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Local Manufacturing May Be Making a Comeback

Contract manufacturing is returning to the U.S. and the San Diego region slowly and steadily, according to both the head of Carlsbad-based Outsource Manufacturing and a business adviser who helps companies decide where to place their manufacturing contracts.

Speaking at a panel June 15 put on by Connect, a nonprofit group that promotes entrepreneurial activity in technology and the life sciences in the region, Ted Fogliani, president and chief executive officer of Outsource Manufacturing, said that his manufacturing business has picked up two manufacturing contracts for work that was being done overseas.

“It takes a year to come back — contract manufacturing companies here are being asked for quotes on work six to 12 months out,” Fogliani said. “Right now is a really good time to push for U.S. manufacturing because businesses can push for good deals and manufacturers want the work.”

Panelist — and global supply chain and operations expert — Christopher Gopal said that businesses he works and has worked with are increasingly looking to keep key manufacturing close to home. This was reflected in a recent survey by Accenture that found 59 percent of companies that outsource their manufacturing are reconsidering their decision.

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“It’s anecdotal at this point, but I know it’s happening,” Gopal said. “It takes time to get back out of China — if you have tools and masking in China, you can’t just get them back out.”

The question of when to outsource and, more importantly, what and where to outsource is at the heart of every entrepreneur’s business, and the answers are found in the shifting sands of the world economy.

Costs and savings of outsourcing are sometimes hard to nail down, according to Robert Blumberg, former chief executive officer of Spectragraphics Corp. Labor costs, usually 10 percent to 15 percent of total costs, are constantly shifting and require real study. For example, labor costs in China are expected to rise 80 percent in the next few years, and while pay runs $1 per hour, perks include housing, food and overhead that push the cost to $6.50 an hour.

“That’s a third of what San Diego labor costs, but it’s very different than 1/20 of the cost, which is what you get if you just go by the hourly,” Blumberg said.

Other considerations — such as the $6,000 to $8,000 per person per trip that it costs to send engineers and managers to supervise Chinese manufacturing, the costs of having the finished goods at sea for a month and rising material costs — can bring the cost of overseas manufacturing even higher.

And that doesn’t begin to take into account what happens when the outsourcer needs flexibility and responsiveness as a product is developed and refined, or the need to protect the company’s intellectual property when it is designed into the manufacturing.

Gopal said the rule of thumb is products requiring more complex engineering and low-touch labor, products that are not easy to ship on the water, should be near-sourced — with the prototypes made here.

Diego Borrego, founder and vice president of product engineering at Networkfleet Inc., which provides real-time monitoring and scheduling for vehicle fleets, said that his company realized that its intellectual property is in one of the parts it designed and sent out for manufacture. That prompted the company to look for manufacturing within the U.S., where rights to such property are widely understood, he said.

“I can’t think of a situation where early stage companies should manufacture offshore,” Borrego said. “The advantage of working with local manufacturing in consumer electronics, electronics, defense work is that there’s local expertise that lets you be efficient about things you never thought about.”

For example, Borrego said, most young companies don’t realize they can look to engineering and design to cut labor and material costs — something Fogliani’s company does long before the start of manufacturing.

“I send new clients to my materials group and in 20 minutes they’ve cut costs in half,” he said. “They come in with sole source materials and we cut costs by 15 percent by double sourcing.”

Contract manufacturing companies — there are at least 20 in San Diego County — also know how to work with the entrepreneurs’ engineering and design teams to come up with designs that cut labor costs as well, Fogliani said.

There are many situations where U.S. manufacturers can easily compete with those overseas, he said.

“If a product has 60 percent to 70 percent material costs, the U.S. can play,” Fogliani said. “Pricewise, San Diego can compete with any location in the country.”

Marty Graham is a freelance writer for the San Diego Business Journal.

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