The Problems of Offshore Manufacturing

Offshore Manufacturing

Around the middle of the 20th century, moving the production of parts and components to other countries became a popular practice for mid sized and large sized companies in an effort to lower labor costs, accrue tax benefits, and maximize profits, a process that is known as offshoring. Though cost benefits were a major motivator for offshoring, other attractive aspects were the ability to avoid governmental restrictions and operate in accepting and tolerant regulatory environments since safety, quality, and production stipulations were less intense and demanding in offshore countries.

In the 1970s, government officials changed their economic philosophy and adopted a free trade concept, which led to the removal of trade barriers and significant changes to tariffs and taxes. In the process, 45000 tariffs were lifted liberalizing trade and making it possible to move American jobs overseas. Companies have leapt at the idea of cheaper labor and lowered costs of production.

How Offshoring Got Started

The concept of offshoring of labor has existed for many years, primarily in the garment industry, which has used lowered labor costs to produce products in offshore countries. As offshoring became a viable business solution for production companies, various business organizations, who were experts in the offshoring process, assisted American companies establish ways to acquire international assets, materials, and labor. They provided blue prints and practices that helped American companies become successful overseas.

Onshore Assistance to Offshore

The various companies that assisted in the offshoring process normally worked with one country. They became knowledgeable about the country’s workforce, assets, facilities, and the many factors related to establishing a manufacturing operation. In some cases, they helped overseas countries with educational programs to improve the quality of the workforce.

Profit Motive for the Stockholders

Chief executives of large and medium sized companies felt that they owed their loyalty to their stockholders. Their main goal was to lower costs and increase profits by moving operations to the cheapest locations, which would increase the returns on stockholder investments.

The movement of distinguished and highly regarded companies offshore, produced a snowball effect. As the largest companies moved offshore, their suppliers, who saw the possible profits, moved their operations offshore as well

Lack of Regulations, Rules, and Labor Standards

In the beginning, the profit motive was the initiating factor in the offshore movement. As firms began their operations offshore, they realized that they could avoid the stringent regulations and standards required by the United State government regarding workplace conditions and the rigid environmental controls. The standards for work hours, rest periods, and number of work days were no longer a requirement. Additionally, offshore countries offered stimulus packages, tax incentives, and other perks to lure American companies overseas.

As companies worked with the offshore labor force, though they were paying less, they found that workers were more literate, educated, and dedicated than their on shore employees. This was an added benefit and made the process of offshoring more attractive to a wider range of companies. Employees work or worked long tedious days with managed and controlled scheduled breaks for less than $300 a month regardless of the conditions and work environment.

Historical Increases in Profits

The rise in offshore production led to a radical increase in corporate profits, which surpassed one trillion dollars as the US unemployment rate grew. In 2009, 47 percent of the profits from the top 500 largest publicly owned corporations came from operations outside the United States. From 1995 to 2008, the US domestic product production grew at a rate of 2.9 percent while the average rate for offshore companies grew at 6 percent to 9 percent. The focus and energy of major American companies was toward overseas operations.

What added to the pain of the offshore moves was American employees, who were losing their jobs, training their offshore replacements. If they failed to comply or refused, they lost their severance pay and other benefits. The math was rather obvious. An engineer, technician, or other expert in the United States makes a yearly salary of over $70,000 while a comparable employee with the same skills from an offshore location makes $15,000 per year.

The concept of offshore production has affected the economies of many of the world's developed countries since using labor and resources from less developed countries is profitable and productive. Though there have been positive aspects of the move offshore, since its start over thirty years ago, many companies who have dedicated production to offshore sites have found some drawbacks that have damaged their reputations and decreased their profits.

Problems of Offshore Production

With all of the benefits of profits, lowered cost, readily available assets, and the welcoming attitude of the different countries, there would not seem to be any drawbacks. In actuality, regardless of the huge profits and production advantages, there are a massive number of drawbacks to offshore production, many of which would seem to be rather obvious.

Language

Most countries in the world have English speaking people. English has become a universal language used by most of the companies of the world. Chief executives and leaders of companies have learned English as a part of expanding their business. In many respects, it is a necessity in the workings of a world economy.

English is one of the most difficult languages to learn due to the many meanings for a single word. These innuendos and subtleties are difficult for people of other cultures to understand. As simplistic as this may seem, it creates a great deal of difficulty when discussing adjustments in designs, production standards, and part configurations. Expressions that American engineers take for granted have to be expansively explained to offshore personnel.

As every management and supervisory expert can tell you, clear and concise communication are the keys to business success. The most minute misinterpretation can lead to delays, lost materials, and wasted effort. One of the problems that companies face when dealing with offshore suppliers is the breakdown in communication, which takes time and effort to correct. This in turn leads to increases in costs and loss of profits.

Culture

The United States as a nation has a very unique and unusual culture as viewed by the rest of the world. Our most successful people are driven, motivated, and focused to the exclusion of everything else. These ideals are not shared by the majority of the world and have been a major problem in offshore negotiations and production.

Several years ago, an American company had negotiated an expansion of their operation into Spain. The company had been working on the project for several years with little success until they made contact with a group that saw the advantages of the alliance. A group of executives from the American company were sent to Spain to do the preliminary set up.

The Spanish reps and American reps met in the morning to go over the plans for the collaboration of the two companies. Around eleven o’clock, the Spanish reps called for an adjournment for lunch and left, leaving the Americans to find their own lunch. After an hour, the Americans returned to the meeting room, but the Spanish reps were not there and did not return until around three in the afternoon. The American reps were confused about the waste of time with the very long lunch.

In Spain, workers go home for lunch and a siesta in the middle of the day because of the heat in the middle of the day. It was a type of behavior that the Americans had difficulty adapting to, which caused them to return home, where the company trained a new group in the cultural ways of the Spanish culture.

In certain Asian cultures, when a decision is made, it is irreversible and written in stone. When a position is created, regardless of its obvious lack of productivity, it is maintained due to the fact that considerations and dynamics had been considered as part of the decision making process. This aspect of Asian culture and its flexibility have created major issues for American executives.

Cultural and philosophical differences are two problems that Americans struggle with in regard to offshore manufacturing. Americans do enjoy the relentless work habits demanded of hourly workers without regard for comfort or the number of hours worked but have difficulties with the wide array of customs, practices, and habits of their foreign associates.

These differences, along with the language barrier, have caused misunderstandings and difficulties in the completion of on time deliveries, shipping, and production methods, which, in many cases, are outmoded and inefficient. When an American company puts a process in place, they perceive it to be ideal and flawless. If there are problems with the process, Americans do not look at the process but blame those who are operating the process.

Managing Hierarchical Issues

In the international production process, the placing of blame on an individual or group tends to lead to distrust and lack of confidence. To gain control of situations, Americans tend to intensely control processes in a hierarchical manner, which leads to less communication and lower independent and creative thought. In essence, it is a suppression of the intellectual skills of the workforce. This type of situation has led to fatal results and a lack of offshore and onshore management that raises costs and lowers productivity.

Time Differences

Another simple factor that causes constant difficulty for offshore operations is the time difference. If production operations are located in Southeast Asia, the time difference is 17 hours. The 17 hours is in the future such that if an American company is texting, emailing, or calling on Tuesday, it is being received on Wednesday morning. If an American executive calls at nine or ten in the morning US time, the day time management staff has gone home at the offshore site and are enjoying their evening leaving the night time staff, if there is one, to answer any questions.

Onshore owners of products have to find time to coordinate with the offshore team. The constant problem of offshore production is the inability of onshore management and technical staff being able to communicate directly with their offshore counterparts. Of all the many issues with offshore production, the time factor is a significant issue and barrier to the success of a project.

Confidential and Proprietary Data and Information

A necessary element of offshore operations is the ability of an onshore company to share proprietary information, data, company constructs, contractual details, and other confidential company information. For most onshore companies, it takes years of working with a supplier to develop the trust, confidence, and loyalty required for sharing classified processes and functionalities. In the case of offshore operations, the proprietary information has to be shared at the outset of the process in an environment where controls of confidential data do not exist or are very lax.

Initially, when a company hears about the wonders of having their products produced overseas with increased profits, significant reductions of labor costs, and the absence of the need for certifications and approvals, they are excited by what they see and how it will benefit the bottom line. What seems to be missing from the conceptualization and vision is the foundation of American manufacturing, which is the team concept.

In order for any organization to succeed, every component, member, and stakeholder has to be committed to the success of the goals and focus of the organization. The idea of team and commitment have become foundational components of American business. If a team member is several thousands miles away living in a different and alien culture, it is difficult to communicate with them and nearly impossible to develop the feeling of unity that comes with being the member of a team.

In the team philosophy is where trust, loyalty, dedication, interdependence, and the feeling of safety are built. The inability to communicate and share are barriers to successful productivity and the development of a viable business model. In a normal work relationship, if a member of the team has a problem, they go to the leader of the team for an open discussion of the issues. This factor cannot exist and is impossible to promote in an offshore operation.

Competitiveness

When there are two different teams on opposite sides of the world, you are going to run into competition as well as the placement of blame. With divergent cultures, languages, and ideals, it is impossible to develop the unity and camaraderie that are necessary for a successful team. Though the goals of both groups are hopefully the same, the barriers of culture, language, supplier and client relationships, and substantial time differences make it impossible for the two groups to have a feeling of unity.

When things go wrong, especially in the United States, the initial tendency is to place blame. Since the members are in different parts of the world, it is possible for them to blame each other instead of working together to resolve organizational and process issues. This fundamental flaw is an aspect of offshore operations that companies find so difficult to resolve.

Regardless of the sophistication of offshore assistance companies, the issues of distance, time, and language cannot be resolved by a phone call, video chat, or email. The essence of American business is built on in person contact where the parties can get to know each other, define personalities and attitudes, and build camaraderie and identity.

Frustration and Annoyance

There are business models that are selling the concept where the emotional and psychological factors of a production operation are being removed and the process is being converted to a technological construct where the buyer and producer don’t meet but do business. The idea is to place an order in a technological vending machine and out pops the ordered product. The buyer walks away happy while the producer gains the profit.

As can be seen in this business model, the fundamentals of business practices are tossed aside as the parties participate in a technological miracle that provides all of a company’s needs. When things go wrong is where the frustration builds with annoyance with the process as the result. What must be noted in this business model is the absence of whom to blame. The technological instigator of the process cannot be held responsible. They didn’t produce the product. The producer was doing what the client said. They can’t be held accountable.

Regardless of the many marvels of technology, it is impossible to exclude human relationships from any business model, especially in the area of component and part production. The design and negotiation of the factors related to product and part production are essential factors regarding the success of a process. Putting in an order and having a workpiece magically appear is unrealistic and filled with potential and irresolvable errors.

Technological and Process Differences

In a simple short study of any production company's website, it is possible to read tons and tons of data, statistics, and engineering processes regarding how American products are made. Doing a careful study of even the smallest company, it is amazing how production methods have been developed and the innovative techniques that have been designed to improve quality and the durability of products.

The United States has been built on forward thinking and innovation. From the Wright Brothers and Thomas Edison to Steve Jobs and Charles Babbage, Americans have striven to develop and conceive of better ways to accomplish complex and complicated tasks. These are the foundational concepts that have built the United States of today.

This particular aspect of American culture is missing from offshore companies with lower labor costs. Processes that American companies have used for years and assumed to be common practices have not made their way to offshore production operations. Access to new technologies is limited by licensing, education, technical information, experience, and the practices of local businesses. Along with the huge gap in technology is the chasm regarding methodology.

The first and most obvious factor is the absence of real time communication and collaboration, which are essential necessities when starting a process. These two factors are difficult to accomplish due to the antiquated and outdated technologies of offshore companies. For example, if a person in the United States is diagnosed with cancer, they are required to undergo chemotherapy and are usually scheduled at a chemotherapy clinic. A person from an offshore country who is diagnosed with cancer may never have access to a chemotherapy process since the process does not exist in their country or is available at a limited level. This example is just one of many that demonstrates the inequalities that exist between developed and under developed countries.

In the area of production, hydraulic and pneumatic machines or alternatives to those processes are so prevalent in the United States that buyers can choose which process they would prefer or is necessary for completion of their part. For an offshore process to have those choices, the onshore company has to provide the machines and technology.

Shipping

The technological problems associated with offshore production lead to delays and problems regarding the supply chain. For large orders of complex machinery and parts, shipping can take months depending on various operational factors. When an onshore company orders parts from an offshore supplier, they are given an approximate date of delivery since there are processes that can cause delays in production and shipment.

The revolution in offshore production has led to a glut of product movements and stress on the supply chain. With the lack of technological tools, the shipping process runs into delays and uncertain deliveries. This aspect of the process does not deter from the use of the offshore process as long as sufficient regard is given to the potential delays.

Producers in the United States advertise rather boldly regarding how efficient they are in meeting the needs of tight on time delivery schedules with punitive consequences if they don’t meet their agreed parameters. Again, this is a tradition of American business that offshore operations are unable to meet or are unaware of.

Onshoring

The negative factors of offshore operations have led to efforts to onshore processes and functions. With the advent of the trade problems between China and the United States and other trade issues, companies are re-evaluating their offshore position and bringing operations back onshore. The main issue for the change in direction is primarily due to the vulnerability of intellectual properties, improvements in product quality, reductions in shipping costs, greater flexibility, and substantial improvements in lead times.

At the center of the change in perspective is the radical changes in product quality and lead times, an aspect that American producers are proud of. Modern buyers and consumers have little patients with delays and short supplies. The general feeling, with the strong influence of technology, is that delays and long lead times should not be an issue. In response, manufacturers and producers are moving their operations to locations that can meet the needs of their customers.

Onshoring provides companies with greater flexibility to be agile and responsive to their customers as well as being able to provide exceptional customer service. A major societal factor is the demand for instant and immediate responses to customer issues, a concept that producers are well aware of and have developed appropriate methods for addressing.

The complex and intricate design of the offshore process has little tolerance for any factors that may disrupt its operation. A single glitch, misstep, or error can cause an operation to come to a screeching halt. In the midst of the stoppages and kinks, companies do not evaluate the process but blame the participants. With onshoring, this may not be eliminated but can be dealt with more efficiently and effectively.

On Demand Parts Marketing

The on demand parts marketing process is comparable to using a vending machine. A buyer develops a concept that they wish to put into production. They design and develop the ideations of the various components necessary to produce their vision. They submit their images and proprietary information to the technological parts vending machine and wait for their components to pop out.

On the surface, it seems to be the ideal relationship between buyer and producer. What is missing from the picture is the relationship between the buyer and producer since they never connect with each other. Additionally, companies are placing sensitive and confidential data in the hands of people they do not know or with whom they have not developed trust, much like the vending machine in the break room.

It would seem that in a technological era a technological vending machine would be the perfect next step in product and part production. What is included in any technological advancement is the elimination of the human element that many producers have spent years developing. Parts and product orders are sent to a vast array of unknown producers located across the globe with the ones with the lowest cost being the winners.

On the flip side of the equation are the thousands of producers who sit and wait to be chosen to produce and order. They do not know where they are in the pecking order or when they will receive their next order. Essentially, producers lose control of their ability to mine and develop their businesses.

In the majority of cases, on demand marketplaces send orders offshore due to the lower costs of production and greater profits for their organization. Buyers end up having their parts and components produced by under paid, technologically inferior, and uncertifiable producers who do not have to adhere to the regulations and requirements of the United States.

Conclusion

The offshoring process will continue to be a factor in regard to technical and online support, which do not require the implementation of equipment, shipping, and the other intricate aspects of production. As regards parts and product production, offshoring may continue to exist though not as radically as it has been in the past.

The intelligence and ingenuity of modern enterprises has led to the development of processes, procedures, and practices that have made businesses successful and productive. In essence, offshoring made major companies aware of their inefficiencies and helped them realize that they could not wait to modernize. Again, as in the past, American manufacturers have realized the need for change and reacted to the need.

Globalization is impossible to ignore as technology and interdependence have shrunk the spaces between nations. As American producers adjust and acclimate to the demands of the new parameters of the world market, the United States will continue to be the ideal place to do business.