One of the biggest problems manufacturers face today is how to reduce costs as they look to grow. Markets such as Europe and the United States have experienced slow growth, yet production costs are on the rise.
“OEMs are getting squeezed, and reducing resources puts stress on innovation,” says Matt Jennings, CEO of contract manufacturer Phillips-Medisize.
To overcome this predicament, firms have traditionally turned to low-cost labor markets to serve their manufacturing needs. But low-cost labor doesn’t stay cheap forever.
“Labor prices go up,” Jennings says. “The difference between high- and low-cost labor is shrinking,” he says.
For example, Phillips-Medisize has seen a 15% increase in its labor costs in Mexico, Jennings says. Manufacturing prices in China, a country that has long been synonymous with low-cost manufacturing, are rising. Wages for workers there have been increasing by about 17% each year, according to the Boston Consulting Group.
As costs in those traditional centers for low-cost manufacturing increase, companies are considering a more holistic view of the cost of production as they look for ways to save. More and more they’re considering factors such as proximity to the end markets for their products in addition to the cost of labor.
“As the gap between low-labor-cost countries closes and the cost of transporting products gets more expensive…they’re seeing that the savings associated with being in those local markets can offset some of those costs,” Jennings says.
Michael Rademacher, senior vice president and president of distribution for PolyOne Corp., a provider of specialized polymer materials for the medical device industry, agrees that keeping the manufacturing and end market close together helps reduce costs. OEMs don’t want to worry about shipping materials or delivery issues, he says, and firms often underestimate the true costs of shipping hold ups or customs delays.
“Staying local is easier, and it is often less expensive to manufacture in the market you intend to reach, wherever that may be,” Rademacher says.
Eastern European locations, such as the Czech Republic, are attractive because they provide access to markets in Western Europe and the Middle East, Jennings says. The region is also appealing because it is experiencing growth in the establishment of healthcare services and still offers relatively low-cost manufacturing, he adds. Jennings also cites locations such as Singapore, Malaysia, India, and Costa Rica as new hotspots, and Mark Bonifacio, of medical device consulting firm Bonifacio Consulting Services, adds Vietnam to the list.
“The reality is that every company is trying to suss out the next best strategic market and the next low-cost manufacturing site,” Jennings says.