I’ll admit it’s hard not to think about price in this economy—everything from gold to groceries costs more. Price is also one of the driving factors behind the move to offshore manufacturing—low-cost labor equals low prices, right?
Not necessarily. As I’ve pointed out in a number of my past blogs, low-cost labor only makes sense for products that require a lot of human interface. All of the other factors that go into determining the price of a product are where the concept of “cost of ownership” comes in.
Cost of ownership is a fancy term for “all the stuff besides materials and labor.” For manufacturers, that can mean the cost of closing your manufacturing line down because a crucial component is out of stock. In the electronics industry, it can cost a manufacturer hundreds of thousands of dollars per hour while it waits for a component that costs less than a penny each. The manufacturer’s cost of ownership for that component just skyrocketed. Whether the manufacturer can pass that cost on to the customer is another question.
I’ve heard numerous stories from manufacturers that were left hanging waiting for materials, subassemblies or other components that were being shipped from overseas. Ocean shipment—still the cheapest method available—takes an average of five weeks. That means if you are quoting leadtimes, you have to factor that into your quotes. If you wait five weeks and find there’s a problem with the part, do you ship it back (10 weeks to get it there and back) or alert your supplier and wait five weeks for the correct part? Either way, it’s a no-win situation.
Many companies took a hard look at that situation and decided to source locally. On strictly a price basis, the products they were sourcing locally cost more. But they were able to reduce leadtimes, carry less inventory, eliminate factory downtime, and meet their production deadlines. The total cost of ownership was reduced.
Now is the prime time for U.S.-based companies to go after domestic accounts that are sourcing overseas. Fuel costs are at an all-time high. Holding and managing inventory costs money. At the end of the day, cost of ownership may trump price.