Digital Version of March/April 2015
Digital Version of January/February 2015 Print Edition
Why contract manufacturing in the U.S. makes sense for security companies
Jim Coghlin Jr.
Every business day, companies fight to keep manufacturing in the U.S., and with good reason. Companies want to keep highly-skilled, well-paying jobs here. They want to keep profits and taxes in the U.S. But, foremost, when one looks at the total cost of manufacturing, domestic manufacturing truly is the most cost-effective option.
Companies witness this every day and it’s starting to become apparent as more customers are re-sourcing product from Mexico, Eastern Europe and the Far East back to the U.S. So, why is the U.S. becoming the next low-cost region for manufacturing?
There are certain times when low-cost region sourcing does make fiscal sense, particularly with high-volume, revision-stable consumer products, such as iPads, DVD players or LED televisions. Such products are manufactured with automated equipment in a factory which can be set up and run 24/7, with very little interruption.
However, once customization, complexity and change are introduced, the ability for offshore manufacturers to adapt and maintain consistency is often greatly diminished. The geographic and cultural barriers cause timely communication to break down, resulting in increased obsolescence and lead times, decreased quality, and overall cost savings are diminished greatly.
Conversely, domestic manufacturing provides these, and many other, efficiencies, not the least of which is efficiency related to communicating and implementing changes. Domestic manufacturing also offers a high level of protection to an organization seeking to secure its intellectual property (IP) from unauthorized use or outright theft. It provides companies with the ability to introduce a change in revision to a safe and secure supply chain. In our experience, there are no low-cost labor region governments that vigorously protect IP like the U.S.
Not all business sectors are suited to pursue this approach, such as low margin manufacturing. Business sectors that are suited for 100 percent domestic contract manufacturing include the military, security and detection industries, as well as the medical device industry and complex high-tech capital equipment sectors.
For instance, while the source of components is paramount in several of these sectors, embarking on the path of 100 percent domestic contract assembly does not preclude one from sourcing reliable, tested commodity components from low-cost regions, such as pc boards, commercial components, machined parts and sheet metal. In fact, by engaging with an experienced contract manufacturer, this can create a true win/win cost scenario. Material costs are lowered, final integration, test and QC is managed domestically and IP is protected.
There is also a significant advantage in logistic costs, from a freight and duty perspective and also for lead time and engineering change notifications (ECNs) by manufacturing domestically. Otherwise, companies must plan 5-6 weeks out to factor in shipping, plus the lead time to manufacture in a specific region. With up to 25 percent of savings consumed by freight alone, this is a major factor to consider, never mind the loss of goods already primed in the supply chain in case a change needs to be implemented immediately -- whether it be for performance, cost or safety.
In addition to the themes outlined above, here are some key points that underscore the advantages of domestic contract manufacturing. This can serve as a short checklist for companies that are considering this path:
- Leveraging existing relationships – contract manufacturing can leverage existing relationships more effectively, such as those built with vast networks of suppliers. Customers aren’t likely to have those in place and would be challenged to source materials and parts as cost effectively.
- Manufacturer/customer dynamics – the relationship that exists between local (domestic) contract manufacturer/customers should not be underestimated. With offshore manufacturing, the aforementioned various differences can impede the flow of ideas and information as products are developed.
- Closer communication – this fosters a quicker and more efficient decision-making process. Time zone and language differences can place barriers between the manufacturer and customer.
- Manufacturer knowledge of markets – often times, a contract manufacturer has deep knowledge of a particular market or markets. This domain expertise can and should be leveraged by customers, as it reduces ramp-up time and can help identify appropriate market segments that may not have been considered.
- Time to market – domestic contract manufacturing can allow for quicker time to market vs. producing in-house, especially given the associated capex, labor and ramping disadvantages. Time is the enemy in bringing product to market.
Jim Coghlin Jr. is chief operating officer at Columbia Tech and principal at Coghlin Companies Inc. He can be reached at: