Article at a glance:

When offshore manufacturing doesn't make sense

While many companies benefit from sending work to places where labor is cheap, manufacturers often overrate the value of wage savings and underestimate the inventory, obsolescence, intellectual-property, and currency risks of offshoring. Some also overlook the benefits of producing goods close to their markets so that customers can get them in days instead of months. Unlike companies in service industries—where wages are typically a higher share of costs and no physical goods change hands—manufacturers often do better staying at home.

The take-away

When manufacturers understand their main sources of competitive advantage, they can decide whether offshoring helps them or creates unnecessary risks. Increasing productivity to reduce the relative importance of direct-labor costs creates an operational edge that can make production at home more competitive.