Trends & Issues

Building a Platform to Assess the Challenges of Outsourcing Risks to Produce Better Results

Start by finding partners to build long-term relationships
— By Angela Engle

Outsourcing of manufacturing processes provides many US-based women and minority companies with highly competitive operational and financial advantages, such as reduction of costs, quality improvement, operational expertise, ability to focus on the core competency, tax benefits, access to a larger pool of skills, and so on. Although off-shore operations often generate controversy, properly implemented outsourcing activity ultimately increases shareholder value and is a strategic advantage to a company of any size.

As the outsourcing market has matured and expanded, small companies are now able to share capacity and outsourcing benefits equally with bigger corporations. Women-owned businesses, in particular, have been capitalizing on a matured outsourcing market. Many suppliers, however, have failed to anticipate risks associated with outsourcing, including product delays, performance lapses, poor customer service, and cultural ramifications.

The buyer’s unclear expectations up front as to the objectives. Buyers often fail to clearly identify their outsourcing objectives, lacking measurable goals or an action plan. Unclear expectations on part of the buyer are often cited as the MOST common cause of outsourcing failure. It is important to create a clear statement and an action plan of what you expect from the outsourcing partnership: cost reductions, cash flow improvement, better alignment of company’s operations with marketing strategy, acceleration of time to market, process streamlining, and so on. Use measurable key drivers, scorecards, standardization methods, and other relevant metrics to create measurable objectives and to monitor the progress.

Vendor selection process. Buyers often don’t do due diligence when selecting an outsourcing partner, failing to understand the suppliers and manufacturing conditions at the outsourcer’s plant. “I would strongly encourage business owners to visit the vendor’s facilities,” says Vinay Gupta, CEO of Janeeva, a consulting company that helps clients manage outsourcing.

“There are a lot of fly-by-night operators, so you want to make sure you have touched and seen the facility before you hand them your business. And I would do at least a 30-day free pilot with the provider. You want to see if it is a good fit and find out who you will be interacting with on a day-to-day basis.” The success in the selection process of outsourcing partners requires getting to know manufacturers personally, physically visiting vendor’s facilities, and performing background research on the prospective partner.

Lack of governance structure for managing the on-going relationship with vendor. According to Steve Mezak, CEO of Accelerance, a company engaged in assisting small business operators with outsourcing projects, many buyers treat outsourcing is if it were a purchasing process, making decisions solely on price and forsaking supervision. Instead, he suggests treating outsourcing vendors as employees, making the offshore team as part of the buyer’s team, one that is carefully managed and monitored throughout.

However, what often happens with failed outsourcing partnerships is that buyers make virtually no visits to the off-shore facility and have no resources on the ground. If the US-based buyer is unable to have an effective governance structure for managing offshore relationship, there are professional sourcing companies that provide services to monitor your outsourcing activity. Use Chinese speaking consultants to monitor factory through on-site visits and be proactive in asking manufacturers to regularly provide updates, including status reports, pictures of the manufacturing processes, and so on.

Quality assurance program. Buyers often make the mistake of trusting the issue of quality to the outsourcing provider. Make sure that the plant has proper infrastructures, capacity, properly organized production lines, and appropriate warehouse facilities. Regularly check factory facilities and machinery conditions, get to know factory’s subcontractors and the suppliers of raw materials, and have quality control systems in place. The US-based buyer should provide her outsourcing partner with clearly defined procedures and requirements as to the quality control, including precise specifications, engineering metrics, etc.

Cultural compatibility. The customs in other countries can be diametrically opposite to those in the United States. The country-specific customs affect practically every component of business behavior, including communication, relationships, team work, contracts, status, presentation, negotiation, and time management.

For instance, in China, solid, friendship-like, personal relationships, or Guanxi, are required before doing business together, while in the US personal relationships in business do not carry the same importance: complete strangers in the US can sign contracts and go on to make them happen. Many US-based buyers lack basic diplomatic skills, which are of paramount importance in other countries. In China, due to cultural differences, it might be very easy to offend your foreign partner.

For instance, Americans’ emphasis on legal contracts and constant deference to attorneys are seen as an insult in China. While Americans prefer to negotiate alone, the Chinese tend to negotiate in teams; while Americans focus on short-term, the Chinese want to have long term partnerships. In India, for example, firm dates don’t have the same firmness that they do in the U.S. Ben Trowbridge, the CEO of Alsbridge, an outsourcing consulting company in Dallas, says about India: “If you ask for things at the right time of the day, you can get work done overnight. But if you wait too late in your day, it may be a two-day process”.

Intellectual property. Accustomed to being protected by the United States law in virtually all areas, many companies fail to take necessary steps to protect themselves legally when engaging in outsourcing. Keep in mind that the potential outsourcing disputes, including those involving Intellectual Property, must be resolved in outsourcing countries, under their legal system. To protect yourself under foreign laws, register your intellectual property rights properly both under the US and the foreign laws.

This will help prevent a competitor from registering your trademark in another country and prevent the export of counterfeit product.

Comprehensive outsourcing contract. Buyers often neglect to properly execute outsourcing contracts, including clauses such as security and confidentiality, legal compliance, fees and payment terms, and auditing.

Before signing any contracts, determine which legal system in which country governs contract disputes. Insist that the US law governs the contract. It’s important to have contracts in both languages: English and local, and ensure that all of buyer’s concerns are properly stipulated.

Gordon Fykes, former Director for Cummins Inc. Supplier Diversity Program says minority companies need to do more to promote themselves. “I see the key risk factor plaguing MWBE’s today is their inability to promote themselves as top performers compared to incumbents and other global suppliers.

I believe when MWBE’s are successful at this level of marketing, they will benefit by being able to prove their performance driven capabilities for specific procurement opportunities and there will be absolutely no way they can be ignored or excluded for sourcing opportunities.”

Many companies have achieved spectacular results in outsourcing their manufacturing processes by implementing proper measures aimed to mitigate risks, provide vendor oversight and otherwise govern outsourcing activities. For example, majority of semiconductor companies, such as Intel and AMD, have for years successfully outsourced almost 50% of their production to Asia. Another success story is K2, the number one ski brand in the world.

The company has completely shifted its skis building facilities to China in the 1990’s and has since kept its reputation intact as a number one ski manufacturer, while enjoying reduced costs and faster time to market.

Other great examples include sports footwear and apparel manufacturers, Nike and Reebok. Having outsourced 100% of their manufacturing to Asia, both companies have implemented their own code of conduct for manufacturers to follow and, as a result, gained considerable competitive advantage in numerous areas: cost, quality, time to market, etc.

By contrast, their competitors, Adidas and Converse, have not enjoyed similar success. Unlike Reebok and Nike, they did not implement proper checks-and-balances systems with their outsourcing partners, and their factories were considered to be the worst in the industry.

In today’s global environment, outsourcing remains strategically viable manufacturing strategy. With measures in place to properly manage outsourcing risks, any company stands to gain ultimate advantage from global outsourcing by reducing capital investment, efficiently managing capacity, focusing on core competency, shifting risk, and accelerating time to market.