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January 27, 2015

Cheap Oil Prices Are Just One Factor in the Onshore/Offshore Debate

Will cheap oil prices (Energy) drive more companies to move production back to the US?  Or how much more does it cost companies to keep manufacturing in the U.S?  That is the real question!

Cheap_Oil_Prices

As a manufacturing company, we are often asked to comment of these types of questions. The answers are not simple but the variables are relatively constant.  It is important to understand that each company needs to establish a process for determining what the total cost of the finished product will be when determining where is the best place to manufacture their project.  Some factors to consider:

Labor Rate

Not just salary, but the fully burdened 'cost' of employment. This includes Insurance, taxes, severance, and employment laws play a factor here.

Raw Materials

You want to manufacture as close to the raw material source as possible.  Example: It's most cost effective to manufacture extruded or molded rubber components where the Rubber Trees grow.  Places like Vietnam have a robust supply chain due to technical skills and proximity of raw materials (Rubber Trees in this example).  Conversely, lumber and sheet goods (2x4s, plywood and OSB) for building products are made in the Southeast and Northwest United States, where Pine and Douglas Fir Trees (the raw material source) are plentiful.

Freight

Saving a boatload on Labor and Raw Materials means nothing if you have to spend a fortune shipping those finished goods or sub-assemblies to your end customer. A perfect example is the reshoring or onshoring of refrigerators by GE back to Kentucky over the years.  Why? My guess is that the initial savings was partially lost to increased freight rates. 

Energy Cost  

If manufacturing your products requires a lot of energy then this variable is a hot topic.  Right now oil prices are on a free fall, dropping some 60% in the last six months!

Other considerations include:

There are always more variables but this should give you an idea of how much planning goes into answering any question about manufacturing cost.  Keeping costs inline are a priority.  Developing a robust plan is the answer.

Free Guide: Contract Manufacturing: The Good, The Bad, and The Solution

Filed Under: Manufacturing, Offshore Expertise, Contract Manufacturing