The sophistication stakes

Colin Chinery looks at the current challenges of outsourcing as market operations become more complex and the integration and management of its component areas increasingly daunting

No doubt they thought the going was good for the first half of the way.” The English wit was referring to the Gadarine Swine, but he might have been anticipating the early rush for outsourcing to far-away places.

But outsourcing is no longer a one track no-brainer chasing the lowest wage rate. It is increasingly complex; organisationally and strategically challenging. Some of the far-away places are now dynamic emerging markets with internal demand generating 90 per cent of annual output growth. And inflation is fast pushing up costs.

The potential for UK exporters is vast, but as Jane Lodge, UK manufacturing industry leader at Deloitte says, businesses located in and selling to emerging markets “are finding their consumers are starting to demand the equality thresholds we have in the west.

“Contracts are tightening with emerging market suppliers, in particular on product specifications and pre-production samples. And there is a shifting of the onus of responsibility for safety and quality on to the supplier. There’s far more focus on this than before.”

Of 650 global executives polled in the latest Deloitte Annual Study of Innovation in Emerging Markets, almost eight in 10 believe product sourcing presents a real threat to their business.

Nearly as many think it likely their company would favour sourcing from markets with stricter standards. Yet perversely only one in three developed market manufacturers say they perform extensive monitoring of subcontractors, leaving Lodge to observe the two thirds where there is little visibility into the subcontractors used by their suppliers.

And Paul Christodoulou, a senior industrial fellow at Cambridge University’s Institute for Manufacturing, and co-author of the IfM’s recent report – Making the Right Things in the Right Place – warns that many firms are relying too heavily on offshoring to countries such as China and India.

Long-term benefits will not come from quick fixes. Instead companies must take a systematically designed global ‘footprint’ or network, attuned to a constantly changing environment.

Failure to do so, warns Christodoulou, is resulting in many of the world’s biggest manufacturers missing out on ‘breathtaking’ benefits. Inf lation is fast rising across Asia, with China – currently 8.5 per cent – experiencing its fastest pace in 11 years. Add in strict new labour laws, new tax regulations, and a strong currency, and you have a four-lane highway to cost acceleration.

Yet these remain low relative to costs in western and even emergent eastern European countries, and China remains the first choice for most manufacturing outsourcing where longterm solutions are required.

But getting the best value from China requires more thought and planning than in the past, says Gideon Milstein. His company, CBL, provides a turnkey solution to China manufacturing at two factories near Guangzhou, focusing in the fields of metals, plastics and electronics, as well as assembly, predominantly for UK customers. “We offer an offshore manufacturing capability without the associated costs and liabilities.”

Components, or simple products when the cost of shipping is included, may not generate enough cost savings to make outsourcing cost effective, says Milstein. Add in the potential cost of quality issues, and any potential savings are further reduced.

“The answer is to look at what can be done to increase the value of the products made in China so the relative percentage savings represent considerably more in cash terms. Also, building in long-term relationships with reliable suppliers can generate savings in labour and management at home that become part of the cost savings equation.”

Like many Chinese companies, CBL has initiated quality and production programmes matching or even exceeding those of their customers and many western outsource operations. “Poka yoke, kaizen, six sigma and 5S are regular topics of conversation around Chinese dinner tables these days, and represent China’s emergence into a mature manufacturing source.”

Product safety falls into two areas, says Milstein – design and manufacture. “If the product is inherently safe by design, there is still an obligation on both parties to define what is critical in manufacture to the safe use of the product.” CBL uses FMEA (failure mode and effects analysis) to identify those defects that are critical, how easily they would be spotted, and the effect on customer and end user.

“If the factory relies on inspection only to resolve safety issues, it may well be that the inspectors miss fundamental issues, either because they simply didn’t notice them or that they didn’t realise the implications. Which is why it can’t just be left to inspection methods,” cautions Milstein. SIC of Swansea is one of Britain’s largest and most successful electronic contract manufacturers, specialising in the design and production of cable assemblies, sub-assemblies, box builds and panel wiring to industries in Britain and across Europe.

The geographical spread of its supply network is vast and constantly changing. “We’ve been working with manufacturing partners in Egypt, China and India for over two years and we’re always looking to expand our horizons,” says technical director Phillip Hurlow. “For this process to work it needs to be completely transparent to our clients. The key is that we – as the primary contract manufacturer – take on the management challenges of managing what can be quite complex relationships – while our clients get the benefit of a competitive service managed by one point of contact here in the UK.

“It is essential to have a solid portfolio of suppliers who we’ve tried and tested and know where their strengths lie. This is often dictated by the supply partners’ order book and their geographical location.” It is a painstaking route, so what questions should an investigating manufacturer be asking? Hurlow offers five considerations:
• Can the regional infrastructure support the supplier with the commodities you will be requiring?
• Does the company have the necessary experience and expertise in the specific markets you are working in?
• Do they have full traceability?
• Do they strictly adhere to specifications?
• Are they able to meet your delivery demands?

“When the answer is yes to all these, the supplier becomes one of our probationary supply partners. And only when we’re entirely satisfied that the good work can be sustained do they become an approved supply partner.” Over time you build up a picture of the industries and applications at which each supply partner excels, and this must be matched to the orders and enquiries you receive, says Hurlow.

“However, we’re the ones ultimately accountable and answerable to the client, and so we take supplier relationship management very seriously.” While the European electronics market continues to offshore majority volume production to China and other Far Eastern countries, specialist UK manufacturers are enjoying something of a renaissance. Cost increases from many global suppliers, the weakening dollar and delivery issues from stretched supply chains, are primary causes.

“We are clearly seeing a shift in emphasis back towards UK manufacturing that is based on quality, not quantity. This is being driven by OEMs that require highly technical products that are generally mission critical and demand either quick-turn manufacturing solutions or strong after-sales services as part of the package,” says Craig Wright, CEO of electronics specialists, Exception. Exception’s strategy is knowledge-based, with its Tewkesbury and Calne plants developing products for its customers, and optimal solution-recognition and attribution of costs to a customer’s product during the whole product lifecycle.

It is a strategy backed by over 12 years’ experience in partnering manufacturing capability in low cost economies like China, Taiwan, Indonesia, Vietnam, Malaysia and Europe, while simultaneously developing a global supply chain footprint with legs in emerging markets such as India. “Recent experience leads us to a fascinating realisation that as low cost economies develop and move up the manufacturing value chain, their needs change to resemble the profile of the European market,” says Wright.

“While the traditional offshore model sees us sourcing low cost/high volume PCBs from Asian countries, we are now seeing this develop into a much more complex scenario. “Over the past few decades of building up a network of approved PCB partners across the Far East, we have learnt a great deal about the global supply chain issues associated with offshore manufacturing.” Exception’s world-class approach to the logistics elements of PCB sourcing has recently led its VAR (value adding reseller) business – with operations in the UK and Penang – winning work from a Chinese PCA manufacturer to supply PCBs within that region.

“We now have a situation where Chinese manufacturers are turning to UK outsourcing partners to manage the complexities of the supply chain. It’s a new take on the ‘coals to Newcastle’ story.” And despite the growing manufacturing and market muscle of other nations, China remains the giant on the Far East block. “Having looked at other Asian areas where low cost labour is still available, they all suffer from distinct disadvantages when compared to China,” says Gideon Milstein. “Vietnam’s relatively small population has lead to soaring wage demands, considerable industrial relations problems and a poor supply chain infrastructure.

“India is the current main competitor to China. But with a considerably weaker transport infrastructure and generally poorer quality standards, it is a place best used for companies setting up their own facilities, run by their own people and highly self-sufficient, rather than as an outsource option.”