San Diego firms reverse Chinese outsourcing trend

Nash-Hoff's book tells of San Diego companies reverse outsourcing from China. (Courtesy photo)

In my experience as a manufacturers’ sales representative in the San Diego market, I previously found that once manufacturing moved out of the United States, it rarely came back.

However, we have been hearing about more companies coming back from doing business in China. The main problems San Diego companies encountered in China were: inconsistent quality, communication problems, long delivery times, and unfavorable terms.

Some of the San Diego companies moving operations back the U.S. include: Vaniman Manufacturing, dental equipment makers; DJO, orthopedic manufacturers; SeaBotix, makers of underwater vehicles; and the company I run, ElectroFab Sales, which helps firms select manufacturing processes for products.

Vaniman Manufacturing

In 2002, Vaniman Manufacturing, which makes dental equipment in Fallbrook, shifted most of their sheet metal fabrication offshore to China to save money. It was a 50 percent cost reduction in piece price.

However, the Chinese manufacturer required Vaniman to purchase significantly larger lots of parts, resulting in a higher cost for the larger inventory. In turn, the larger inventory required more storage space.

In addition, transportation costs for shipping from overseas were higher. These additional costs and other “soft” costs, such as travel expenses to visit vendors and communication costs, make up what are referred to as the “total cost of ownership.”

After realizing that these additional costs were eating up the cost savings in the piece pricing, this company brought their sheet metal back to a San Diego supplier in the fourth quarter of 2007.

Don Vaniman, who heads the company, cited several reasons for his move: shipping delays, security hassles, and poor quality control. “If you order a thousand widgets in four shipments, three shipments might be all right, but the fourth might be totally wrong.” Vaniman said.

“In the U.S., a supplier would jump through hoops to fix that kind of problem, but in China, it could take six months to work out the details.”

Vaniman said that the new San Diego-based supplier was able to nearly match the Chinese costs by developing more efficient and creative production techniques. Vaniman was able to significantly reduce its inventory and the space required for inventory, due to smaller lot sizes being delivered.

DJO

DJO decided to make its own molding tools in-house, after outsourcing delays. (Courtesy photo)

DJO, LLC., is an orthopedic products maker, based in Vista, California. It has manufacturing plants in the United States and Tijuana, Mexico, which produce wrist braces, arm slings, back and abdominal supports, and rigid knee braces, among other orthopedic products.

Because it’s a medical device company, nearly all its projects go through strict quality assurance. One such project was a cooler, which forms part of a cold-therapy unit to reduce pain and swelling.

When the company first developed the product line, the coolers were sourced in the United States, but eventually moved to China for a total landed cost of around $10 each.

However, the company had to buy the coolers by a boat-container load, and when the molds broke, the Chinese supplier stopped shipping product for two months.

The project team figured out how to economically manufacture the cooler in-house – making their own injection molding tools, sourcing the blow-molded components locally in the U.S., and creating fixtures for the high-pressure foam injection machine.

Jerry Wright, DJO’s vice president, said, “The cooler will cost $2 less than it did to buy it from China, when you factor in the freight, handling, and inventory costs. It’s a nice enhancement to the product line, and we don’t have to go through the horrible supply-chain frustration with China.”

SeaBotix

In late 2007, SeaBotix Inc., a San Diego-based manufacturer of miniature underwater vehicles, told me that their Chinese molder was substituting 10 percent glass-filled ABS (a plastic material used in injection molding) for the specified 30 percent glass-filled ABS.

The Chinese vendor claimed that the parts were made in the specified material, but an independent lab test confirmed that they weren’t. The 10 percent glass-filled material caused the parts to shrink more in molding, so that the parts were smaller, didn’t fit mating parts properly, and were not as strong.

After the Chinese vendor refused to take the parts back or give credit for the defective parts, SeaBotix decided to bring their tools back to the United States and sourced them at a molder in southern California.

SeaBotix now outsources molds for its underwater vehicle parts in Southern California, not China. (Courtesy photo)

Don Rodocker, president of SeaBotix, said, “The Chinese tooling was one-third the cost of tooling in the U.S., the delivery was one-third the time quoted by U.S. companies, and the piece part price was one-third the quoted U.S. price.

“But each time we reordered the parts, the Chinese molder increased the price, until they were three times the price we could get the parts molded for in San Diego.

“We would probably go to a Chinese toolmaker in the future for the molds, but would bring the molds back to the States to
be run,” he said.

ElectroFab Sales

In mid-2007, ElectroFab Sales, the company I run, was able to get an order for a new part for the U.S. plastic injection molder we represent. The company had previously gone to China for parts for their new product, but we were able to get it from another San Diego-based company.

Vaniman Manufacturing, a dental equipment maker, decided a 50 percent cost savings in China wasn't worth it.

The plastic injection molder had such an unpleasant experience in China that they decided to source domestically for the last part needed for the new product. The San Diego parts molder finished the tooling in only three weeks and provided first articles of the part that met the customer’s quality standards without any tooling rework.

A few months later, the manufacturer pulled three tools that made other plastic injection molded parts for the same product from their Chinese vendor and transferred them to our U. S plastic injection molder. Two of the tools had to be reworked by our molder before they were able to make good parts.

Can’t outsource quality

At a time when chief financial officers and controllers are under increasing pressure to create more cash flow and enhance the company’s valuation, the unfavorable purchase order and credit terms of Chinese companies are causing U.S. companies to take another look at the projected cost savings of doing business offshore.

There’s also a growing realization that when it comes to quality and location, location may be the best guarantee of all. It’s hard, very hard, to outsource quality, particularly to a land many miles and time zones away.

The question for smaller companies is whether the advantages of outsourcing manufacturing and other business process operations will be worth the time, effort and risk. The decision process is often a balancing act, and the dynamics can often change unexpectedly and rapidly.

The challenge for America is to keep as many companies as possible growing and prospering within the United States.

Michele Nash-Hoff is a leader in San Diego's manufacturing industry.

Michele Nash-Hoff is president of ElectroFab Sales and author of the book, “Can American Manufacturing Be Saved? Why We Should and How We Can.” This article is an excerpt from the newly-released book, which she will be presenting at the Del Mar Electroncs Trade Show this week.

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