Local manufacturing trumps outsourcing for Deloitte Fast 50 winner

VANCOUVER—While President Barack Obama continues the push to bring manufacturing back to the United States, Alexander Fernandes is right at home making his product in Vancouver.

Fernandes—founder, president and CEO of high-definition surveillance systems maker Avigilon—is overseeing an expansion to more than double his company’s current 10,600-square foot manufacturing facility in Richmond, B.C.

“We don’t do this for some sort of altruistic theoretical. It’s really because it costs us less.”

“You have to be a little bit more proactive,” Fernandes says of the expansion, noting the current facility is running at about 80 per cent capacity. “It’s in part because of existing demand, but also anticipated demand.”

The need for the massive expansion—the plant’s footprint is increasing by 150 per cent—is due both to sustained and anticipated growth, as Fernandes’ firm doesn’t look to bring back manufacturing, but stay on the course set out at the company’s inception almost 10 years ago.

Named the fastest growing technology company in Canada by Deloitte in 2012, as well as the fastest growing software firm in North America for the second year in a row, a big component of Avigilon’s recipe for success has been the decision to manufacture its products in Canada.

“I’ve been involved in high tech software and hardware manufacturing for over 20 years now … and (this) is not a new concept,” Fernandes says of the renewed popularity of reshoring. “I’ve built my whole career around onshore manufacturing.”

Fernandes has never taken that decision lightly, however.

Avigilon routinely compares in-house operations to the cost of contract manufacturing abroad, and since the company’s inception in 2004 has yet to find a combination of quality and cost efficiency that trumps manufacturing locally.

“For us the direct labour-per-product cost of goods is somewhere in the range of about three per cent,” he says. “So what that means is that if you make the labour component small enough there’s no reason to go offshore.”

Components and raw materials are sourced globally—discreet electronic components come from southeast Asia to Avigilon’s facility where its 80 to 100 production employees complete testing and assembly of surveillance systems, which include a range of high-definition cameras.

“Buying the components and materials, it’s commodity stuff—it’s the same price in Europe, North America (and) Asia because it’s a global market,” Fernandes says.

Making the decision to design and manufacture Avigilon products in B.C.’s Lower Mainland came down to a number of factors that go beyond direct labour costs.

Time to market is a key factor for any manufacturer, and Fernandes says Avigilon is able to get products to the marketplace two to three times faster working locally.

“That is a huge competitive advantage, because if we’re faster to market than our competitors with the same products that becomes a sustainable competitive advantage,” he says, noting his firm competes with major players like Panasonic and Sony, to name a few.

Other factors Fernandes says play into the equation are prototyping, intellectual property and the reliability of one’s supply chain.

“If you outsource manufacturing then you have to also by definition outsource your prototyping, and low-volume prototyping is extremely expensive,” he says, also noting the time-intensive process of design transfer.

While it doesn’t directly effect cost during production, handing over intellectual property can damage profit margins long-term, as firms run the risk of having innovation and technology replicated when dealing with third-party manufacturers.

“When you outsource you hand over access to your crown jewels,” Fernandes says. “You basically have to give all of your designs and know-how and technology over to a third party.”

Supply chain predictability is also a major factor, as medium-sized firms can often take a back seat to larger customers in contract manufacturing environments.

Adding automation into the process helps, too, Fernandes says, as it brings down production cost while avoiding human error in the manufacturing process.

“Robots, at the end of the day, are less expensive than the cheapest labour anywhere in the world,” he says. “And the robots are cheaper to operate locally than offshore.”

Fernandes says local manufacturing also allows for far more oversight in the manufacturing and design processes. At home, he can quickly address technical issues and refine  processes in a more fluid manner.

And finally, quality control is a major factor.

“One thing I’ve learned over my (time) doing this is you cannot outsource quality control,” he says. “All of the companies that successfully outsource manufacturing have their own people on their own payrolls stationed physically in these contract manufacturing shops,” says Fernandez, who classifies this as an unavoidable cost whether manufacturing locally or offshore.

While patriotic, Fernandes says the notion of manufacturing on home soil to create jobs falls towards the bottom of the list.

“We absolutely do this for economic reasons,” he says, frankly. “We don’t do this for some sort of altruistic theoretical. It’s really because it costs us less.”

“There’s all the good things and the good karma things of supporting your local economy, but at the end of the day global competition trumps all that, because if you go out of business you’re not helping anybody.”