Happy New Year! One resolution many people have made is to cut costs. One way to do that is to manufacture in China. Just transfer your current manufacturing processes, use China’s lower-cost labor, and increase profits. It’s not that easy. If you rush into it you may find costs actually go up.Reduce costs by manufacturing in China? Not necessarily
Most of the press about China emphasizes the large labor pool with much lower wages than in the West. As consumers, we all see numerous low-cost Chinese products, from toys to electronics to clothing. Those products are rarely leading edge technologies, but they’re typically “good enough.” In any case, those products seem to support claims about low-cost Chinese manufacturing. How else could China make a profit on a DVD player we can buy at retail for $29?
Some might assume that because those products are so inexpensive, manufacturing other products there will also be much less costly, allowing for higher profit margins. However, there’s an important difference between the low-cost Chinese goods we can buy here in the United States and U.S. goods manufactured in China. The Chinese goods we buy here are built and tested in China. Once they leave the country it’s simply a transport issue through wholesalers and retailers until U.S. consumers finally bring the product home. Except for shipping, the entire process resides in China. Will it be the same for a manufacturing process transferred from the U.S. to China?
Buying Chinese goods vs. American goods manufactured in China
Consider your manufacturing process. Everyone is under pressure to reduce costs, especially if any of your competitors have low labor or production cost advantages. Most American manufacturers have embraced automation to reduce labor costs, one of the main reasons that the amount of U.S.-manufactured goods increases yearly while manufacturing labor declines (William Ward, Ph.D., of Clemson University says, “One hundred percent of the [3.0 million U.S.] manufacturing jobs lost since 2000 were lost to manufacturing productivity growth.”). This situation brings up a weakness in the “lower costs” in China’s argument—more on that later.
Back to those Chinese goods bought in the United States—think about the metrology. Assuming measurements of some kind are made in the manufacturing process in China, the measurement process and its associated tolerances are developed and refined there. As competitors in the global economy, you can be sure the Chinese streamline their manufacturing processes too, doing just enough measurements to make sure parts go together properly and perform as designed—no more than that. It’s unlikely you can compete in process efficiency.
Now consider your product manufactured in China and exported to the United States for sale here with your name on it. Your customers might not know or care that your product is manufactured in China. They will still expect the same level of quality and performance that you delivered in the past. This is where the importance of the metrology process comes into play. Might you cut costs too much?
Design tolerances and measurement tolerances
Have you ever noticed a disconnect between design and measurement tolerances? For example, it may be common practice to spec machined parts to the nearest tenth because that’s the default in the design software. In other words, parts may be over spec’d because no one analyzed the actual requirement, or out of fear of tolerance stack-ups when all the parts are assembled—better to have tight specs to increase the likelihood the assembly will go together properly. Now take these over-tight specs and apply the 10:1 metrology rule (the measurement resolution should be 1/10th the required measurement value) and you have a potential metrology problem that may not transfer well to China. Do you know if your Chinese manufacturer is capable of applying the 10:1 rule to your product, either in terms of equipment or in expertise?
Of course you can reduce your costs of manufacture by loosening tolerances, something you can do here in the United States, or you may be tempted to use looser tolerances in your Chinese manufacturing operation. Don’t lose sight of the objective of manufacturing overseas in the first place.
Saving or shifting?
Now let’s try to tie all this together in a geographic process transfer and see if it makes sense. First, costs are lower in China because of lower labor costs and a much larger labor pool (Professor Ward again: “China actually lost 17 million manufacturing jobs between 1995 and 2002, net job losses that approximated the total U.S. manufacturing employment during that time frame.”). So a prime question for your process-transfer decision is, how labor-intensive is the manufacturing process you plan to transfer? If the process is quite automated there will be little or no benefit from lower labor costs of duplicating that process in China.
Next, how complete is the process you intend to transfer? To be most effective, your Chinese manufactured products should import to the United States just like the Chinese goods any of us can buy at Wal-Mart. That means no further processing, including measurements, when they come into the United States. But remember that your brand name is on the goods, and your reputation is at stake. Will you have 100-percent confidence that the Chinese manufactured goods are as good as those you make here? How will you know the goods are within tolerance? One way to tell is to measure them when they get here.
I keep harking back to metrology, but that’s key in this discussion of transferring a manufacturing operation to China. You want to avoid measuring parts you’ve had made in China when they come back into the United States because you will be adding back one of the costs you sought to reduce. What’s the alternative? The best solution is to transfer the entire manufacturing process, including the metrology. If you have high confidence that your metrology processes ensure quality products every time, then those processes must be integral to the geographic transfer. Whether you change tolerances in the process transfer or not, you need to know that the Chinese-manufactured goods are in spec.
Don’t think only about the manufacturing aspects, leaving the metrology completely to the Chinese operation. Your parts may end up costing less to make, but you may end up with higher costs from increased metrology demands, or worse, higher scrap costs. Or you may offset any cost savings by tightening manufacturing tolerances on the Chinese-manufactured parts to ensure they are good enough. You end up transferring costs you “saved” from doing less metrology to higher costs from tighter manufacturing tolerances, and without adequate metrology, how do you know whether tolerances are being met?
It’s a cost/benefit analysis
You may find after detailed analysis that your product-quality requirements and your reputation may not benefit from cost savings you might realize from manufacturing in China. Unless you know the metrology requirements for any parts you transfer, you may make a poor decision that ends up costing you more in the long run.
No matter where in the world you manufacture, measurements matter.
[To read Professor Ward’s paper, go to: http://business.clemson.edu/cit/Documents/Mfg%20Employment%20Working%20Paper%20draft%208%202005.pdf ]