics including toys and video games, to be outsourced offshore. In these cases, the cost savings are frequently realized, despite the rework and failure rates of these types of products. The also believe it is acceptable to offshore outsource services when the talent cannot be found domestically. In these situations, a company has no other alternative but to outsource.
Yet, offshore outsourcing is not an option for Mer-Mar. However, due to Mer-Mar’s niche market positioning and reputation for excellence in assembling highly technological and advanced circuit boards, customers continue to rely upon them for these services. With its plant located in the lower-cost, high desert community of Hesperia, and its focus on quality, reliability, and offering service to its customers, Mer-Mar continues to maintain its competitive edge.
Dr. Joe Greco is Director for the Center for the Study of Emerging Markets (CSEM) located in Fullerton, California. As part of the College of Business and Economics at California State University, Fullerton, CSEM was established to promote the flow of global information and technology between the academic and business communities. In particular, CSEM studies offshore outsourcing and it economic and cultural impact on US based emerging markets.
# posted by Medical Information : 1:49 AM
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