Would you stake your reputation on a new supply chain in a new region?
The one predicable outcome of trade wars is they tend to make sourcing teams evaluate their outsourcing strategies. Given that project requirements and cost drivers change over time, even without fluctuating tariffs, periodic evaluations can help better align electronics manufacturing services (EMS) partners with current needs. That said, moving to mitigate tariff concerns alone can create a cascade of unplanned costs that far outweigh the cost of tariffs.
Areas to evaluate when considering a move include:
Supply chain implications. Moving a project into a different region can trigger supply chain woes on two levels. First, while the materials market is less constrained than a year ago, materials allocation can vary by region. Consequently, material that was available in one region may not be available in a different one. There can also be surprises in the precision engineering realm. Molding and metal fabrication equipment can vary by region. In some cases, that impacts preferred tooling sizes, which could result in a need to fabricate new tooling. If the original supplier licensed the design being used or amortized tooling as part of the unit, a decision to move could create a requirement for an entire custom part redesign and tooling development effort. If new tooling is required, one important question to consider is whether a product is too far along in its lifecycle for new tooling to be cost-feasible.
Additionally, the business “culture” of a region’s custom part suppliers is usually heavily influenced by the industries it serves. If the bulk of work done in the new region is high volume, there may be limited availability of suppliers willing to do smaller lot sizes. This can be a concern for low-volume, high-cost products that utilize large numbers of fabricated parts. The speed of quoting those projects may also vary by regions, and that can add unanticipated lead-time to the transfer process.
Transfer of work costs. Any transfer of outsourced work typically generates some level of nonrecurring engineering (NRE) costs and may generate tooling costs as well. It also creates an unmeasured cost internally at the OEM. Auditing, coordination of work with the new EMS provider and reacting to learning curve issues typically add a lot of hours to work schedule plus travel cost. And, in a labor market with less than 3% unemployment, that may also translate to key staff attrition as work demands or time away from home increases.
The transfer of work learning curve factor should not be discounted. Projects that have been at an EMS provider for a long time often benefit from institutional knowledge built up at that EMS provider. If the project transfers to a new EMS provider, that internal, unwritten product expertise may not. As a result, inefficiencies and unaddressed challenges may pop up at the new EMS provider, even if that company has a fairly robust NPI process. That often carries both a time and monetary cost. In the worse-case scenario, it can create disappointment for end-customers if learning curve-related defects make it to the field.
Another factor to consider in evaluating new location options is whether the rest of the world is making the same choice. If that is the case, unanticipated logistics delays, competition for key suppliers and labor market challenges may impact project startup dates.
Market factors. Perhaps the biggest factor to consider is the impact on the end-market. Will customers pay a higher price or switch to a competitor? Will the costs associated with transferring the project elsewhere ultimately raise the price higher than a tariff would? Could learning curve mistakes impact the brand? Are there any negative brand issues associated with building in the new region?
I’m reminded of a story an older colleague shared when I was first getting started in sales. He had worked for a test equipment manufacturer that dominated its market. When he felt he was in danger of losing a sale to a lower-priced bidder, he would always ask, “Do you really feel confident enough in your decision to bet your reputation on it?” At that point, the buyer started contemplating whether they had enough confidence in the lesser-known test platform to bet their reputation on the choice. That often swung the decision in that salesperson’s favor.
Trade wars are political and, therefore, transitory. If a reevaluation of an outsourcing strategy determines a need for change because of multiple factors, it is likely worth the cost. If it is simply a move to mitigate tariffs, however, a good “gut check” question to ask before making that decision is, “Do you feel confident enough in your decision and assumed cost model to bet your reputation on it?”