Modern Executive
Nov 1st, 2007                                Print this article

Managing compliance in an outsourced world

By Clare Goldsberry

In light of well-publicized recent problems and product recalls, it’s evident that even the biggest and best OEMs can stumble in their offshoring attempts. Here are some pitfalls for which a processor should prepare.

Zone process review with Wayne and Stacy.

Outsourcing has been getting a lot of attention recently, almost all of it negative, with millions of dollars in product recalls and untold damage to some leading brand names. “Despite the significant benefits that come with outsourcing, there are also risks and challenges for OEMs to consider,” said Mark Holman, senior vice president of operations for Arena Solutions (Foster City, CA), a provider of on-demand product lifecycle management (PLM) programs for manufacturers. “Outsourcing, by definition, leads to a loss of control. Done properly however, outsourcing is a good strategy, but don’t confuse outsourcing with offshoring.” Arena recently published a white paper on potential pitfalls when outsourcing manufacturing.

The first pitfall to avoid involves selecting the wrong contract manufacturer (CM). But how do you identify the right CM? If a processor or OEM and a CM are separated by 10 time zones, it’s easy to lose control of standards and specifications. Plus, if the only criteria for outsourcing is to make products as cheaply as possible, it is easy to see how corners could be cut by CMs keen for new business, but interested in their own profit.

According to Holman, “Working with the wrong contract manufacturer is the root of many problems that we observe in outsourcing. An OEM selects a handful of contract manufacturers—or worse yet, a single CM—and starts discussing business without having a clear understanding of the appropriate selection criteria.” He says selecting the right CM has two key elements: first, select one that is in alignment with your needs, size, and stature. “We work primarily with mid-sized manufacturers. If some of these work with the very large CMs, they get lost in the machine,” Holman explains. A little OEM won’t get the attention of a large CM, and a big OEM will overwhelm a small CM. Second, find a company that has the skills you need. Understand that their procurement policies should match your policies. “When you outsource you’d better put your ‘A’ team on the outsourcing project or you’ll lose your competence,” Holman cautions.

Next, avoid what Arena calls the “Quote-and-Go” approach. Depending on price to drive the decision has pitfalls including component price ambiguities such as what assumptions are built into the pricing quotes and lack of visibility to product pricing structure. For plastics processors, these might include the guarantee of using virgin resin (no regrind allowed!), FDA approved colorants, and paint, labels, and other decorative processes that contain no lead.

Ante up before offshoring

“People get very focused on one element of the cost, and yet labor is such a low percentage of the total cost for molding, that going to China may not mitigate the costs of manufacturing,” says Holman. The cost of going to a partner in China, but with no infrastructure to support the relationship, can offset any savings. In a survey, Arena found that more than 50% of the companies surveyed incurred costs in mistakes, reworked parts, or orders for the wrong parts.

Offshoring’s promise of lower costs is clear, but many need to ante up to play in the offshore game. “People rushed to outsource and in the hurry to save costs they don’t want to add costs back in. A poorly done outsourcing strategy often results in higher costs such as the cost of errors and lack of infrastructure to manage the project,” Holman says.

Also, inadequate change management processes and infrastructure “can increase drastically in an outsourcing model, as the OEM and CM are following different but interlocked business processes and making use of differing information systems,” says Holman. “It was hard enough to build bonds with U.S. suppliers when conversations on changes or redesign weren’t captured in documented form. Offshoring immediately increases the need for better process organization; the need to build a good process discipline goes up another order of magnitude…you can’t rely on a quick conversation to solve the problem. You need good documentation.”

To receive a copy of the white paper, visit www.arenasolutions.com.

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