Economy

The Real Cost of Outsourcing

By Jason Allen
Published August 02, 2010

So the other day I wrote about the process of offshoring and the tendency to have incompatible parts in the 'same' product. This has prompted a number of questions, such as "That's not right, all the products that are called a Model X 9000 are the same, both inside and out, aren't they?"

This is simply not true.

To understand why, we need to take a bit of a dive into the murky world of electronics offhshore production. For one, when companies offshore (or as we'll call it, outsource) the manufacture of an electronic good, they have a few key considerations:

  1. How well will the product do what it says it will?
  2. How long will it last?
  3. Will choosing this vendor damage our brand in any way, due to a high rate of returns/defects, or lack of reliability in the supply chain?

And of course, the big one:

  1. How little can I get it for, while keeping these other three things in mind?

From the contract manufacturer's point of view, there are only three considerations.

  1. How much am I going to get per unit?
  2. How cheaply can I get my materials?
  3. How low can I keep my 'production costs' (read 'labour') and still ensure my employees come to work every day (because reliability of delivery is key)?

The thing to know about major offshore electronics productions facilities, is that they are not exactly a lone gleaming warehouse surrounded by rice paddies. To the contrary, they are located in areas densely populated with electronics part suppliers. All of whom are trying to get a piece of the action going on down the road.

So the parts suppliers have salespeople who knock on the big warehouse door daily, saying that their part will do what the other guy's part will do, for $0.005 cheaper. Yes, it's that little of a difference.

In fact it turns out the manufacturers have a contractual obligation for the most part to listen to these salespeople, and find ways of doing things more cheaply. (See Section 7.4)

A few years ago, I worked at a company that outsourced our production to China, and the main ingredient in product X was brass. As the price of copper jumped by 300% in four years, we started looking around for ways to save on copper. One day, a batch of samples arrived in the office just before I taught a class on our quality.

In the middle of the class, I disassembled the product to demonstrate its all brass construction, and found a big plastic insert holding it together. From the exterior, it was indistinguishable from the previous iterations (even the difference in weight was only 2-3 grams - too little for the average person to notice). On the inside, it was completely different.

When I inquired at Head Office as to why the change was made, the difference was $0.015 per unit. The thing was, we moved over 1,500,000 of this item a year, so the savings were..carry the one... close to $23,000. Doesn't seem that much, but if you reproduce those savings over the entire 100 item catalog, the money starts to add up.

That is why, in the post industrial future, the idea that we can all trot our beloved consumer electronics down to 'Ye Olde iPhone Repair Shoppe' is little more than a pipe dream. Not only can the specifications of the parts change from factory to factory, but they can even change from production run to production run within the same factory. All in the interest of saving money.

So now, for 'Ye Olde iPhone Repairpersonne' to fix your iPhone, she doesn't only need to find a discarded 2nd Gen 16 GB iPhone with the part you need still intact, she needs a discarded 2nd Gen 16 GB iPhone where the first 12 digits of the Serial Number match, or with some similar indication that they came from the same production lot.

Good luck with that.

Admittedly there are repair places now that can fix these items, but they are doing so with parts shipped from the same factories that supply the original manufacturers. Factories that are 1000's of miles away. The distance isn't a big deal now, but in a world where even bunker fuel commands a premium price, shipping the parts isn't going to make any more sense than shipping the original item.

Back to my original point: Maybe if we stop relying on our electronic devices to entertain us all the time - or if we had that option slowly taken away from us - maybe we would start to do other things with our time. Things like growing our own vegetables, or going to the park to play with the kids or have a picnic with friends, or even volunteering to fill some need in our community. Maybe even just bringing cookies to a neighbor who is home ill for a couple days.

These are the things that enhance our quality of life - not how many GBs or hours of battery life we can cram onto a device.

Don't get me wrong: this whole discussion never would have even come up if I hadn't been trying to fix my iPod, so I could continue to get my 'fix' of daily tunes on the 1 1/2 hour train/bus trip to downtown Toronto every day. Like I said, I'm down to my 500mb shuffle (which, for the record bought used off of Kijiji), and when that's dead...I'm going to have to think long and hard about if I replace it, or with what.

Trying to wean myself off the electronic bottle is one the more difficult tasks for me in preparing for a future with a whole lot less cheap energy. But the tasks I am replacing it with sure beat sitting in a shopping mall overnight waiting for a future that's only going to flourish ever so briefly.

This was first published on Jason Allen's personal website.

Jason Allen is a chronic hive whacker in the Kirkendall Neighbourhood.

3 Comments

View Comments: Nested | Flat

Read Comments

[ - ]

By UrbanRenaissance (registered) | Posted August 02, 2010 at 22:18:33

Also great article Jason. It reminds me of the time a power surge fried my Nintendo and Super Nintendo and my dad and I trying to fix them.

The NES we were able to open up with a regular screwdriver, replace a couple standard tube fuses and it worked. The SNES on the other hand, required a special bit to unscrew the case (which we just drilled out) and after trying for days to find the correct fuses to replace, we discovered that the manufacturer discontinued them, and as you described, the only fix was to find another SNES to cannibalize. In the end we just put a screw across the terminals and that worked fine, at least until the second fatal power surge.

Comment edited by UrbanRenaissance on 2010-08-02 21:23:52

Permalink | Context

[ - ]

By Undustrial (registered) - website | Posted August 03, 2010 at 17:32:53

This kinda thing is why us doomsayers is always sayin' doom. Not that we depend on iPods, but what about

Computers, for me, represent a very double edged sword. On one hand, they represent a lot of social possibilities we've only imagined before. On the other hand, they really are mainly a way for manufacturers to con us into buying some of the most expensive per-gram machines out there, only to watch them break months or years later.

Saving half a cent or less per unit may sound like almost a bargain, but if it incapacitates the whole unit beyond the hopes of repair, it isn't. And the thing is, most of these parts - microcontrollers, diodes, solid state hard drives, lasers, screens etc are useful in a million different ways. Or at least they would be if ya could still tear 'em apart like we used to. It's such a penny-wise and pound-foolish way to go about these things, but because consumers get stuck with the bill, the corporations barely notice.

Permalink | Context

[ - ]

By Kiely (registered) | Posted August 04, 2010 at 16:44:28

It's such a penny-wise and pound-foolish way to go about these things, but because consumers get stuck with the bill, the corporations barely notice. - Undustrial

It is, but let's not allow the "consumers" off that easy... They want the crap. It isn't always the big bad corporation's fault Undustrial, sometimes we "consumers" get what we want and deserve.

Permalink | Context

View Comments: Nested | Flat

Post a Comment

You must be logged in to comment.

Events Calendar

Recent Articles

Article Archives

Blog Archives

Site Tools

Feeds