February 12, 2016
Case Study: ZeeVee Assesses Onshore Vs Offshore
When ZeeVee Inc. was founded in 2007, its principals knew exactly where it would manufacture: China. A significant number of OEMs and electronics manufacturing services (EMS) providers had spent the prior decade moving manufacturing facilities there, so ZeeVee decided to follow best practices at that time.
Today, ZeeVee, a manufacturer of video and signal distribution technology, is a bit more tentative about that decision. The outsourcing of production to partners in China is complex and can be both rewarding and frustrating at the same time as Littleton, MA-based ZeeVee eventually found out. The decision of where to base production is a difficult one that demands the careful evaluation of all the pros and cons, according to Zee Vee executives.
“In 2007 we started in the consumer products market with a small device that was going to go into the living room,” said Steve Metzger, co-founder, vice president of hardware development and operations. “We were going to sell millions of these things to gadget geeks for Christmas. That was the plan, anyway. Conventional wisdom at the time dictated that high volume products had to go to China – so that was what we did.”
A couple of things happened on the way to the high-volume consumer market. First, in 2007 and 2008 it was becoming more difficult to break into the consumer electronics market. The PC was on the decline and smartphones and tablets were storming the market. The global economy was on the verge of a recession. And ZeeVee found some significant quality problems with its products.
“Our projected volume never materialized. If you don’t manufacture a zillion products in China they will build a batch [and] tear down that line to use for something else until your next batch. So every new order is like a new product introduction into manufacturing.”
At its worst, the failure rate at the end of the manufacturing line was up to 12 percent, requiring correction before shipping to customers. Occasionally things would sneak into the field as well.
“To fix products in the field is a dramatically larger expense than in manufacturing,” Metzger said. “We were trying to manage a production line in China but every two or three months we had to go over there—send a few engineers and audit the line—and for us it wasn’t practical to have people living in China to manage that.
ZeeVee found what many other U.S.-based companies discovered about offshoring: manufacturing costs were significantly lower than in the U.S., but that benefit was offset by other factors. “During the 2008 worldwide recession, Chinese manufacturers were stuck writing off boatloads of unsold customer inventory,” Metzger explained.
“To avoid that in the future they changed the payment terms, requiring payment of at least half up front before producing a thing. That ties up cash early in the manufacturing process. So we then had the cost of a line of credit to order the goods, payment of the balance when the goods are shipped, and we then had to wait 4-5 weeks for the goods to arrive on a boat before we could sell them and actually make any money for ourselves,” he added.
At the same time ZeeVee executives are quick to point out there were a number of things its Chinese manufacturing partners did very well. “The quality of sheet metal in China is fantastic if you select the right supplier,” Metzger said. “Cable assemblies have significant labor content and the only cost effective way to source them is in China. With the correct supplier and a good process the quality is generally great.”
A Second Look
ZeeVee began to reassess its manufacturing and supply chain strategy in 2012. When ZeeVee first looked at U.S.-based EMS companies, executives said they had a hard time getting anyone’s attention.
“On our second pass at trying to manufacture in the US, we found that domestic companies were willing to talk and they learned a few things during the economic downturn,” Metzger said. “We knew how much it cost to build our product in China so we knew what price we were trying to match. It would never be as cheap as China – maybe 15 percent higher—but the big benefit was that the overall quality improvement was phenomenal.”
Domestic EMS companies were becoming more cost-competitive with overseas manufacturers by automating processes previously done by hand. “If you look at metrics such as the cost of cash, carrying costs and field failures, it can make sense to manufacture in the U.S. There are many more factors than the simple cost of the PCB as it leaves the line.”
ZeeVee also found it had better control over its supply chain in the U.S. The straw that broke the camel’s back: “If you give the Chinese the freedom to select whatever component meets your specs you can save a lot of money but you may end up with a component that fails. We had a certain component on one type of module that failed after running in the field for a brief while. We ended up tracing it back to the supplier and they said ‘that isn’t our part.’ It turned out to be counterfeit. That really caused us to question whether we did the right thing by offshoring.”
ZeeVee sources its strategic components directly from suppliers. Other devices are sourced through electronics distributors. “The lesson we learned is we have much tighter control over our sourcing and we can really narrow down our supplier base to avoid quality issues.”
When ZeeVee develops a product “on day zero we must approve the vendors’ list and component spec for every single component,” said Metzger. “Our EMS will do the sourcing and some pricing. Based on their suggestions we might add vendor or part variant to the AVL (Approved Vendors List) after the initial phase of production. We will see where it makes sense and work with the EMS to qualify parts in a controlled fashion. That’s something we always had some questions about when sourcing material offshore.”
One of the side benefits of manufacturing in the U.S., said Chris Scurto, VP of marketing and North American sales at ZeeVee, “is the ability to take our staff and customers to see this stuff being made and the state-of the art facilities. The customers get the idea that this is serious manufacturing. When we take our employees there they get a better sense of ownership in the products when they see it being made. We couldn’t do that in China.”
“The one thing I would conclude is it really is all about customer satisfaction,” said Bob Michaels, CEO of ZeeVee. “At the end of the day the cost is one thing but you can’t afford to have a field failure. That will tank a company’s reputation. “We now have one of the longest – 5 year – warranties in the business. We could not have dome that if we had remained exclusively in China. We are only comfortable with that if we have a tight control over the process.”
ZeeVee, with revenue of less than $50 million, is four times the size it was when it was founded. One of its EMS partners is EIT LLC based in Methuen, MA.
Written by: Barbara Jorgensen | February 12, 2016