Offshoring the production of goods was at one time all the rave for companies looking to take advantage of cheap labor in factories overseas.
However, what many of those companies failed to see were the many outside factors that would shake up costs and essentially add more risk to the production process.
“Over the last five to 10 years there was a huge effort to chase low cost wages in developing countries,” said Jeff Moad, Research Director of Manufacturing Executive, a unit of Frost and Sullivan. “One of the problems with this strategy was that it overlooked the associated costs and risks of producing good overseas, like supply chain disruption.”
Although many companies were initially able to raise profits by sourcing production in countries with low cost wages, like China or Taiwan, the risk was overlooked.
It takes just one look at the scandal involving shoe-giant Nike and the accusations of “sweatshop abuse” to see the political ramifications of living wages and poor factory working conditions.
Secondly, there are innumerable outside factors that can have a huge impact on the cost of production. Extreme weather (or other natural disaster) could drastically offset production timeliness, essentially nixing the profits a company would hope to gain by outsourcing. Same goes for oil, a main factor that can hike up shipping costs- one of the biggest concerns for companies who produce mainly overseas.
“Many manufacturing companies have looked more at near shoring or bringing production closer to home to reduce some of those risks,” Moad said, explaining how companies can benefit from exploring their different options when it comes to choosing where they source production.
One executive who has utilized this idea of near shoring, or “smart shoring” as he likes to call it, is Brad Heath, founder and CEO of Austin-based VirTex Enterprises, a company that makes electronics products and prototypes for other companies.
Heath says smart shoring is all about first doing what makes “sense” in the states, next in neighboring countries like Mexico and lastly overseas in China.
“Really it is about doing the work where it makes the most sense,” he said. “If you’re selling into a country you should do the majority of the work there. If you’re selling into the US, you should look at producing on shore or nearer by in Mexico.”
Heath and VirTex have executed this strategy to perfection. In each of the last five years, VirTex has been named in Inc. Magazine’s annual ranking of the 5,000 fastest-growing private companies in the U.S. The company presently grosses $26 million and boasts 164 employees and plants in the U.S. and Mexico.
Three Factors Are Key When Considering Where to Produce Your Products
Heath revealed to the Digital Journal that the main point of smart shoring was to simply maximize flexibility. He explained that the three main factors he considered when helping companies decide where to source production were lead time, shipping costs, and the overall price difference of producing domestically versus overseas.
Before they convince the company they can benefit from smart shoring, “we first have to convince ourselves,” he said of how they achieve success. “We have to understand [the company’s] supply chain- we have to understand what they need.”
Moad added that he felt Heath and VirTex were able to accomplish this task for more than just that reason.
“My sense is that [Brad] has a relatively small company with a tight team,” Moad said. “He has the benefit of having a culture that supports innovation and he can act quite nimbly around new ideas. Near shoring is a pretty good example of that.”