The High Price Of Low Cost Manufacturing

Has a contract manufacturer offered you a price that seems too good to be true? We hate to break it to you, but it is likely too good to be true.

When it comes to manufacturing, two things are unquestionable:

1. You get what you pay for
2. There are tons of hidden costs

Manufacturers in China and other Asian countries can sometimes offer the lowest piece rates. But they can’t always offer the best prices. Many companies learn the hard way that going with an overseas company that offers the lowest piece rate ends up costing more money in the long run.

Here are six reasons why doing business with a manufacturer halfway across the globe is hardly worth the low initial costs:

1. High Shipping Costs

Photo Credit: amicon via the Noun Project

Asian manufacturers can offer cheap prices upfront because they rarely include shipping costs. The truth is that shipping from an Asian manufacturer costs an arm and a leg. They are located halfway across the globe, after all.

Also, shipping costs have been rising right along with oil prices. Even if oil prices drop, shipping costs will still rise because of the other factors listed in this post.

2. Large Minimum Orders

With an overseas manufacturer, chances are high you would need to place a large minimum order every time. Many manufacturers need you to fill a whole container for two reasons:

1. Overseas shipping is a long and expensive process, and it’s hardly worthwhile unless you fill a whole container.
2. The manufacturer’s piece rate is so low that their work won’t be worthwhile unless you place a large order.

Placing a large minimum order negatively impacts cash flow for many companies. This is especially true if the minimum order is equivalent to three months or more of sales. It requires a large cash outflow all at once when most revenue is typically generated steadily over time.

3. Longer Wait Time

Overseas shipping takes a long time. In fact, even the customs clearance can add a few weeks to your total shipping time. It’s common to wait weeks or months for your shipment. It’s also common for unforeseen circumstances to extend the wait time. Examples of unforeseen circumstances include:

• Supply chain interruptions
• Equipment breakdowns

Supply chain interruptions can be quite cumbersome, especially when your shipment is large. A longer wait time can bring significant financial consequences for your business.

Even then, there’s no guarantee that your shipment contains products that meet your quality and design standards. It’s not fun waiting a long time for a shipment, only to find out that the products within the container aren’t up to par. This sort of thing happens all the time with overseas manufacturers. If you find yourself in such a situation, you’ll have no choice but to either:

• Ship it back (possibly at your own expense), or
• Order a new shipment.

Either option means an even longer wait time.

4. Lower Quality Products

When it comes to manufacturing, you get what you pay for. The low piece rate some overseas manufacturers offer may seem attractive. But these rates hardly yield high-quality products. Often times, these manufacturers can offer low prices because:

• They use lower grade materials to produce your parts
• They use cheap labor that’s often unskilled
• They usually don’t have state-of-the-art equipment
• They have little to no quality control procedures in place

Low-quality products reflect poorly on your brand. Even though you pay less money upfront, low-quality products may cost you more money in the long run. To be more specific:

• Your company will have to spend money replacing all the products returned under warranty
• Your company will develop a reputation for selling cheap and unreliable parts and lose a lot of potential sales

5. Higher Risk Of Intellectual Property Theft

Here’s a secret Asian companies don’t want you to know: your company’s intellectual property (IP) isn’t quite safe overseas. In fact, you can pin 50%-80% of all U.S. intellectual property thefts on Chinese entities. As a result, U.S. companies have collectively lost hundreds of billions of dollars in revenue.

IP theft is common overseas because the IP laws in Asian countries aren’t written in favor of foreign companies. If you end up partnering with a manufacturer in an Asian country, you’re running the risk of having your IP stolen. If that happens, you could choose to spend a lot of time and money fighting the company in court. Yet chances are pretty good you have no chance of winning.

6. Communication Challenges

It’s common for U.S. and Canadian companies to run into a lot of communication barriers with overseas manufacturers. This often leads to expensive and time-consuming travel for high-value employees.

You’ll Save More In The Long Run With A Reputable Manufacturer In Mexico

For all the reasons listed above, many companies do what is often called “nearshore,” which means looking to local or regional manufacturers for help. Yet, for U.S. and Canadian companies, most of these local manufacturers are high-cost, low-volume producers. There’s another solution, though, that can be affordable and high volume: Mexican manufacturing.

Contract manufacturers in Mexico (like Intran) can offer the best of both worlds:

• The same quality, ease of communication, fast shipping, and low shipping costs of a U.S. or Canadian manufacturer
• Volumes and per piece rates comparable to Asian manufacturers

Not to mention, Mexico’s intellectual property protections are robust.

The bottom line is that there are a lot of hidden costs in sourcing parts from halfway around the world. You get much more value when you nearshore, especially when you partner with a reputable manufacturer in Mexico.