Should you move manufacturing closer to customers?

When selling products overseas, should you mitigate the cost of international delivery by manufacturing closer to customers or should you cut costs another way? This article discusses the pros and cons of each option and offers suggestions to help you in your decision-making process.

You’ve hit a key milestone: You’ve expanded your market reach and are selling across the globe. And now you have a decision to make.

Should you mitigate the cost of international delivery by manufacturing closer to customers or should you cut costs another way?

The growing pains of success

Going global is a great sign that business is booming, but international customers bring the added demands and stress of international delivery. As you gain traction in other countries you will find there is a great deal of cost associated with getting your products to the point of delivery—especially countries that have added tariffs and fees.

Key factors in your decision-making process

  • Quality—Will a decrease in product quality ultimately cost you more?
  • Logistics costs—Will a global supply chain reduce or increase your logistics costs?
  • Cost of international management—Are you equipped to manage multiple supply chain partners across the globe?
  • Communication—Will you be able to keep lines of communication open across a complex and global supply chain?
  • Supply chain resources and relationship—Will your current supply chain support you as you expand?
  • Taxes, tariffs and fees—Will you incur any new taxes, tariffs or fees? Can you eliminate any by manufacturing closer to customers?

Weigh the options before making a decision

Option A.

Find suppliers close to your customers to avoid international delivery costs.

Option B.

Work with your current CM to find other ways to cut costs.

Option A: Make the move

When this can work for you:

  • You have a mature product
  • You have a well-documented and well-managed product
  • You feel comfortable in your ability to deal with and manage risk
  • There are several competing companies that can address your manufacturing needs
  • Manufacturing isn’t your core competency or the core driver of your product’s value

Potential Benefits

Risks

Lower shipping, freight and logistics costs Decreased stability
Increased supply chain efficiency Less control over quality
Improved customer relationships Increased supply chain complexity
Fewer barriers to foreign markets New social and geo-political challenges to navigate

Manufacturing closer to customers can help business in more ways than one

There are many reasons why manufacturing close to customers can be beneficial—not only does it reduce the shipping, freight and logistics costs associated with getting your products to market, but there are a few additional and unexpected ways you can benefit from this move. 

Increase the efficiency of your supply chain

Distributing your manufacturing across the globe can make your entire supply chain more efficient because it allows you to lighten the load for your current supply chain partners. By passing some of the total workload along to the new international manufacturers, you can ultimately make your whole team more efficient and achieve faster turnaround times.

Achieve better customer relationships

You may also find that being physically close to your customers improves your relationship with them. For example, if a customer has quality check points during the manufacturing process, your nearby location could dramatically reduce the cost of business on both sides. Your customer may also appreciate that some of the manufacturing is done close to the point of delivery if the product has security or quality issues to manage, or a lot of custom features.

Minimize tariffs and other barriers to foreign markets

A last thing to consider are the tariffs and restrictions associated with shipping to some countries—developing a global supply chain can help cut some of these additional costs. Plus, businesses in some countries (like China) will only buy from you when a percentage of the product is produced in their country.

Consider your long-term goals

There is an argument to be made for keeping things the same to maintain stability, but the trade off is leaving money on the table. And while sticking with your current strategy is less risky in the short term, building a global supply chain can reduce your risk in the long run as currencies and availability of raw materials fluctuate depending on region.

Option B: Stick with your current supplier team

When this can work for you

  • Your product is immature
  • You can’t afford a reduction in quality
  • You are dependent on a competency owned by your current suppliers

Potential Benefits

Risks

Maintain control over product quality Higher shipping, freight and logistics costs to ship internationally
It’s less work to maintain your current system than to set up a new one Less access to some foreign markets
Avoid short term risk Less opportunity for innovation

Maintain your current supply chain and cut costs another way

In spite of the advantages, there are reasons why you might not want to move parts of your supply chain across the globe. A local supply chain gives you better control over product quality—and if you are in medical device or an especially quality-sensitive industry, quality control may be more important than ease of distribution. Also, the risk of production stops and errors increases when you are further away from your supply chain, so you will have to invest in remote management resources to ensure consistent quality if you move your manufacturing. 

You may not have the resources to develop a global supply chain

Additionally, you should consider what else is going on in your organization and where you are in the production schedule. It takes time and energy just to set up a new domestic manufacturer, let alone manage the new team, once travel, new customs and other socio-political challenges are added to the mix. If you have other organizational changes to manage simultaneously, or if you are getting close to kicking off your next production cycle, you may be asking for trouble by making major manufacturing changes.

There are other ways to cut costs

Remember, moving your manufacturing close to customers isn’t the only option for cutting manufacturing costs—you can also save money by optimizing what you’re already doing. For example, if your current domestic manufacturers have the bandwidth to handle the new demand, you may be able to leverage quantities of scale and save money there.

To recap

You may want to consider moving your manufacturing close to customers if:

  • You have a mature product with strong documentation and management
  • Manufacturing the product isn’t a core competency
  • There are a lot of competing providers that can meet your manufacturing needs
  • You are in a position where you can take a manageable risk

You may not want to develop a global supply chain if:

  • Your product is immature
  • The cost of poor quality is greater than the potential savings from shifting
  • Your current manufacturers hold a great deal of power in your relationship

Tips for making it work

If you decide to make the move and develop a global supply chain, a little bit of planning upfront can prevent a huge headache later on—so be sure to put in your due diligence. Also make sure to check the political ramifications of the move, as well as taxes and tariffs domestic and abroad, because these factors can help you make the go or no-go decision.

Remember that making a big change to your supply chain can be risky, and it can take awhile for things to settle. If this is your first stab at a move of this magnitude, don’t make too big of a bet on this strategy. Start small and grow it out.

If you decide to keep things the way they are, see if you can optimize your procedure by leveraging economies of scale or adopting business improvement practices like TQM, Lean or Six Sigma. And don’t hesitate to revaluate often. Just because you made the decision to stay local two years ago doesn’t mean that it is the right decision for life.  The sooner you can refine your process domestically the sooner you will have the option to go international.

For more information

Harvard Business School Case Study, Arcor: Global Strategy and Local Turbulence
Harvard Business School Article, Are you ready to go global?

 

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