Driven by a need to capitalize on lower overseas manufacturing costs and higher growth rates, this aggressiveness leads American companies to consider overseas outsourcing, subsidiaries, and manufacturing partners in lower cost lands.
Many American companies are challenged to adapt to a world in which some US markets are flattening, costs are increasing, and foreign vendors seem to be able to produce goods more economically than domestic firms. These types of cost pressures are leading many firms to outsource some of their manufacturing to regions where labor costs and production expenses are significantly lower. Others are seeking corporate business partners or subsidiaries in countries with lower costs or higher growth rates than the USA.
Often these decisions are made at the highest corporate levels, but the implementation is assigned to engineering and manufacturing teams. This article, accordingly, looks at some of the issues that may arise after the go-no/go decision is made, and covers several organizations that are available to facilitate such an implementation.
First, a few definitions. Outsourcing is often defined as moving your manufacturing to a lower cost area. As one of our observers put it, “Outsourcing used to mean manufacturing in a low-cost US state like Mississippi. Today, it means China.” In outsourcing, the usual goal is to make products for sale in the US less expensively. Contrast this with overseas subsidiaries or business partners, where the object is to move into a high-growth rate country with overseas manufacturing, plus marketing, sales, and sometimes engineering. This article describes three types of organizations that can assist you in meeting these goals. Eastbridge Partners specializes in setting up overseas business partners and subsidiaries. MFG.com specializes in helping you find suppliers to build your products, both in the US and abroad. And Eknowtion.com focuses on outsourcing consulting.
A growing practice
By most estimates, the level of outsourcing will increase 15% per year for the next five years. Asia continues to lead in contract manufacturing production, followed by the Americas and Europe. However, most analysts expect Asia to grow at an increasing speed over the next five years, while the proportions of the Americas and Europe shrink. These figures come to us from Douglas Kent, CEO of Eknowtion.com, an outsourcing consulting firm and author of “Managing the Tradeoffs of Low Cost and High Risk.”
According to Mr. Kent, rates for outsourced manufacturing are highest for industries such
as computer systems, communications, and medical instrumentation. He notes that the conventional wisdom used for making outsourcing decisions in the past has primarily centered on the desire to reduce the overall Cost of Goods Sold (COGS) in order to increase the product and/or company’s profitability. Of course, COGS is an important aspect for consideration – however a focus on the Total Supply Chain Cost is likely to yield a much better input for decision making. According to the Supply Chain Council the definition of the Total Supply Chain Cost includes “costs associated with the supply including execution, administration and planning” as opposed to COGS which focuses solely on the costs associated with buying raw materials and producing finished goods.
The attraction of lower COGS has lured some companies to make a quick shift of manufacturing to China because of what has come to be known as “The China Price”. As Business Week stated (6 December 2004, p. 102), the words “The China Price” are the three scariest words in U.S. industry. But China is not the only destination. A study by the Economist Intelligence Unit (EUI) reveals that China and India are topping the list for offshoring destinations. However the Czech Republic was not far behind in third place. Factors taken into consideration were labor costs and skills, regulation, and political and economic security. India and China will likely continue to reign as choice destinations due to their low labor costs, developed legal system and ready supply of English-speaking graduates (higher for India than China). Eastern European and Latin American
countries have attractive regulatory environments and close proximity and cultural ties to those companies considering outsourcing, Mr. Kent concludes.
Take a moment to Google the universe of firms involved in Manufacturing Outsourcing. There are a jaw-dropping 14,700.000 listings. But of the top fifty listings, eleven are for China, four for India, two for Bulgaria, and one each for the “Asia-Pacific area” and the UK.
Mexico and Brazil are recognized as the strongest destinations in Latin America. Mexico, traditionally strong, had fallen off the pace in recent years, but now is enjoying a bounce-back in outsourcing popularity. And Eastern Europe continues to make its mark in outsourcing. Not only Bulgaria, but the Czech Republic, Rumania, and Poland are achieving success.
There are textbooks and consultants to help you, and with nearly 15 million Websites, no shortage of raw information. You will find common issues to overcome, mainly centered on language and cultural differences with your overseas partners. All the consultants stress the need to communicate honestly, openly, and quickly. Some suggest that your efforts will be most productive if you leave the door open for overseas engineering teams to recommend approaches that capitalize on foreign capabilities.
Here’s one personal story that highlights the Asian emphasis on speed in communications. When this writer contacted a new business partner in Honk Kong, we received an almost
immediate reply. The reply stated, “We are too busy to reply to your inquiry right now. But in 45 minute we will answer your inquiry in the detail it deserves.” Sending an email or fax to apologize in advance for a 45-minutes delay reflects Asian sensibilities more than ours in the US, and suggests that we might have to update our communication procedures to mesh with those of an Asian partner.
As you deal with the issues highlighted in this article, we hope you’ll tell us about your own experiences, thus providing feedback that we can share with your fellow readers of Design World. You can use the reader-feedback email address mentioned below. The best responses will be published in an upcoming issue.
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Top 10 tips for outsourcing success (Do what you you do best and hire the rest!)
Here’s good advice from Keith Crosley of Elance Online. “When I talk to buyers who’ve mastered the art of effectively managing external service providers, the same themes emerge over and over. I’ve distilled their advice into the following ‘Top 10 Best Practices’ ”
1. Clearly define the scope and schedule for your project.
Give vendors as much information as you can about what you need delivered and the way in which you need the work done. Also, be clear and realistic about your schedule requirements – project schedules can have a huge impact on project costs.
2. Evaluate a service provider like you’d hire a full-time employee.
When you’re evaluating proposals from service providers, don’t be afraid to ask questions. Just like hiring a full-time employee, selecting a vendor is a very subjective experience. Check their references and ask for feedback from other clients.
3. Look for specific experience fit.
Ideally, the service provider you select will have specific experience with the type of project that you’re undertaking. You don’t want to be somebody’s “guinea pig.” This is especially crucial when outsourcing complex technical projects such as software development.
4. Don’t choose a vendor based solely on price.
Though it might be tempting, never select a vendor based solely on price. Experienced buyers who have outsourced many projects and evaluated hundreds of proposals almost always recommend discarding the highest-priced and lowest-priced bid.
5. Review portfolios and samples.
Examine the vendor’s previous work (their “portfolio”) and make sure that their previous work meets your expectations for quality and style
6. Start small.
When engaging with a service provider for the first time, start with a project that is relatively small and simple in scope. This will give you a better idea of the provider’s style and capabilities before you entrust a “mission critical” project to them.
7. Tie payment to clearly defined project milestones.
Just as you should be clear about project scope, make sure that you define a work plan for your outsourced project with clearly defined milestones. Having scheduled checkpoints where you review the status of the project as it works toward completion—is an easy way to ensure that you meet your final deadline and that the final product meets your standards.
8. Negotiate ownership of work up front.
For any type of outsourced project, make sure that you are clear about who owns the resulting work product and any important components of that product.
9. Work out warranty in advance.
For technology projects, it’s a good idea to specify a warranty or support clause so that you are assured of some amount of continuing support from the vendor after the project is complete. It’s much easier to negotiate a support clause before the service provider begins work, rather than after the completion of the project.
10. Get it in writing.
During the course of a service engagement, the scope of the project, deliverables or even the agreed upon price may change. Make sure that you clearly communicate any schedule, scope or payment changes to your service provider and get confirmation from them – in writing – that they understand and agree to the changes.
Economic growth in manufacturing industries is far stronger in Asia and Latin America than in Europe or the US. These numbers, for Parker Hannifin, tend to repeat overall ratios between areas shown.
Online link between buyer and supplier
Mitch Free, CEO and Founder, describes MFG.com as an online marketplace that matches a sourcing professional or engineer’s drawings and specifications to qualified suppliers. The company creates efficiencies in the creation, distribution, tracking and awarding of RFQs for custom manufactured parts and assemblies by matching buyers and suppliers at an exact moment in time, when they need each other. Their community rating system reduces the risks associated with developing new business relationships. MFG.com is free for buyers while suppliers pay an annual membership fee.
A buyer who wants to use the service uploads their file to create an RFQ (Request for Quote). The system will lead them through the process and determine the attributes needed by the prospective supplier. Then the computer software matches those attributes with those of the suppliers, yielding a matched list of suppliers with those attributes, along with ratings of suppliers. The RFQ is only sent to suppliers that they buyer approves and once it is released they begin to interact online.
Buyers can follow this process and deal with the suppliers that come up through the RFQ process. Or they can select specific suppliers to receive RFQs.
As Free explains it, MFG.com has thousands of suppliers, most of which are in the US. While outsourcing once meant getting a supplier in Mississippi, now it means getting one in Asia or Eastern Europe. If you, as a buyer, are interested in foreign firms for contract manufacturing, large numbers of offshore vendors are part of the MFG.com supplier network.
MFG.com Supplier Breakdown
North America: 64%
Latin America: 1%
The intelligent engine within MFG.com is powerful in matching suppliers that can meet buyer needs. But when international matches are involved, a little extra human care can be helpful. Mr. Free suggests that some of the following procedures be employed to minimize glitches when looking into offshore suppliers:
First, the MFG.com engineering team gets in the middle to liaison with overseas companies, sometimes by checking references of suppliers. If there is a disconnect over terms or practices specified in the drawings, MFG.com has staff engineers to smooth out kinks between buyer and contractor.
• It’s essential to look beyond the cost. Sometimes, a prospective buyer becomes so fixated on cost that they overlook the other parts of the proposed procurement package. Not too many mistakes are made on technical issues, but some buyers get giddy over low prices quoted them. Remember, if a price looks too good to be true, it probably is.
• Payment sometimes can be an issue. Chinese companies, for example, are leery of shipping an order for which they have not been paid. American buyers are used to paying 30 days after parts are delivered. If the savings are great enough, it’s possible to arrange a third organization to “factor,” or handle the financing in a manner acceptable to both supplying and buying companies.
• It’s important to understand the difference between a manufacturer itself or one of its rep firms (called trading houses). Trading houses are OK, but know what you’re dealing with. If you think you are dealing with a manufacturer, but your contact is with a trading house, then you may find that a different manufacturer is producing each order you send to your supplier contact. Complicating this situation is the matter of trading licenses: small manufacturers may not have trading licenses, but trading houses do. Again, this is another reason why an experienced intermediary can help you avoid trouble.
• Free continues: we have to help out with technical aspects of languages. There’s no room for mistakes in translation. MFG.com may host a 3-way conversation to ensure accurate communications.
• Asian companies expect a prompt response. It’s in the culture. If they send an email or fax, and you don’t respond quickly, they will begin thinking, “what kind of partner are you?” if you don’t answer common questions. Your speedy response gives them a high comfort level with you.
Get matched to only qualified suppliers
As you create your online RFQ and your specs are instantly matched, a live list of qualified suppliers is created. You choose who you want to invite into the process and we do the rest. Your RFQ is sent, non-disclosures are presented, drawings are securely distributed and you simply wait for your quotes.
Analyze your quotes and award the job
All of your quotes are in an “apples-to-apples” format so you can make an intelligent decision, faster. You can export the information to excel. You can even check out the suppliers’ profiles and community ratings to see it they have lived up to their promises on other jobs.
Create your request for quote (RFQ) online, in minutes-Our online wizard walks you through the process. We even allow you to upload associated drawings and specifications securely. And revisions? You won’t cringe anymore because it’s so easy to update your specs and redeploy them.
Distribute the RFQ:
Once your RFQ is created you will be presented with several distribution options. You can let the system automatically match your RFQ to suppliers with the right expertise and capacity or you can create a preferred supplier list and control the distribution. You can even invite your suppliers who are not presently members of MFG.com to quote your RFQs online for FREE.
Collaborate with suppliers:
You’ll love the power of one-to-many communication as you collaborate with suppliers regarding technical and business issues related to your RFQs. And of course all collaboration will be permanently tracked with your RFQs for historical reference.
Review the quotes:
Quotes will be delivered to you online in an apples-to-apples format that makes comparison easy. You can even export quotes to Microsoft Excel if you choose.
Perform due diligence with our rating system:
MFG.com gives you the tools to perform real-time due diligence on potential suppliers. We combine self-disclosed information with third party information and ratings from other users (eBay style) to give you an accurate profile of suppliers you may be considering for a project.
Select a supplier:
Finally, you select a supplier and award the RFQ online.
Real help from real people:
Even though MFG.com is an online community and marketplace, we are backed by experts who are here to help you at anytime. Engineers, customer service professionals and sourcing experts with years of experience are on staff to help you get the most out of your membership.
Learning to do business in China
Jack Daniels, president of Eastbridge Partners, describes that firm as an international consulting group specializing in business development in greater China. They assist clients in developing their business, market, and technology initiatives and in structuring new enterprises in the Asia-Pacific region.
Mr. Daniels explains that Eastbridge specializes in small and medium-size companies that need to create business in Asia. Really large corporations, he explains, have the resources to go on their own. But a small-to-midsize company, say $25 million to $450 million, may need a supporting structure to get started.
Current clients include:
• Pen-based tablet keyboard computer
• Materials for dental applications
• Consumer products company that makes high-end
• Software companies that need to localize products
He advises a potential client that, “ if you can’t take 35-40% out of manufacturing cost (by manufacturing in China), you probably shouldn’t start.”
Daniels notes that Asian engineers are well educated, but they have a different culture. “We Americans tend to be stiff-necked with them. Chinese mercantile culture is at least 5,000 years old. Americans are perceived as overly concerned with minutia, like grades of steel.” Some of his clients have found that it works better to send over spec documents and allow Asian engineering partners to make recommendations.
What is the best way to assure a smooth, cooperative relationship with a Chinese partner? Assign an “Asia Champion,” one person in your company to be a conduit for all calls and information. Another Daniels recommendation to facilitate communications: download Skype software and put Skype addresses on business cards.
One key to doing business in China: the pace of business is much faster. It’s possible to cause a major cultural “car wreck” by not promptly acknowledging communications. You can acknowledge them promptly and respond to them within one business day. China has a culture based on speed and execution.
One downside is that the emphasis on speed sometimes leads to a “good-enough” mentality in quality. In one anecdote, Daniels described putting in office facilities in a new building in China. When he decided they needed a doorbell, a Chinese associate installed the bell by the front door, upside down, and out of plumb. When questioned, he replied: you wanted a doorbell, and you got one, and it rings, so why worry about the appearance?
We often don’t understand Chinese culture, and they sometimes don’t understand ours. Daniels described one client, an apparel maker, who wanted to have blue jeans made. Sent over samples. Word came back: no one in China can make pants like these. Why not? — China makes a large share of all the blue jeans in the world, so why not these? The answer — these are faded and they have holes in them. We make better product than that.
(It was necessary to explain that in the US, faded blue jeans with holes may be valued more highly than ones without.)
Mr. Daniels notes differences among Asian cultures: China is fastest to get things done. “Japan is glacial — achingly slow. Korea is between the two extremes.”
Advice: read good books about the culture and about the people. Then go there. You can’t do it at arm’s length. Business in Asia is done at personal levels. Personal relationships come first in Asia.
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