As the development of your product progresses, the focus starts shifting towards finding a good manufacturer. Before looking at specific manufacturers, you should make a couple of wider decisions - one of them being where you want to produce your products. In recent years, a heated debate has emerged surrounding the choice between domestic and overseas manufacturing.
This ongoing discussion revolves around the pros and cons of each approach, as businesses weigh factors such as cost, quality, efficiency, and ethical considerations. While some argue in favor of domestic manufacturing, citing benefits such as job creation and reduced transportation costs, others advocate for overseas manufacturing, emphasizing lower labor costs. In this blog post, we will delve into this great debate to help you with the decision making, exploring the advantages and disadvantages of overseas manufacturing compared to a domestic production to gain a deeper understanding of the impact because in order to make good business decisions you need to be well educated on available options.
Advantages of overseas manufacturing
It is understandable that as a business owner, you have to consider a cheaper way to produce products in order to maximize your profit margin. Sourcing products overseas, particularly from Asian countries like China, India, and Taiwan, is often cheaper due to lower labor costs and a wider selection of manufacturers which increases the competition bringing the price down. Overseas manufacturers are usually more cost-effective for mass production and they can also scale up quickly and produce large quantities of products in a relatively short period which can save money with volume discounts and lower costs on raw materials. Just make sure you know and can support their minimum order sizes.
2. Greater variability in production
This means 2 things: there is a wider selection of manufacturers to choose from giving product developers several choices and many factories can produce a variety of different products rather than being focused on a single manufacturing type. This holds particularly true for China, which, according to the data published by the United Nations Statistics Division, accounted for 28.7% of global manufacturing output in 2019 before the pandemic. When exploring possibilities in China, you gain a sense of the extensive range of suppliers, including factories and wholesalers. Additionally, other countries in Asia are expanding their manufacturing capabilities, providing even more diverse options for consideration.
3. Proximity to suppliers of raw materials and components
Overseas manufacturers generally have robust supply chains and established connections to diverse raw materials. Many common raw materials also originate in Asian countries, shortening the delivery times. Choosing domestic manufacturing may result in possible delays, especially when you rely on imported components or raw materials. The pandemic highlighted the significant impact of supply chain disruptions on manufacturing, particularly when exporting raw materials or components from their country of origin.
International outsourcing can be very tempting when you compare numbers but there are many other factors you should take into consideration before you make the decision. These might make domestic production a better option.
Disadvantages of outsourcing versus domestic manufacturing
1. Lack of oversight
As we all know, manufacturing a product involves significant financial investment, making it critical to inspect the facilities firsthand before selecting a manufacturer so you will have to take the extra cost of this/these visit(s) into account if you choose to go with an overseas manufacturer. We will discuss what to look at during the visits in our next article but let us tell you, these visits will give you a lot of critical information and therefore shouldn’t be skipped.
Regular visits aren’t as easy with an overseas supplier either because regular travel often incurs high costs and diminishes the cost savings of overseas manufacturing. This could lead to limited visibility throughout the business contract. Engaging in frequent in-person meetings for negotiation, problem resolution, and quality control is challenging with overseas manufacturing and building relationships becomes more difficult, especially in cultures that highly value face-to-face interactions.
Hiring an overseas agent can reduce the risk but you really have to trust this person. They will be your eyes and ears at whichever factory you select, provide local supply chain management, and carry out the quality control tasks you would do if you could be there yourself.
2. Language barrier
When it comes to communicating, expect the best but also be prepared for the worst with overseas manufacturers as many factories won’t speak fluent english making the communication quite challenging. This can present difficulties during contract negotiations and price discussions, comprehending operational processes and ethical considerations, and acknowledging and respecting cultural variations.
The issue could again be alleviated by hiring a local representative to act as a link between you and the manufacturer so they can communicate in the local language, but this will be an added cost and, as mentioned in the point above, you really have to choose this person carefully as they are the key between success and failure of this business process. They have to focus on your best interest and will need to understand exactly what you need to make it a success.
3. Problems with Customer Service
Think about what happens if something goes wrong - you realize that the latest batch has arrived with a quality problem or you need to stop the production suddenly for an unexpected reason. You need to be able to reach the manufacturer instantly and they have to be able to rectify the problem quickly to minimize the damage to your business. When the manufacturer is in a completely different timezone, they might not be readily available unless they offer 24/7 customer service.
And picture the frustration when your customers or retailers are left waiting and dissatisfied. In these situations, you are accountable for handling complaints regarding delays or quality issues. Regardless of the source of the problem, customers link the issue to your brand, requiring you to promptly resolve it.
4. Longer lead times and need for product importation and customs clearances
We discussed how the lead times for raw materials could be shorter for an overseas manufacturer. However, it could be the other way round for the delivery of the ready made product. This will depend on which countries you are planning to sell your product in. If the products are planned to be sold domestically, the lead times from overseas will be significantly longer due to the distance they need to travel.
Producing products overseas for domestic sale also incurs significant shipping expenses when transporting them to the market. While experienced manufacturers abroad can assist their domestic customers in managing these costs, customs play a crucial role in determining whether to manufacture a product domestically or overseas.
5. Lower perceived quality by customers
Products manufactured overseas are often perceived to be of lower quality and thus customers are usually not willing to pay as high of a price as they would for a domestically produced product.
6. Reduced security
Validating overseas manufacturers is more challenging compared to domestic ones, and the level of intellectual property rights protection and payment security is typically lower. Therefore, if you opt for an overseas manufacturer, it is essential to conduct thorough inquiries about their partnerships with competing brands, even mentioning the names of your competitors to ensure caution.
Additionally, discuss the measures and strategies they implement to maintain the confidentiality of trade secrets and prevent the unauthorized exchange of sensitive information among competitors. Selecting a reliable vendor who can provide a transparent commitment to safeguarding intellectual property is crucial.
Last but not least, you should examine the payment security systems and processes they have in place to maximize the protection of your business as the level of security around payments typically isn’t as high overseas.
NB! It is essential to note that before sharing any trade secrets with any manufacturer, it is vital to have a Non-Disclosure Agreement (NDA) in place. This legal document adds at least some level of protection against unauthorized use or disclosure of your product information.
7. Missed marketing appeal and positive press
When you manufacture your products overseas, you will miss out on the marketing appeal and positive press associated with domestic manufacturing - customers often prefer products made in their own region as they see them being of a higher quality, supporting the local economy and creating jobs.
8. Geo-political climate and weather-related risk
Although overseas resources may offer extremely low prices, unstable labor relations or political turmoil can result in a failure to obtain the necessary products. It is crucial to invest time in thoroughly assessing the potential for unrest in the areas that play a vital role in your supply chain success.
For example, the pandemic caused disruptions in global logistics and maritime trade, resulting in port closures, delays, and higher freight rates. Container ship waiting times increased by about 16%, and the number of connected ports declined. The world started bouncing back but it was short lived. As the Russia-Ukraine war started, concerns about potential food crises, input shortages, and price hikes rose. Several ports shut down due to the war, leading to increased ocean shipping costs and congestion, exacerbating global supply chain conditions. These disruptions have caused steep price increases. But it doesn’t even have to be such an extreme situation to cause disruption to overseas production.
What’s more, natural disasters such as hurricanes, snowstorms and droughts can affect communities worldwide but unfortunately, these events often receive limited news coverage regarding their impact on the supply chain. However, you cannot afford to overlook this aspect. When choosing between overseas and domestic manufacturing, it is important to identify the weather-related events that are typical in these regions as well as en-route and evaluate how they could disrupt your ability to conduct business as usual. Droughts and floods can destroy raw materials bringing the prices up, hurricanes and snowstorms can delay shipping and so on.
9. Value added services may be lacking
For smaller-scale production, a domestic producer may be a better choice as local manufacturers not only have the ability to create your product but can also provide valuable tips and ideas for improvement based on their experience.
10. Bigger carbon footprint
The carbon footprint of overseas production is typically significantly bigger. Challenges arise from factors such as renewable energy adoption struggles, less stringent carbon targets as well as long-distance transportation (air freight being a major polluter). For example, the UK has lower carbon emissions per unit of electricity than production hubs like China, Bangladesh, and Turkey thanks to the use of renewable energy. A manufacturer in China would typically release around 90% more greenhouse gas emissions (GHG) while using the same energy as in the UK - what a significant impact to the environment. China’s large emissions of carbon dioxide are directly linked to high emissions from its exports.
In the distribution stage, air freight is the worst polluter but any long distance shipping method will pollute more than a local one. What’s more, every time you travel back and forth to the overseas country to visit the manufacturer, it increases your carbon footprint significantly as well.
Both domestic and overseas manufacturing have their strengths and weaknesses and choosing between these options ultimately depends on personal preference and what works best for your product. Just keep in mind that although overseas manufacturing might be cheaper when it comes to cost per unit, the overall cost after shipping and customs as well as time spent on paperwork and communication issues could counterbalance the initial benefit. What’s more, local manufacturing can have many value-adding benefits like positive press and better perceived quality allowing you to charge a higher price for your product not to mention the positive impact on the environment thanks to the lower carbon footprint.