Understanding “true and total cost of a product”

Posted: December 15, 2010 by Ted Fogliani in: Blog Posts

I spoke yesterday at a Connect Event in San Diego, and one of the most critical question related to what Outsource Manufacturing – Made In San Diego does was asked. The question was, “How often to do customers have a true, complete, realistic understanding of the actual total cost of manufacturing off-shore or in Mexico compared to the cost to have it manufactured in the U.S.” The answer was too easy…I said “Never”. There are a few categories of companies and people we talk with. One type has already decided they belong in China or Mexico or some other supposed low labor rate market. This type doesn’t even quote U.S. manufacturing sources, he or she has been trained to know that “China is the place, the lowest cost to build my product.” This person is tough sell, a tough one to convince to even quote a local, U.S. facility. By the time the experience some of the challenges to their plan, it’s often too late to bring the process back. It happens time and time again. Not until they have trouble to they quote a local source, only to find out the total cost would have been about the same, if not less, and they would have avoided much of the additional costs, headaches and delays.

A second type, might be wise enough to actually quote both off-shore, Mexico and some U.S. facilities. Where this 2nd type can have trouble is what they use to calculate the “total cost of the product”. I have sat in meetings where we are discussing costs, and I’ll ask the most simple, “I don’t see where you have captured the cost to have 3 engineers at your China supplier for 6 months to launch, and 1 full time during on-going production, I don’t see air-fare, hotel, etc.” Their answer, “not a line item we assign to cost of goods, and not in my budget or area of responsibility”. It doesn’t matter how lean we may choose to go on margin, if a customer chooses to leave out the operating costs of doing business with my competitors, when those costs are significant, it’s a very tough one to win. Not impossible, but takes a lot of education and defining the real cost of goods.

What I have learned in nearly 20 years of this business is that every person, every company is going to calculate the total cost of manufacturing differently. Most will do the math to fit into their pre-conceived expectation of where it should be built. That’s a dangerous pre-conception. I have worked hard to find customers that are smart enough to understand what value a U.S. manufacturing company can bring, and we are always happy to be included in the evaluation they do to find a partner and source. For many products, probably most, a deep look at total cost keeps the U.S. as a viable location to manufacture. You need the right partner who is committed to manufacturing in the U.S. and all that goes along with that such as job creation, maintaining our edge for innovation and continual review and improvement of process and efficiency. But when you find that, it works for the OEM, it works for the CM and it works for the eventual customer and consumer.

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