When to source manufacturing offshore in a country like China, India, or Mexico?  When to keep manufacturing at home in the U.S.?  Don't start with cost:  start with strategy.

Lowering costs has been the most common and highly publicized impetus for companies to source and establish manufacturing operations offshore in a low-cost country like China.  But there are myriad reasons why a company might expand operations to an offshore country, or on the flipside, choose to maintain manufacturing at home.  Many of them have nothing to do with cost, but can be far more significant to a company's health than the cost of goods.

For many consumer product industries, seeking the cost-savings is a given.  To be competitive on the retail shelf, offshore manufacturing operations in low cost country sources is necessary.  But the strategic planning for sourcing and manufacturing often does not go beyond this perspective of thinking, a practice which often lands companies in trouble by sacrificing the most valuable aspects of their organization, or results in them missing a chance to maximize the value of their supply chain.  

First, consider a company's competitive advantage.  What aspects of the company are most important to the company's competitive position in the market?  Innovation and launch of new products?  Delivery of a consistent, high-quality customer experience with the company's products and services?  Lowest prices on the market?  There are many ways a company can differentiate itself and flourish in the market.  The question is–how will sourcing an offshore supplier in a country like China detract from or augment this competitive niche? 

Business case studies have shown that companies which have sought offshore suppliers to lower costs, at the expense of other important aspects of their company (such expenses were not clearly understood at the time), have ended up losing market share and value.  For example, companies which are leaders in innovation and technology often become so because they have nurtured a culture of strong, horizontal communication within.  Ideas, knowledge, and relationships are built across functional boudaries (meaning engineers eat lunch with marketing folk) which all contribute to the cross pollination of ideas  and the development of new, innovative products.  However, when a VP of operations decides to begin contracting out manufacturing an ocean away, without paying specific attention to developing the proper communication channels, the core strength of the company is sacrificed over time in the pursuit of short-term cost reductions.

A way in which the above technology company may have gone about this in a better way?  Keeping manufacturing operations at home may or may not have been the answer.  But they clearly could have prepared for their move offshore more effectively.  They could have sourced lower cost manufacturing suppliers and developed close partnerships to foster open dialogue.  Perhaps the company makes sure its design team goes over to visit their suppliers several times per year to visit manufacturing facilities, and vice versa.  A company seeking to optimize its supply chain in this fashion, by attaining a lower cost of goods, IN ADDITION to investing the resources to support its competitive advantages with outsourced service providers, can truly maximize value.  Apple computer could be considered a company that has done this very effectively.  Apple knows where to spend and where to save.  For more insight into how Apple does this on a product basis, check out Manufacturing the Ipod Shuffle: How Apple Produces Great Products at Great Prices.

As Dan Harris of ChinaLawBlog points out in his post Manufacturing in China.  Because There Are 1.3 Billion People There, gaining access to China's consumer market is now becoming a significant reason cited by companies for expansion of operations in China.  Following customers to support them in foreign countries might be another reason.  The fact is, there are numerous ways to drive value beyond lower cost goods.

Why keep manufacturing at home?  Some companies may find it more valuable in the long term to keep manufacturing operations at home, despite the opportunities for cost reduction elsewhere.  These companies know that paying more in the short-term to maintain whatever edge their domestic operations gives them, offers greater rewards in the long-term.  An example of this may be a fashion oriented company that creates new product lines several times annually, and has difficulty accurately forecasting which items will sell.  Thus, they may find that the cost of holding inventory for long periods of time and not being able to respond quickly to market trends is more expensive over the long haul than manufacturing their products domestically and gaining very short lead times.  An analysis of the supply chain at the product level may motivate a company like this to choose a hybrid model in which some of its products are manufactured abroad and some at home.  A fashion company like Zara, which can go from product concept to market in 18 days, is a great example of this.  It starts with strategy.

The bottomline is that companies, particularly smaller companies, that are now sourcing contract manufacturers in places like China, India, Vietnam, and elsewhere because of cost pressures, should consider how else manufacturing in these areas will impact their business.  They have the opportunity to advance to a higher level of strategic planning.  In a country like China, they may gain greater access to materials suppliers, they may be able to take advantage of low cost engineering and design talent, they may find an opportunity to sell into China as well.  If their competitive advantage rests upon delivering high quality product, or innovating products on the cutting-edge, they would do well to ensure that they source suppliers that can support these functions and invest the necessary level of resources to optimize them.  Some may find that not outsourcing, and staying at home, serves their purposes better in the long run.  Companies may find that smaller minimum quantities and faster turnaround are the key drivers in their business.  The point is to assess the strategic sourcing circumstances, make an educated decision, and execute it accordingly.

Is this your factory?

An article by Andrew Reich from ChinaSuccessStories (h/t Dan Harris of Chinalawblog) highlights five straightforward but oft missed steps in assuring the quality of product from your China manufacturer.  Dan Harris, added a sixth point, and Global Sourcing Specialists is chiming in to add a seventh key to quality when when working with chinese factories: Source a quality manufacturer

First, it should be noted that these steps need to be taken together.  Accomplishing one or a few of them will not suffice to assure your product quality, and will likely only delude you into a false a security about what is coming off the production line and potentially making its way into the hands of your customers. 

ChinaSuccessStories's first five points:

1. Detailed documents: The number one key to quality when working with factories in China
   is documentation. Having bi-lingual, detailed, factory agreed upon
   checklists in place that document an item’s specifications and the
   criteria for inspecting the product before shipment, is essential to
   controlling product quality. One can not say for sure, but I would be
   willing to bet that the factories responsible for products recently
   recalled for lead paint did not have bi-lingual documentation on hand
   from their customer stating the type of paints that could and could not
   be used. Sure, this type of documentation takes time and hard work to
   create, but putting such processes in place is the first and most
   important step in avoiding quality issues. QC Checklists should describe in detail:

   a)     Item Packaging

   b)    Item Defect Classification (what is considered an defect and at what 
           severity)

   c)    Item Size and Other Specifications

   d)    Item Functionality and How it is Checked

2. Factory Presence:  Having a presence at the factory ensures that both factory staff and
   management really know who you are. Either through a 3rd party QC
   company or your own staff, ensure that you are being represented at the
   factory in person on a regular basis, and that the factory clearly
   connects your presence there with your production. Success in China is
   all about relationship (Guanxi), and dealing with quality is no
   different. Work towards a state where the factory has a personal
   commitment to you and your products.
3. Inspection:  Perform regular product inspections (either with your staff or a via
   3rd party), not only on the final product shipment, but also during
   production (otherwise knows as DUPRO). Ensure these inspections are
   consistent and based on clear inspection criteria. Always review the
   inspection results with factory management and their own QC team.
4. Keep Approved Samples:  Some say that a picture is worth a thousand words. I say that a sample
   is worth a thousand headaches! Items often get revised and modified
   several times in the sourcing process, and then again after production
   begins. Keeping an approved sample in your office, and also one in the
   factory that can be used to verify the production product by the QC
   team, is essential in seeing eye to eye with your Chinese suppliers.

5. Take Responsibility:  Nothing will alienate your Chinese suppliers more than a mistake on
   your side for which you take no responsibility, and blame their
   misunderstanding. I’ve seen hard-headed buyers make this mistake more
   than once, to the demise of their hard earned factory relationships.
   So, make sure you have all the facts before you start to blame.
   Recognize when it’s possible that a mistake or production issue may
   have been caused by your own fault, or your own team’s
   mis-communication. Take responsibility when this happens, even if it
   means a financial loss. If you are working with the factory on a long
   term basis, the credibility you will gain will outweigh what you have
   given up.

   The message here is don’t take anything for granted. You and your
   suppliers most likely come from two vastly different cultures, have
   different values, and see quality differently. By making sure quality
   standards and procedures are in place and clear to all parties you will
   definitely avoid costly production issues.

Dan Harris' 6th Point: Legal Contracts

Our 7th Point:  Sourcing of Quality China Manufacturers

Really, this point might be placed first, only because the sourcing process takes place before any of these other steps are taken, AND, if you work with the wrong China factory, or any factory for that matter, these other steps may be very difficult to accomplish and/or ineffective.  It's similar to following all of the cooking instructions with great meticulousness to bake a world-class cake, and then baking your cake in the Easy Bake Oven.

Thus, to ensure supplier sourcing sets the other 6 steps up for success, one would do well to locate several potential sources, receive manufacturing and cost feedback from each of them, and select one or two that seem best able to support the project's and company's needs based on qualifications, engineering and QC support, product lines, and customer service.  Assessing a supplier for these qualities will likely, and should, involve auditing the factory production line, as well as meeting with management and key personnel.  Do this–and the rest will be much easier.

I attended Stanford University's third annual conference on socially and environmentally responsible (SER) supply chains last Thursday, May 21.  The conference has doubled in size every year since 2006 and promises to be larger next year.  A full day of presentations and panels from executives at leading companies such as Cisco, Intel, Safeway, Disney, HP, Verite, and more made for a multitude of perspectives and approaches to the topic of sustainability in supply chains. 

A few general observations from the conference:

• The realm of social and environmental responsibility in supply chains is still very nascent.  It seems each company, industry, and the business world as a whole is still establishing definitions for what it means to be socially and environmentally responsible.  This dialogue, of course, is very important and will likely set the stage for a future platform to act from. 
• It seems greater success can be had when companies address issues of social and environmental responsibility in their supply chains from an industry approach.  This leads to a greater probability of standardization and leverage in the supply chain, which in turn, based upon presenters' comments, seems to foster faster and more widespread change in the supply chain as a whole.  Some critical factors for success gleaned from many of the presentations, despite the industry of a given company, are the following:
  • The involvement and commitment of top, C-level, management
  • The combination of efforts across companies within a given company
  • Honest and free communication within companies and with competitors (a very scary and challenging proposition for many companies)
  • A sharing of best practices and communication amongst shared suppliers within the industry (meaning–get your suppliers to talk and share with each other to benefit everyone as a whole)
  • Outside and independent verification to create transparency and accountability

A few other interesting takeaways:

• Cooperation amongst several companies within an industry to acheive industrywide social and environmental responsibility seemed to be easier to accomplish in B2B industries, and industries that did not generally "face" consumers or receive consumer and/or watchdog scrutiny.  Those companies that had more of a B2C orientation viewed supply chain SER as more of a competitive differentiator, and thus were less inclined to share information and resources with others. 
• I expect the conference will double in size and notoriety next year.  This is an issue the business world has only begun to explore.  I found myself wanting more nitty gritty dialogue from the conference, but as companies move down the path from the general questions of definition and the surface levels of implementation, I am sure the dialogue and topic will become much more comprehensive, heated, and fruitful.

 By Ashton Udall