Don’t Get Ripped OffShoring – Overseas Production Can Cost You

Filed under: Global Business — October 19, 2011 @ 2:52 pm

Countless executives complain that Chinese factories deliver the wrong products, defective materials, items not made to specifications and shipments delivered late.
There are horror stories of knockoffs and counterfeit pieces. “We hired a firm to make our nail clippers, and now the factory is selling nail clippers directly to our clients!”

Here are 11 strategies to employ to prevent this from happening to you.

• Ask yourself: Why did you think this would be easy?
This may sound psychological, but is a fair question to ask. If making lounge chairs is difficult in Cincinnati, why would someone think it’s easy, say, in Malaysia? The language, culture, currencies and laws are different. It’s also thousands of miles away. Managing factory workers is tough in any country and much more difficult in unknown countries.

• Protect your home base.
If you’re worried about your Malaysian factory selling your designed chairs to your U.S. retailers, then you’ve picked outsourcing as a solution without first solving some key branding, positioning and customer-service needs. Market power at home is your best protection against a less-expensive product.

• Live there for a while.
If you ‘re really considering making your lounge chairs in Malaysia, you should invest the time and live in country for a while. Get to know the rhythm, communication styles and your factory.

• Don’t use a one-country approach.
Tying political and currency risk to one supplier is a bad idea. There would be less hoopla about China’s currency valuation if firms had a better production mix with several other countries. The tsunami in Japan demonstrated that there was only one supplier for some of the parts used in the automobile industry. Hence, car companies couldn’t complete their orders.

• Train your production management.
If your production management knows how to make lounge chairs in the United States, train them properly about how to manage Malaysian (or wherever you’re doing business) factories, workers and processes. Be prepared to send a good production manager overseas for at least a year. This is a good way to validate manufacturing abroad. Are you spending enough to justify the costs of an expatriate worker?
• Don’t rush into a deal.
Many U.S. firms meet a factory or a representative and quickly turn their production over to them. Beyond checking references, doing background checks and finding out all you can about the manufacturer, allow for plenty of relationship-building time. Malaysians (as well as many other cultures) will know you are versed in how they do business if you speak in the long term.

• Get the right introductions.
Being introduced to the same outsourced partners you already know is a classic Asian way of doing business. Introductions are valuable because the Malaysians now know someone else is in the mix — watching, monitoring and, if necessary, keeping everyone honest. The higher the introducer’s status, the fewer problems you’ll encounter.

• Use legal enforcement on your brokers.
There’s very little you can do in Malaysia if a Malaysian factory decides to rip you off. Seeing your product knocked off or finding factory overruns selling in Malaysia is a part of doing business overseas. However, if these products head for the U.S. market, legal protection can help. Reps or middlemen can place funds into U.S. banks as guarantees, payments can be delayed, and trademark and copyright protection is available.
• Use a pilot project to test the relationship.
The Chinese say “a small boat turns back faster.” A few pilot projects work the bugs out of your processes and communications. And in doing so, if you learn that the Malaysian factory is incapable of producing, say, $10,000 worth of your product, then why would you give them more production?

• Keep some aspect of production to yourself.
An overseas firm could manufacture most of the lounge chair in one place — but you should have part of the process done elsewhere. Perhaps it’s the back of the chair, a coating on it, or branding, art and logos. Can the legs be made in one place, the back in another and the cushions in a third?

• Make it someone else’s problem.
These strategies are about controlling the manufacturing and, thus, spending a great deal of time and money.
Is it possible to hire a U.S. firm, give it your specifications and have it deal with these headaches? Can an importer pull up with a truckload of lounge chairs and be paid only after you’ve opened the box and inspected the contents?

Your cost per chair increases, but the real cost is in not understanding your production. If that doesn’t matter in your case, why bother?

A firm needs to commit to it or forget it when it comes to offshoring manufacturing. And be sure to analyze the costs of each.

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