When Does It Make Sense to Work with an Offshore OEM?
Finding an OEM is no simple task, and it requires tremendous amount of evaluation over a wide array of consideration points. Making the decision even more complicated, companies would come to a time when they need decide on whether to have a domestic OEM (outsource) or a foreign one (offshoring).
There are pros and cons to both scenarios. A large number of American and European companies work with offshore OEMs because of various strategic reasons other than just cheaper labor cost. In this guide, we would like to point out some of the scenarios in which it makes sense for companies to work OEMs from another side of globe.
When You Need to Access Proprietary Know-Hows and Resources
Because working with an offshore OEM is often more cost-effective, many people assume that you will compromise product quality and integrity by doing so. This is not entirely true. In fact, the opposite is probably far more accurate. As the manufacturing industry in Asia has grown, and companies compete fiercely for contracts from the west, the quality standards have greatly increased over the last decade.
Many OEMs offer state-of-the-art manufacturing equipment and expert employees who have decades of experience in hands-on manufacturing experience in your particular industry. Certain Asian areas have even developed reputations for specific industries. For example, Taiwan has been known for its leadership position in semiconductor related mass production as well as low-volume high-mix type of high-end electronics manufacturing.
The specialized manufacturing strength in different niches often translates to OEMs’ proprietary know-how and ability to obtain specific talents or materials which might be extremely scarce. There are advanced manufacturing facilities dedicated to electronics sub-niches such as HiFi and speakers. If you are looking to work with a company that knows how to provide the best products, a company that has dealt with high demand for a number of years is usually a good starting point.
When You Need to Comply with Local Regulation
When you supply or sell to foreign customers, your product or manufacturing processes could be subjected to local regulatory compliances which may require certain percentage of the components in your products to be supplied by local suppliers or even fully manufactured locally all together. This happens to certain industries more frequently than the others; especially, when the products are sold to military or other government agencies. There are very limited ways to be exempted from such regulations, and by having a local manufacturer is often the only option.
When You Want to Be Strategically Close to Your Customers
Not all your product manufactured oversea need to be shipped back to your home country for sales. Perhaps your customer base is already international, and your main market is actually offshore, then manufacturing closer to where your customers are can give you strategic advantages in not just cost saving but also shorter lead time and timelier customer support.
When You Are Confident and Comfortable to Delegate Most of The Manufacturing Process
Although you will want to work closely with your OEM, it would come to a time when you want to focus on what you and your in-house team really good at and leave the manufacturing process to outside experts.
What this means is that you need to have the production plan and process thoroughly communicated to the OEM initially. You might even want to run not 1 but 2 or even 3 pilot-run with the OEM to make sure you are fully comfortable delegating the work to them. This might sound like a lot work, and indeed it is! However, once you get to the point where you have great confidence in your OEM and willing to let them run the production from the other side of the globe, the hard work will eventually payoff. When that happens, you will no longer need to spend more time on tasks that drains yon and your in-house team’s energy and time.
When Your Local Currency Is Strong
This consideration typically happens after you already made your decision to manufacture offshore; therefore, this is more of tip on when you want to place a much larger volume of orders with your OEM.
When your local currency is strong in comparison to foreign currencies, it could put you in an even stronger position. Many companies are tactical about when they place orders, and if your order quantities tend to be huge, the strength of the currency you are dealing with can make a very significant difference.
It isn’t realistic to build your whole procurement strategy around how the global currency markets are doing. However, when you are dealing with huge order volumes it definitely helps when you are supported by a strong economy. In global trade, currencies should always be considered.
When You Want to Improve Your Gross Margin
OEMs are usually more cost-effective. Production costs in Asia are far lower than the ones in the US and other western countries because Asian countries have lower minimum wage requirement, cheaper energy cost, and greater accessibility to certain raw materials and components. By having the product made more cost effectively, you can see direct positive impact on your margin dollars.
When You’re Making Affordable Products Appeal to the Mass
As we’ve already established, there are a number of ways in which offshore manufacturers tend to be more affordable. If you are trying to make an affordable and functional product, and your main ambition is to create something for a budget market, an offshore manufacturer can often provide you with cost benefits.
Because so many other companies are already taking advantage of the lower price points that come from the cheaper labor and materials, you probably won’t be able to compete if you produce with in-house team or work with a domestic OEM.
Cost is not always the only consideration; however, if you are making products that were designed for mass appeal as most of the consumer electronics, taking advantage of lower labor cost to maintain attractive price points can be mandatory for your products to be competitive in the marketplace.
Finding the Right OEM For You
Finding an OEM partner can be a key decision, so whether you opt for a domestic or offshore OEM it is vital that you know how to make the right decision. There are some steps you can take to further vet and consider whether a manufacturer is right for your product.
Start a dialog about your product. You can often share CAD model plans and discuss your potential needs with a client. This will give you a good idea of whether or not they can handle your project.
Ask for samples and previous project specifications for reference. A reputable OEM will keep its clients’ identity discrete, so you might not be able to get a comprehensive list of its clients. What you can do is request the OEM to provide you with project specifications that are closed to what you are looking to produce (without disclosing proprietary know-how, of course).
Ask people around in your industry to see whether anyone has any kind of feedback on the OEM you are qualifying. First-hand experience would tell you a lot about the OEM.
Ask about workflow and quality control, and what machinery will be used to fulfill your order. This can be a good way to check if an OEM is thinking along the same lines as you.
In conclusion, we would like to re-assert that there are much more strategic reasons other than cost benefit for companies to take into consideration when qualifying an OEM. The decision of whether to work with an offshore OEM at all needs to be made in a balanced way that enables companies to take on both operational and financial challenges.