Increasing offshore costs give rise to changing global outsourcing strategies.
There has been a lot of talk lately about the actual cost associated with outsourcing PCBs to Asia. The early promises of lower pricing and higher profit margins made many customers salivate. “Go East” was the rallying cry, and many followed that cry–only to find out the savings weren’t as great as expected and were only a short-term solution.
We may never know if the prices that were originally quoted were accurate or purposely deflated, and it really doesn’t matter. Customers are now realizing they need to determine the actual total cost of acquisition for themselves, especially since offshore labor, logistics and fuel costs are rising, and as a result, increasing the total cost of acquiring a PCB from overseas. Because of this customer realization, some of the major orders placed offshore several years ago are now coming back to be manufactured domestically. There are several reasons why we should rethink offshore supply.
Customer Order Entry and Planning
Unless your product has the words iPod or Blackberry on its face, the days of blanket orders with six-month windows are probably gone. It is not so much that the economy is bad, but rather that customers are hesitant to commit to such large orders. The original, enticing offshore pricing was based on those types of large-quantity orders.
Smaller Order Delivery Size and Rising Fuel Costs
A significant decrease in customer back orders combined with an inability to make long-range plans goes hand-in-hand with a reduction in the size of shipments. Along with higher fuel costs, these factors increase the final freight bill.
Time-to-Market
There is more caution when placing purchase orders, and sometimes orders or re-orders may have to be produced in less than the originally quoted extended lead-times. Material availability and shop loading will raise costs as well, and if there is a spike in demand, a faster shipment method may be required, meaning a higher freight bill. Having completed inventory on-hand could curtail the need for an expedited build and shipment, but maintaining inventory costs money too–and what would you do if there were a revision change or push-out?
Currency Fluctuations
The value of the dollar has been falling, and tight margins are definitely affected by just the slightest of differences.
Higher Labor Costs
The results of the successful development of a low-cost nation are that eventually, there will be an increase in the cost of living and a demand for higher wages. Remember Japan 25 years ago? The same thing is now happening in China.
All the above factors affect the total cost of acquisition of the PCB orders. But this list does not include the cost of on-site visits needed for initial plant surveys, engineering changes or the need to address quality concerns, nor does it include the considerable investment of time needed to develop and to maintain a successful relationship with an offshore vendor.
Another issue to consider is whether to have products manufactured in China or Taiwan. Both countries are experiencing price increases at the moment. However, I believe Taiwan is more stable, both economically and politically. The working wage in China is increasing, the dollar has fallen against the RMB and lead times have been pushed out due to internal demand, natural disasters and heavy government intervention. Both Taiwan and China have been affected by rising fuel costs, but the price gap between the two for the total cost of product acquisition is narrowing.
To help American companies combat the difficulties of getting PCB orders of various quantities from Asia, several companies have opened international purchasing offices (IPOs) in hopes of containing costs and grouping total annual PCB and other commodity purchases. This strategy has succeeded for some very large manufacturers because they do have buying power. However, it is not really working for the majority of smaller domestic companies. That’s because these companies, while establishing an office and staff overseas – which is really just a duplication of efforts – are still being affected by those five factors mentioned above.
There is an offshore solution, however, for those lower-volume orders. PCB broker/distributors – once shunned as the black sheep of our industry – have become much more popular because they offer ease of purchasing, better quality controls in place and direct shipments. Some even include freight with the price. As a matter of fact, some of these broker/distributors are even building product for domestic PCB manufacturers that then ship the very same product to its customers.
But not all broker/distributors are created equal. If you are considering using one, you should first do your research and ask a lot of questions such as: Does the broker use one vendor or several? Will you be informed of the manufacturer of your order? Will that vendor be the vendor for the life of a particular part number? Will the broker allow on-site audits? Does the broker have references immediately available for review? If there is a problem with an order, how will it be handled?
Before making the decision to go with your offshore orders or to start an IPO, consider a PCB broker/distributor as a Group Purchasing Organization (GPO) that can pool your monthly spending on PCBs with that of many other customers and then use this as leverage with vendors. By going through a broker, you can increase your buying and shipping power..
In fact, brokers may very well be able to beat most IPO pricing because they have concentrated buying power and will help you minimize cost fluctuations. Reputable GPOs will identify and use only UL and ISO-approved sources; some brokers may also be ISO-approved. Also, an IPO requires a long-term commitment of time, energy and finances. A GPO frees you of that long-term commitment, allowing you to take advantage of its services for the length of a purchase order.
Not all PCB manufacturing orders are coming back to the United States. It’s just those orders that make sense to build domestically–the ones that were borderline or had tight margins several years ago and are now proving to be less expensive to manufacture domestically. It is as if a wave of products went across the sea, hit a seawall of cost and, whatever doesn't make it over that continually rising wall, is being returned in a smaller wave, back to our shores. PCD&F
Greg Papandrew is founder and president of Bare Board Group. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
