Trade War or No, Local Sourcing with Maker-to-User Model has Advantages

Spend Matters welcomes this guest post from Jason Middleton, Ray Products vice president of sales and development.

Our trade deficit with China surpassed $301 billion in 2018 — and it’s no mystery why. Thanks to cheap labor and fewer regulations there, it tends to be more cost-effective to have “Made in China” stamped on your product than it is to have “Made in America.”

In the last year, however, the trade war has prompted many companies to re-evaluate their outsourcing practices and consider a “maker-to-user” model of sourcing locally. With the U.S. imposing approximately $250 billion in tariffs on Chinese imports, it’s simply no longer cost-effective to source products and materials from China.

The domestic companies evaluating reshoring are slowly discovering what some of their peers and competitors have known for more than a decade: Because of hidden costs, outsourcing has never been cost-effective in the long term.

A noteworthy example comes by way of the United Kingdom’s renowned car manufacturer Aston Martin. In 2014, after receiving complaints about broken throttle pedals in certain vehicles manufactured after 2007, the company launched an investigation. Their engineers quickly uncovered the issue: The faulty pedals had been made with counterfeit material rather than the company-specified, injection-molded DuPont PA6 plastic.

How counterfeit resin ended up in these pedals is the result of a complex web of supply chain dynamics.

The first stop was close to home — the pedals had been assembled in England by a local company called Precision Varionic International (PVI). According to their website, PVI does their own tooling on-site but sources parts from manufacturers in China. The pedals were traced back to one of PVI’s suppliers, which is based in Hong Kong. The preceding supply chain remains murky, but Aston Martin believes that the supplier subcontracted the molding of the pedals to another company, which likely purchased the counterfeit resin from a company in Dongguan, China.

The subcontracted molding company claims to have done no business with PVI’s supplier, so it’s unlikely the origins of the counterfeit material will ever be determined conclusively.

But what is indisputable is that outsourcing can result in reputable companies being far removed from the business end of their supply chains—and ultimately, the quality of the product is compromised.

In this instance, Aston Martin ended up issuing a recall for 17,590 vehicles, and while the financial implications of that recall were not catastrophic, they could have been.

Aston Martin is a convenient example, but the limitations of outsourcing are far-reaching and span a huge range of industries. Nobody would dispute that offshore manufacturing tends to be less expensive initially than partnering with a domestic manufacturer — at least before the ongoing trade war. But it’s important to acknowledge that with those short-term savings comes a loss that’s hard to put a number on: visibility into who is manufacturing your parts — and how they’re doing it.

Without this kind of oversight into contractors and subcontractors, it’s nearly impossible to guarantee the quality of the final product. And in the long term, seemingly small issues like the type of plastic used in a pedal can inch up the supply chain and cause far-reaching problems for your business and reputation.

As companies shift back to domestic manufacturing so they have better insight into the practices and products of their partners, many are opting to offset costs by keeping their assembly plants offshore to take advantage of lower labor prices.

No one can predict how the trade war with China will shake out, but those of us who are investing in a maker-to-user model are confident we’ll be in better shape than companies who prioritize immediate cost-savings over long-term financial health.