Identifying the Total Cost of Outsourcing

Gerry Fay, Chief Global Logistics & Operations Officer, Avnet: If all electronics OEMs had the same supply chain needs, my job would be fairly simple: Map out a standard process and take a nice long lunch. But, there is no "one-size-fits-all" strategy for managing the global electronics supply chain.

One customer may barely break $1 million in sales in a year, while another is topping $10 billion. A customer may source, manufacture, and market its product within a single defined region, while another may design in one region, source and produce in another, and market in several separate locations across the globe. Supporting each of these different customers clearly requires very specific and distinct methods.

Given this reality, I must say that I am somewhat surprised by the seemingly ubiquitous pursuit of offshore manufacturing, particularly in low-cost regions like China. From the very beginning, Avnet Inc. (NYSE: AVT) has counseled our customers to carefully consider their needs and the pros and cons of offshoring. As tremendous an opportunity as this may be for some -- those with high volume, predictable manufacturing requirements -- to lower production cost and gain access to indigenous markets, it can be an equally expensive move for others.

There are significant costs associated with migrating a supply chain to a foreign region. Unless the intent is to sell your product in the manufacturing region, the greatest expense is logistics. Shipping finished product from Asia to intended markets in the United States, Canada, or Latin America can be very costly. You must consider the impact of rising fuel costs, complicated import/export procedures, and, of course, time -- depending on the shipping lanes, it can take weeks to move product. For some, the labor cost savings may still far outweigh the additional expense, but unless you understand these costs in detail, the competitive advantage can be somewhat elusive.

I have heard a number of OEMs express their disappointment with this strategy, yet many are reluctant to consider alternatives. The prospect of another major supply chain movement so soon after settling in overseas is daunting, to say the least. These OEMs should consider, however, that there is a big difference between moving a supply chain to a region that is 6,000 miles from headquarters and to a region that is a short flight away.

For example, Mexico has been talked about a lot in the past as an increasingly attractive low-cost manufacturing option for North American OEMs. The relative proximity, the low-cost labor, and the quality of providers in the region are definitely worth considering. I know that for many, the topic of Mexico automatically conjures images of cartel violence. There is no denying that this exists, but this has generally not affected the manufacturing hubs. When I visit Avnet's facilities in the region, I honestly do not feel in danger. In fact, there are some ultra-urban areas in the states that have much higher crime rates.

I say this not to try to convince anyone to transfer their business to Mexico, but to encourage OEMs who are not satisfied with their current offshoring strategy to review their options, including their total cost of outsourcing, and consider the alternatives. Understanding the key advantages that China and Mexico offers can uncover significant savings opportunities.

For companies whose end market is the Americas, Mexico offers an excellent choice for outsourcing when considering increased competition for air freight space and the landed cost from China, which includes insurance, potential lead time issues, and time–to-market.

Posted in Nearshoring/Offshoring