Cost comparison for an OEM in US and China

by rdan

The handyman in me got to thinking as we discuss trade policy and issues. Drills made a good start, in that a way into a man’s heart is a good drill, and something to relate to not so complex as a car.

…may actually cost you to move manufacturing of a product overseas. In the chart above, part costs represent 72% of a product, overhead is 24%, and labor only 4%.

Here is a link to quick analysis of ‘true’ costs for manufacturing, including the lack of analysis by companies to track their costs. The handyman part of me found it interesting that ‘returns’and replacement costs for product can be accounted for in another budget area not under ‘cost’ per unit, and other anomalies.

Areas impacted can be major, such as design limitations because of where the product is manufactured, ‘cheap labor’ as a simple fact of cost savings overall not put in perspective, “lean manufacturing’ limitations, and precision ordering and inventory control limitations around transport and container issues (as an example)are discussed.

It’s rare to see an OEM in the U.S. today questioning the presumed logic of lower-cost manufacturing in China. “Can’t beat those labor rates,” they say. “My competitors are all doing it, and I have to stay competitive.” The fervor is a bit similar to those in the stock market shortly before the dot-com bubble burst.

A few voices have risen above the cacophony, however, pointing out that perhaps this lemming-like exodus to China has not been fully examined from a cost perspective. Business analysts such as Boston Consulting Group and Aberdeen Group are uncovering both the risks of outsourcing and the limited view most U.S. manufacturers have about what it costs them to produce their products.

I am not an expert or even particularly knowledgeable on the manufacture of this product line, but have used many different drills from many places of manufacture, with many experiences about cost and quality. Here is a counter argument. Makes for a good Sunday consideration.