Manufacturing Costs By Country – The Big Picture
There’s a myth in manufacturing that you’ll save money by outsourcing to countries where the labor costs are the lowest. While there’s some truth to it, it’s still a myth.
Manufacturing Cost Is Determined By More Than Labor Rates
While labor rates are a big part of the cost puzzle, there’s a lot more to low cost manufacturing than low hourly wages. In fact, as automation and technology improves, labor costs become less and less important. If we look back at our nearly five decades of being in business, we’ve never needed fewer man hours to produce assemblies and components than we do today.
If you’re looking for the lowest cost manufacturing options, you want to look at costs in the following areas (in addition to labor):
Shipping is expensive and makes up a large chunk of your manufacturing costs. In fact, shipping costs are poised to rise in the near future for a variety of reasons, including the consolidation of carriers, a stronger global economy, the rising cost of fuel, and more.
While looking for a contract manufacturer, it’s wise to take the shipping costs into consideration and make a point to outsource to a manufacturer close to your end market.
Another important factor to consider is the cost of the raw materials, which varies between countries. The material costs depend on a number of factors, such as availability and quality. You want to get a contract manufacturer in a country where raw materials are high-quality, affordable, and readily available.
All contract manufacturers have to pay their bills. The higher their overhead costs, the more they’ll charge you. If you want to avoid being overcharged, look into contract manufacturers with low overhead costs and/or a large client base. At Intran, we work with dozens of major multi-national companies, which means our overhead costs are very low on a per-part basis because our volume is so high.
Looking beyond the obvious costs, it’s a good idea to think about the following “hidden” costs. None of them are certain, but all of them are possible:
If the manufacturer doesn’t live up to the terms of your contract, the costs of using them can skyrocket. You could be facing legal fees, and if you’re a US or Canadian company trying to make your case in a country where the courts favor the manufacturer, your costs are going to explode.
How to prevent this from happening: In some countries (like Mexico), the legal system is honest and fair to foreign companies. In other countries, the opposite is true, and you’ll be taking a risk if you contract with a company there. To play it safe, contract with a company in a country that has a rigorous legal system.
Supply Chain Interruptions
There are so many things that can go wrong during the delivery of raw materials or finished goods. For example, it’s not uncommon for cargo to get lost at sea. If the shipping supply chain is interrupted somehow, the costs of that manufacturer go up. If your manufacturer has shorter supply chains, the risk of interruptions are lower, as well as the size of the disruptions.
How to prevent this from happening: Contract with a manufacturer with a short supply chain. Also, it can’t hurt to contract with a manufacturer close in proximity, like Mexico. If the manufacturer is 1 day’s drive away, the longest it can take to have your finished goods delivered is 1 day. Sure beats a few weeks, doesn’t it?
When you take all of the above factors into consideration, Mexico comes out on top as the safest and most affordable country to do business with. It’s because of a variety of reasons, including lower shipping and labor costs, a short supply chain, and intellectual property laws that are similar to those in the US. Read more about the advantages of manufacturing in Mexico.