How do I start my nearshore/offshore operation?
Of the many pitfalls a company can suffer when moving operations nearshore or offshore, one of the greatest is creating its own stand-alone facility. Teaming up with an experienced contract manufacturer such as IOS mitigates the impact of startup issues and distributes business risks between your company and your nearshore/offshore partner. A competent operation provides skilled and experienced project managers who have years of manufacturing experience and an acute knowledge of operating in the nearshore/offshore environment.
It's worth noting that working through a contractor such as IOS does not limit your ability to become independent, should you elect to do so. This makes IOS an ideal partner for startup ventures. IOS's years of experience in offshore markets will save you from the pitfalls.
Will I need to relocate my own personnel?
You can choose to have your own personnel working at the nearshore/offshore site. However, less than 10 percent of IOS customers do so because of the high-quality, economical labor available locally. The cross-border outsourcing movement began nearly four decades ago, and many developing countries have built modern infrastructures to support their manufacturing economies. Many second- and third-generation offshore production workers have experience in a wide range of international manufacturing systems, industrial processes, quality standards and certifications. As with any startup, there are various issues and an initial learning curve to be navigated before full production capabilities are reached. Typically, key foreign workers are sent to your facilities for training. You may also elect to send your domestic employees on temporary or permanent assignment to your IOS nearshore/offshore production center during any time of your program, including start up.
What do I contribute to a nearshore/offshore operation?
It depends on what type of operating agreement you reach with your contractor. In a shelter arrangement, for example, you can consider the remote operation as a satellite of your company, another department. A shelter provider, such as IOS, will contribute the facility, personnel, customs services, offshore legal presence, and administration of all offshore functions such as human resources, security, accounting, food service, transportation and others. You provide machinery, materials and initial technical knowledge regarding your manufacturing processes and quality systems.
For and explanation of the different types of outsourcing arrangements, see our Global Outsourcing Glossary of Terms.
Is it true that contract and shelter operations are particularly efficient for small- to medium-size companies?
Yes. A company operating nearshore/offshore will need administrative functions similar to those at home: human resources, finance, legal and upper management, for example. The responsibilities of these functions, with the exception of human resources, create duplication of effort and redundant costs. Add to this the fact that in some countries, foreign employers are required to provide and manage food services and bus transportation for local employees. An exporting company will also need a customs department to manage cross-border transportation issues. As you can see, the addition of these functions adds significant overhead costs to an offshore manufacturing operation owned and operated by a domestic company. Depending on the specific situation, a company could need a minimum of 125 employees in order to offset these required overhead costs. A contract or shelter operation allows smaller operations to benefit from lower labor costs while sharing common administrative and overhead infrastructures with other IOS customers.
Can a contract or shelter operator run ISO, QS, FDA, or AS certified operations?
Absolutely. Operations with these certifications are currently being run by IOS under the "umbrella" of the customers' operations. A large number of nearshore/offshore facilities are QS, ISO, FDA and/or AS certified, with many years of experience in practice.
Will I need to incorporate?
Only if you plan on creating an independent operation. Many companies choose to work initially with a contractor or shelter provider and forego incorporation until they grow operations sufficiently to become independent or move to an alternative structure for their offshore operations.
How do I calculate savings?
The labor market varies considerably around the globe. Your IOS representative will help you calculate cost savings for offshore Laborgistics® services based on the geographic region where you intend to conduct operations. Your IOS specialist may even be able to suggest viable operations in a part of the world that you hadn't even considered, based on our global sourcing, labor network and factors affecting international logistics. As an example, however, consider an offshore operation in Mexico. Generally speaking, the Mexican fully loaded cost per direct labor hour will be half of a U.S. fully fringed cost. Such savings generate from $12,000 to $18,000 per direct employee per year.
How do I determine if my labor savings are negated by duties or tariffs?
The answer to this question should be a key part of your analysis and business case for offshore outsourcing. With a sample of your product, including individual parts and a finished assembly, your IOS representative, in consultation with a customs broker, will perform a preliminary evaluation of tariff implications. IOS will provide documentation with a summary analysis of your situation.
I've heard that offshore employee turnover is a significant issue. Is that true?
The most significant factor affecting employment stability is the region's labor market. While labor markets around the world are all impacted by global trade and economic conditions, localized factors create unique market environments in individual countries and/or regions. In Mexico, for example, the maquiladora industry posted a growth rate of over 11 percent annually for many years, reaching a peak of 15 percent in 2000. This explosive growth created a more volatile labor market, with large numbers of workers exercising mobility to secure competitive wages. However, a much slower growth forecast, coupled with layoffs following the 2001 economic downturn, has cooled the labor market and created an ample availability of workers. In addition to economic factors, good management plays a key role in retention; well-managed operations typically report far more stable employment.
I'm considering a nearshore or offshore operation, but I'm uncertain where to locate.
Many companies claim to offer comprehensive solutions. However, a viable outsourcing partnership depends on many supporting factors. The weakest of these links determines the success of the operation. Your own analysis is critical in making sound business decisions. You can begin the process by asking yourself a few questions:
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What skills do I require? If your process, systems or machinery are relatively complex, beware of smaller cities that lack a large or sufficiently experienced workforce and infrastructure to meet your requirements. |
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What transportation do I require? Transportation costs are often a deciding factor in determining whether or not to move operations offshore. In fact, offshore transportation costs can, in some cases, be significantly higher than domestic rates. |
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What local sourcing and support do I require? Smaller cities often cannot provide sufficient resources. IOS offers a global sourcing network to give you more flexibility and open new opportunities around the world. |
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Will domestic personnel supervise the operation? Location along international borders becomes a more significant factor when domestic employees will be engaged in daily operations. Successful offshore operations supervised by domestic managers are often sited along international borders within modest commuting distance of a desirable onshore community that offers a suitable quality of life, educational opportunities, and cultural attractions and activities. IOS will assist you in evaluating your possible onshore/offshore city pairings around the world and help with the decision-making process. |
What should I look for in a proposal?
A proposal should clearly state the responsibilities of each party and give an estimate of actual costs, outlined in detail. Be careful to review the following items:
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Watch for hidden cross-border charges. In some countries, it may be necessary to transload from an over-the-road carrier onto a border-crossing service and vice versa. The company will need to utilize a warehouse service to make these transfers. In addition to this cost, brokerage services may be necessary to prepare and transmit documentation to the appropriate governmental agencies. |
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Some countries have government-controlled utilities that employ entirely different methods to determine costs. Expensive installation charges are sometimes billed up front, and rates are sometimes calculated on a variable scale, all of which can make cost management more challenging. |
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The cost of real estate can be difficult to analyze initially. When you are quoted a price for square footage, be certain it includes the cost of real estate and value-added taxes. |
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Know what's included in a quoted price. Have your outsourcing company specify, in detail, each item of the cost structure. Any items that are not included, but necessary for a successful operation, should also be outlined in detail. |
Can IOS operate under customers' umbrella certification?
A: Yes. IOS can accommodate customer-specific certifications in a number of ways. IOS is certified under a variety of internationally recognized quality standards, such as ISO 9001, SAS 70 and others. In many cases, components manufactured by IOS in accordance with these standards become part of a finished product certified under other programs. Additionally, IOS has the capability to implement specific procedures and programs to assure compliance with specific customer-driven quality standards and/or certifications. Under other circumstances, particularly in shelter operations, IOS facilities become virtual extensions of your own operations and certifications.
Have more questions? Contact an IOS representative.
