Global Operations Management: Overseas Manufacturing Pros and Cons

Introduction

When an entrepreneur first launches a company, most of the labor and materials can be covered domestically and in-house. However, as the business expands, it makes more and more financial sense to move production overseas. For many companies, using a foreign supplier is the answer to absorbing the bulk of burgeoning sales and administrative expenses. There are both marked benefits and significant disadvantages to developing manufacturing operations outside of the United States. Engaging in such an endeavor requires substantial preparation, flexibility, and an overall understanding of cultural diversity among nations, races, and ethnic groups. It is best suited to highly skilled managers who have experience navigating delicate and nuanced interactions between peoples and cultures.

Benefits of Overseas Manufacturing

The most obvious advantage of creating a manufacturing operation outside of the United States is reduced cost. "Choosing to outsource your manufacturing can potentially reduce your costs of labor by up to 80% depending on the labor intensity of your product. The reduced operating capital will allow you to channel more funding towards marketing, research and development, salaries, as well as other areas that can help improve your bottom line" (Sourcingoverseas.com, 2017). When one opens a production facility in another country, manufacturing costs are markedly lower than those in the United States. Labor tends to be one of the biggest manufacturing expenses, and foreign labor is often significantly less expensive than domestic labor. When combined with lower utility costs, lower real estate costs, and lower overall taxes and material expenses, manufacturing abroad becomes an extremely attractive option.

Another advantage to manufacturing outside the United States is not as widely recognized, but many small business owners argue that they receive better service abroad for their manufacturing needs. Many entrepreneurs with smaller businesses—companies roughly half the size of giants like Target or Walmart—report that when they contact domestic manufacturers, they do not even receive the courtesy of a callback. Many domestic manufacturers refuse to do business with companies that are not large-scale. As one entrepreneur noted, "On the other hand, I never had difficulty finding a Chinese factory that was willing to work with me as a smaller company" (Shugar, 2016). Another benefit cited by companies doing business overseas is a pervasive "can-do" attitude. As one small business owner explains, "I never experienced a factory in China that was unable to produce a large order for me. Most times, when a Chinese factory tells you they can produce your order in four weeks, they produce your order in four weeks" (Shugar, 2016). There have been numerous complaints from business owners who have manufactured domestically about capacity limits and frequent delays. Foreign manufacturers are known for aggressive turnaround times that often exceed the expectations of American companies.

The benefits of manufacturing overseas are numerous, and many are connected to a positive attitude toward business and the enormous manpower available. This means that American companies can experience a shorter manufacture-to-market timeline, enabling them to grow their businesses more aggressively. Access to a larger workforce means that entrepreneurs can delegate more effectively, allowing them to refocus their energies on their core competencies and overall business development. Having access to a large pool of skilled workers is highly significant for a company of any size. Furthermore, many entrepreneurs argue that setting up manufacturing in America is not worth the cost or trouble given the volume of factory regulations. Foreign countries often have fewer regulations, making them more attractive to U.S. companies.

Finally, some entrepreneurs make the compelling argument that many foreign countries offer excellent duplication capabilities. While no one should be outright copying a competitor's product, there are times in business when reinventing the wheel is unnecessary. "For example, if you're manufacturing shirts and you like the fit of Shirt Brand ABC, then buying Shirt Brand ABC and asking your Chinese factory to duplicate its dimensions and fit is an easy way to begin your product-building process. Quite frankly, no one does that better than the Chinese" (Shugar, 2016). This illustrates that foreign manufacturers offer a form of specific problem-solving that can be both attractive and a practical means of simplifying design and production.

Disadvantages of Overseas Manufacturing

The disadvantages of developing a manufacturing facility abroad are significant and should not be taken lightly. One obvious concern is quality control: given the distance and time zones separating a company from its overseas manufacturer, it can become increasingly difficult to ensure that quality standards are consistently met. "To maintain quality control over your product, you might need to spend more on management, including hiring one or more managers to live near the production facility. The other option to monitor quality is to increase your travel expense by sending managers to the facility on a regular basis" (Ashe-Edmonds, 2017). These checks and balances can naturally chip away at the savings generated by overseas manufacturing. One way to mitigate quality control issues is to select a location where other manufacturers have already established operations, as there is likely to be a well-qualified labor force in place (Ashe-Edmonds, 2017). Some entrepreneurs also argue that certain goods—such as textiles—are ideally manufactured in China with greater attention to quality, while more detailed and technical products, such as electronics, may be better produced domestically (Shugar, 2016). As one entrepreneur explains, "Yet, with any factory—overseas or domestic—it will be important to stay on top of quality control because mistakes happen and shortcuts are made no matter where the factory is located. I used an agent when manufacturing in China who was responsible for ensuring the quality and accuracy of the manufacturing of our goods along the process" (Shugar, 2016). This entrepreneur argues that the benefits to quality and minimal cost have been well worthwhile.

Another drawback to overseas manufacturing is the compounded costs of shipping, customs, taxes, and arrival delays (Ashe-Edmonds, 2017). Much depends on where a company sells its product, as producing in a foreign country can sometimes make shipping less of a headache than shipping from the United States (Ashe-Edmonds, 2017). For example, if one is manufacturing in China, the facility is likely located in a remote city, where most factories are situated. Calculating the "landed cost"—the final cost of goods once they arrive at the buyer's door, including duty costs collected by the U.S. government—determines the final price (Shugar, 2016). It is also important to account for time differences and the duration of shipping. Most goods are shipped by sea, which takes approximately 30 days, compared to domestic shipping, which can be completed in a single day if necessary. For some sellers, the shipping time, costs, and logistical complications make overseas manufacturing an unsuitable option, particularly when accounting for lost sales during the nearly 30-day period when no goods are in stock (Shugar, 2016). Shipping by air is also an option when time is critical—an expensive choice, but one that can help compensate for potentially lost sales or clients (Shugar, 2016).

Another concern for American businesses is the overall political climate and general stability of the country where manufacturing will take place. It would be naïve to assume the same level of stability or minimal corruption as exists in the United States. Many overseas nations have workforces affected by political instability and corruption: "Political instability can rear its head in the form of a coup, revolution or terrorism. You might also have to deal with a culture of bribery and organized crime, with little or no law enforcement able to help you" (Ashe-Edmonds, 2017). This can make doing business treacherous, and for some companies the savings simply do not justify the risks. Depending on what is occurring politically within the foreign nation, unexpected price hikes may blindside a company. These are all factors that entrepreneurs and American companies must carefully consider.

It is also crucial to recognize that developing an overseas manufacturing facility could result in stigma and public relations problems. With increasing political pressure to bring manufacturing jobs back to the United States—a trend that predates but was amplified by the Trump administration—there has been growing momentum to boycott American companies that manufacture abroad. "If word gets out that your product is not made in the U.S., the media might report this, social media campaigns might damage your reputation or your competitors might use this fact in their advertising to take market share from you" (Ashe-Edmonds, 2017). On the other hand, if a company intends to sell its products in the region where manufacturing occurs, the goodwill generated by creating local jobs may actually yield increased sales and positive press.

Conclusion and Key Advisory Questions

If counseling an organization to consider a global manufacturing operation, one of the first questions to ask is whether they will have a quality control manager on the ground in the foreign nation, and whether they can afford more than one. Another important question concerns shipping: how time-sensitive are their products? A third question addresses cultural awareness: how sensitive is the organization to the different customs, work cultures, and related issues of the target country? Finally, it is worth asking whether the company has a public relations strategy in place to address any potential stigma associated with overseas manufacturing. The answers to these questions can go a long way toward determining whether a global manufacturing operation is the right move for any given organization.

References

Ashe-Edmonds, S. (2011, July 2). Advantages and disadvantages of opening a production facility in a foreign country. Retrieved from https://bizfluent.com/info-8676723-advantages-production-facility-foreign-country.html

Peavler, R. (2010, August 12). How just-in-time (JIT) inventory management can benefit your business. Retrieved from https://www.thebalance.com/just-in-time-jit-inventory-management-393301

Shugar, G. (2016). The pros and cons of manufacturing in China. Entrepreneur. Retrieved from https://www.entrepreneur.com/article/269783

Sourcingoverseas.com. (2015, November 4). The pros and cons of overseas manufacturing. Retrieved from

Tao, N. (2013, September 2). Managing cultural differences will be key to success overseas. Retrieved from https://www.shine.cn/archive/opinion/shanghai-daily-columnists/Managing-cultural-differences-will-be-key-to-success-overseas/shdaily.shtml