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Best of Business 2011
In the Zone
The Business of Intelligence
When Opportunity Knocks
Moving manufacturing operations overseas has a number of benefits for businesses large and small. Wages in developing countries are generally lower, as is overhead and, sometimes, the cost of raw materials.
But before taking the leap over oceans and continents to take advantage of these tantalizing benefits, businesses need to be aware of a number of pitfalls and hidden costs, according to Kurt Jensen, vice president of product development for VPI Engineering based in Draper.
“Everyone thinks they need to make something overseas and that’s not always true,” says Jensen, who manages relationships between his company and manufacturing plants in countries such as China, Thailand, the Philippines and South Korea. “So many companies think, ‘Well, I can just do this in China’—huge mistake.”
VPI Engineering began as part of Utah State University’s Center for Self-Organizing and Intelligent Systems (CSOIS) in the mid ‘90s and has its genesis in projects such as the Red Rover Goes to Mars project that helped middle-school students explore space using robotics and groundbreaking tele-presence technology.
Since then, the employee-owned company moved to its current Draper location and added about 40 employees, the majority of whom are engineers. Today, the company designs products such as radiation detectors that help the military and first responders detect dirty bombs. VPI has also engineered a number of consumer electronics and high-tech products for industrial, medical and agricultural applications.
VPI has had more than 200 clients during its 15 years in business, and its clients determine whether or not to ship manufacturing overseas. About 70 percent of the products VPI engineers are built overseas. The remaining 30 percent, including all the military applications, are manufactured in the United States.
Assessing the Hidden Costs
Companies considering overseas manufacturing need to be aware that supply-chain issues alone can add up to 15 percent to the price of a product, Jensen says. Furthermore, issues such as cultural differences and the lack of “entrepreneurial spirit” outside the United States can make hasty decisions to shift manufacturing operations disastrous.
“Here’s the biggest thing: don’t rush into it,” he says. “Go in eyes wide open. Take the time before you commit to a manufacturer—or anything else. Go over there. Tour the facility. Nail down the relationships.”
One of the most important things to realize about working with overseas companies is that many firms lack the entrepreneurial spirit fostered in the United States, according to Jensen. He provides an example of a problem VPI encounters regularly in China.
“Decision or problem-solving paralysis is a real and common occurrence,” he says. “Often when a decision needs to be made, the manufacturer will get stuck in eternal data collection mode and not make it to presenting solutions.”
Critical analysis and innovative thinking is also lacking in China compared to the United States, Jensen says, because students are trained to follow processes exactly rather than look for problems, “To find a contract manufacturer that will retrain their staff to critically analyze processes is like finding a rare gem.”
Smoothing the Transition
Despite inevitable stumbling blocks, there are benefits to working with overseas factories that are hard to ignore. The U.S. Bureau of Labor Statistics expects jobs in computer and electronic product manufacturing to decline by nearly 20 percent by 2018 due to imports and the movement of jobs to lower-wage countries. In other industries, such as shoe and clothing manufacturing, 35 percent of products purchased by U.S. consumers are already made in China.
Companies moving overseas, as many invariably will, can make the job easier in a number of ways, according to Jensen.
First, he recommends finding a company to work with that is similar in size to your own, for the sake of balance. If a customer automatically runs to the biggest manufacturer available but only needs a few thousand products, “they’re going to treat the customer like dirt,” he says. If the roles are reversed, the U.S. company will “walk all over the manufacturer and it’s going to crash and burn,” he says.
Next, Jensen recommends working out specifics with foreign factories. Things to put on the checklist include how dollars will flow, how reporting will occur, how you will get progress updates, how you will identify failures, how goods will be shipped, and what kind of volume is going to happen.