Positive Outcomes to Outsourcing in China

The common stereotype associated with outsourcing to China is that it means lost jobs.  However, several companies are finding that it makes sense to evaluate asset reallocation in terms of plants, property, equipment and labor.  The following was published in the Portland Business Journal and illustrates how one company actually used strategic sourcing to lower cost and increase market share.  The result:  more factory jobs for one town.

Tualatin firm finds that outsourcing leads to growthThe Portland Business Journal – Sean MeyersSpecial to the Business JournalFinally, a story about outsourcing to China that even a labor official might love. In the late 1990s, Sure Power Inc., a longtime Tualatin designer and manufacturer of vehicle electronics, was feeling heat from customers and pressure from the market to simultaneously reduce product price and dramatically increase quality.

 

Like many other U.S. manufacturers caught in a similar bind, Sure Power turned to China. That’s nothing new, but the results of the effort might surprise some opponents of outsourcing. “I can’t attribute a single layoff to outsourcing to China,” says Steve Scheidler, Sure Power president. “In fact, the result has been just the opposite.” Local employment has increased 53 percent to about 160 and taxes paid to the state of Oregon have increased by 204 percent, not counting additional income taxes paid by the new employees. Sales are up 188 percent. Why? Outsourcing portions of manufacturing have freed up more of the company’s 115,000 square feet for research and development, he says. That has made the Tualatin location more competitive by making new products easier to build. Outsourcing has improved cash flow and allowed Sure Power to better manage resources. “The purpose in going to China was not to shutter our factory. Our customers were compelling us to get aggressive on price and design,” Scheidler adds. “It’s allowed us to compete and gain business we may not otherwise have received [and] gives our customers a perceived best-cost opportunity even if that savings is not real or is insignificant.” Going global may be the most important decision in the 47-year history of the company. “When you step back and take a look at the globe, doing business in another country today is not that much more complicated than doing business in an adjacent county,” he says. “Really, what’s the sense in building an expensive new factory when there’s so much factory capacity already available around the world? I think we need to quit being afraid of outsourcing. The U.S. is the No. 1 economy in the world for a reason. We might take a hit, but we bounce back.” Sure Power produces about 1 million parts annually, mostly for use on heavy truck, military, bus, marine and other nonpassenger vehicles. His father, Ralph, started the company by inventing a “battery isolator” that prevents the direct current electrical systems in boats and recreational vehicles from discharging when not in use. The product is still widely used today. Next stop? Outsourcing projects to Eastern Europe, but it’s still in the early development stages, Scheidler says. “I think it would be a good way to break into the market and get them to buy our products.” Scheidler got the advice he needed to establish a foothold in China from suppliers that made referrals and from other manufacturers “who had already been there, done that.” He says he doesn’t know of any other manufacturers who have increased local employment while outsourcing to China.

 

What assistance would Scheidler like to see from government agencies for companies that want to outsource? “I’m not the kind of guy who looks to the government for any help,” he says. “I’m not trying to be negative, but my feeling is, ‘Just stay out of the way.'” So far, the government has been doing a pretty good job of that, says David Alexander, president of BaySource, a Tampa Bay, Fla., consulting firm that specializes in manufacturing in China. “The only assistance that I’ve seen provided to U.S. manufacturers that want to set up projects overseas, at any level of government, is by providing general information on trade.” Many small or midsized manufacturers turn to a consultant to speed the process and to reduce setup costs, he says. A company that sends a fact-finding mission to China will spend an absolute minimum of $5,000 per person, with $8,000 to $10,000 being a more realistic figure, he says. Alexander has daily contact with two very large Chinese manufacturing companies that often have the part an American manufacturer needs already sitting on the shelf. If they don’t have it stocked, they can often design and cast a new part and crank up production within a week, he says. That’s an incredible turnaround time compared with a typical American manufacturing environment, says Alexander, who previously ran a U.S. factory that produced a famous brand of hair and beauty products. Outsourcing is helping U.S. manufacturers improve efficiency, quality and profits, and stories like Sure Power’s are not as rare as people think, Alexander says. “We’re not looking to shut down factories. We’re in business to help companies stay in business.” portland@bizjournals.com | 503-274-8733  

Analyzing the pros and cons of outsourcing to China

To make the right decision, conduct an extensive cost analysis of your total delivered cost.

Wayne Forrest — Purchasing, 2/3/2005

If you’re considering setting up shop and outsourcing in China to reduce your sourcing costs, make sure that you first conduct a detailed cost analysis to determine that it truly will be a less expensive approach for your company.The reason: China isn’t necessarily a low-cost haven for companies looking to outsource. Two recent studies have concluded that while the cost of manufacturing products in China is less than the United States, businesses often underestimate the complexity of managing trade with China and, in some cases, companies might be better off redesigning their products and maintaining production at home.

Indeed, success in a China trade strategy requires companies to take a “true end-to-end management approach.” That’s the advice from Aberdeen Group’s China Trade Management Strategies Benchmark Report. The survey was cosponsored by technology providers E2open of Redwood City, Calif. and Manugistics Group in Rockville, Md. The survey found that 42% of respondents had order cycle times of more than 60 days. In addition, 89% of the respondents that had the highest logistics costs also had the longest order leadtimes. The report says those numbers are a “clear warning sign that price-based supplier selection is the wrong strategy in China.”

“If you just do it based on pricing negotiations and have not thought through the logistics of delivery, assurance of supply, flexibility of supply and quality, your total cost very quickly outweighs the price savings you made in the negotiations up front,” says Richard McCluney, vice president of account operations for E2open.

The survey cites four important criteria for success in China trade management: lowest total delivered cost; delivery reliability; supply chain flexibility; and regulatory compliance and risk minimization.

Yet, U.S. manufacturing—particularly in regard to China—”seems to be experiencing a lemming mentality when it comes to outsourcing,” suggests “A Case to Consider Before Outsourcing to China,” a recent study conducted by Boothroyd Dewhurst, a company that specializes in software tools that provide manufacturing assembly knowledge for the product design process.

While all companies strive to reduce manufacturing costs, the report found that few firms analyze and act on the greatest potential for cost savings—the design of products. “The part cost is about 70% of the cost of a product,” estimates Nicholas Dew-hurst, Boothroyd Dewhurst executive vice president and coauthor of the study. “If that’s true, then you’re barking up the wrong tree if you’re [only] looking at labor, which is the smallest piece of the pie.”

“When they look only to outsourcing for cost reduction, [companies] run the risk of becoming myopic in the design process,” says the study. Another common error: too often, companies look at the current design of a product and naturally—and mistakenly—assume that its redesigned predecessor will cost the same amount to produce, says Dew-hurst. “I think a lack of real involvement of the purchasing or supply chain group in that early design process has some impact on getting a full understanding of what the costs are.”

As Dewhurst explains, many companies design a product, send the plans to three suppliers for quotes and then choose the lowest bid. Not only does that “take a significant amount of time to arrive at the design,” but when you use that type of conventional process, “it is already too late [to have an impact on] the cost you want to produce it for.”

Similarly, many companies do an inadequate job of setting the initial target cost, revise design closely based on the original product and pay too much attention to what the competition is doing, says David G. Meeker, consultant with Neoteric Product Development in Acton, Mass. and coauthor of the Boothroyd Dew-hurst study. “Gone are the guys who could look at a product and, in their heads, know the process and costs of design and manufacturing and how it could be done less expensively.”

But how realistic is it to set a low cost for redesign and production?

“You have to absolutely do it, because you won’t know if you can bring a product to market and get the kind of [profit] margin that you want,” Dewhurst says. “If the market will bear a price of $100 and you have to make it for $75, the problem is this—how do you know that’s a good target? We see a lot of manufacturers arbitrarily picking numbers; they’ll set the cost at $75 and then see if they can do it.”

If the process is done correctly, Dewhurst maintains that a finished product’s time to market is shortened. “If you have a product that has 10 parts in it and you can make it with five, that’s five fewer things you have to carry through the development process.”

China connectionThe Boothroyd Dewhurst study also notes that some products are not good candidates for overseas manufacturing, whether they are redesigned or not. For example:

  • Products which utilize a highly automated process.
  • Products—which because of their weight and size—increase shipping costs by air or ocean.
  • Products which require scheduling flexibility.
  • New products which may require engineering and design changes to ensure quality.
  • Products with proprietary intellectual rights and/or patents that may be copied and marketed less expensively.

To assess the bottom line, companies must total all additional costs associated with overseas manufacturing, whether it be travel, shipping, legal, material or labor expenses. In other words, find the total lowest delivered cost of making a product.

China imperativesTo successfully do business in China, adds E2Open’s McCluney, it’s also critical to have key people in the sourcing process—perhaps Chinese-Americans—who know the local customs and can conduct accordingly.

“As the supply chain gets longer, if you don’t spend a lot of time making sure you’re making the right decisions on sourcing and trying to save a penny here and a penny there, you get a more convoluted supply chain,” he says. The most successful companies take key sourcing people and place them in cities such as Singapore and Shanghai because those are key areas for identifying good suppliers.

Common mistakes among companies attempting trade in China include assuming that supplies will sail through Customs easily and misjudging infrastructure capabilities in the Chinese market. McCluney used to work outside of Shanghai, where, at one time, roads were quick to travel. Today, getting from one place to another can take three times as long. “Because of the huge increase in traffic, you now have to rethink where you have your suppliers based,” he says. “A good assumption six months ago might not be the right thing today or in six months time.”

“If you do a lot of work up front to prequalify the supply base, then you are getting your assurances and benefits of the lower cost,” McCluney says. “If you just go for a successful price negotiation without all the other pieces, you may end up missing orders, not being able to fill orders, if demand changes, and your costs go up.”

On the horizonIf adventurous companies can find a way to handle China’s idiosyncrasies, they should do so quickly. Why? Meeker believes that the cost of doing business in China will not stay inexpensive forever, especially if and when China begins to more seriously enforce regulations that pertain to the environment, minimum wage, worker safety and the like—and have foreign manufacturers pay part of the tab.

“It’s not a stretch to think that at some point in the future—I don’t know if it is one year, five years or 10 years—China will have to do something and the costs [to do business in China] will only go up,” Meeker says.

E2open’s McCluney believes the Chinese market will “continue to grow, but I don’t think it is the be all and end all. I think the economics that make people look at China trade might work right now, but you have to reassess your strategy,” as the economic and political climates in the country change.

Seeing tons of new wine drinkers, Nomacorc opens China plantTriangle Business Journal – by Amanda Jones Hoyle

china-wine-industry.pdfArticle on China wine consumptionAnd now some fun stuff going on in China

ZEBULON – Nomacorc has staked an early claim to the Chinese wine industry by opening a plant in the mountainous Shandong province to manufacture its synthetic bottle corks.

It’s the first Asian facility for Nomacorc, which has made impressive headway in the U.S. wine business, claiming more than a 30 percent market share of all wine bottled in America and more than 10 percent of all wine bottled in Europe.

Next up is China, says President and CEO Lars von Kantzow. “We believe strongly the Chinese wine market will continue to grow rapidly in the next decade,” he says.

The move into China does not signal a pending export of Nomacorc’s North Carolina manufacturing operations, he says.

Instead, if China’s domestic market grows, Nomacorc likely would add another extrusion production line in Zebulon and continue shipping the plastic wine closures to Asia for printing and finishing at its plant in Yantai. “We have no plans to export (corks) from China,” says von Kantzow.

In 2005, Nomacorc was awarded a $150,000 grant from North Carolina Gov. Mike Easley’s One North Carolina Fund to help pay for a $16.5 million expansion of its Zebulon production plant and the creation of 100 additional jobs. It so far has added 74 positions for a total work force of 250 in Zebulon and more than 400 people worldwide.

While the Chinese wine market is nascent compared to the mature North American and European markets, some industry experts are predicting that China, with its population of 1.3 billion people, will surpass the U.S. as the largest wine-consuming nation in the world in the next few years.

“Historically, China is not a wine drinking country at all, … but now China is deciding wine is healthy,” says Cyril Penn, editor of Wine Business Monthly.

More than 500 wineries in China are selling wine to 83 percent of the domestic market, with imports making up the other 17 percent, according to an August report in Wine Business Monthly.

Nomacorc founder Marc Noël opened a business development office in China in 2005 to begin investigating the market potential in Asia. “There’s no question that economy is growing, and as people become more affluent, their ability to buy quality products of all kinds increases,” Roth says.

Duane Long, chairman of the North Carolina China Center and founder of Raleigh distribution company Longistics, says the serving of grape wine during meals in China has become common during his multiple business trips to the country in the past few years.

“I’ve had excellent grape wine … marketed under the brand Great Wall that compares to our excellent California grapes,” he says.

Nomacorc in 1999 began production of its plastic plugs that consist of a foamed inner core layer and a flexible outer skin. The company since has been growing revenue at a pace exceeding 20 percent a year, Roth says.

In 1999, Nomacorc produced only 10,000 synthetic corks. By 2002, it was selling more than 400 million of the corks, or wine closures. The company opened a second production facility in Belgium in 2003, and by the end of 2007, Nomacorc will have sold almost 2 billion wine bottle closures to wine makers around the world.

Wine brands that use Nomacorc closures include many of the mass-produced Kendall-Jackson labels, and several E.&J. Gallo brands.

Nomacorc is a subsidiary of the Noël Group, which also owns thermoplastic foam company Nomaco, polyethylene pipe and sheet insulation company Nomaco Insulation, elastomeric rubber pipe and sheet insulation firm Nomaco K-Flex, manufactured moldings and home decor company Focal Point, and automotive weather-sealing company Jyco Europe.

From Reactive to Proactive: Redefining Safety Standards in the Promotional Industry (A Four-Part Series)

The following article is the final installment in our monthlong Promo Marketing Headlines series titled, “From Reactive to Proactive: Redefining Safety Standards in the Promotional Industry.” For the past four weeks, we’ve discussed product testing, quality assurance and how both suppliers and distributors can work in tandem to ensure the items they sell are safe for children and adults alike. Read on for the last chapter, which addresses the dangers and benefits of offshore manufacturing.  From Promo Marketing Magazine written by Christen GruebelPart 4: The Global Sourcing Gamble There’s a reason why Tylenol is still on drugstore shelves across America. Johnson & Johnson’s response to its 1982 cyanide debacle (and the subsequent redux in 1986) was prompt, honest and ethical. It’s really no wonder, even 25 years later, the event is still upheld by public-relations practitioners as the paradigm for crisis management.

Accepting blame is certainly tougher than assigning it, yet what saved the Tylenol brand was swift admission, and an open line of communication between Johnson & Johnson and America.

While this situation and that of the recent product recalls have similar elements, in today’s news stories, by contrast, the perceived “enemy” of global outsourcing has taken center stage as the guilty party—not the companies.

They may be apologizing. They may be collecting harmful items. Yet, the common implication that China is at fault for each and every product defect is a conception that they aren’t going far to discourage, either.

Shades of Gray

It’s no coincidence that with cheap labor comes the added risk of sub-par quality, however, there’s a big difference between design flaws and manufacturing defects. According to a study titled, “Toy Recalls—Is China Really the Problem?,” published in the September 2007 issue of the Asia Pacific Foundation of Canada’s proprietary publication, Canada-Asia Commentary, “A design problem will result in an unsafe toy irrespective of where it is manufactured. … Only toy companies can prevent problems associated with designs.”

For example, instances with lead paint are manufacturing defects. But anytime a recall involves something like choking hazards or sharp points—it’s a design flaw. Whether the mistake occurred in the Chinese factory or in the boardroom where the design was finalized, one fact must hold true: A company must accept accountability for the products it puts on the shelves.

“Product recalls have happened across a vast number of industries for a good number of decades, regardless of their manufacturing origin,” noted David Alexander, president of BaySource Global—a sourcing company that partners with American companies to facilitate day-to-day business dealings in Asia. He added, “Any company marketing and selling a product to the U.S. consumer is ultimately responsible for the safety and performance of that product.”

Cause and Effect Patterns

But why has China become the scapegoat? Mel Ellis, president of Humphrey Line, suggested it’s because, in general, trade with China just isn’t fair trade. And the reasons that send American companies overseas—cheap labor, low overhead—are the very same ones that lead to product defects. “There is no effective OSHA in China, and they recently executed the head of their FDA. They can use child labor … their wages are very low,” he added. Not to mention, Ellis said, “We know that our intellectual property rights are not respected in China.”

To wit, most Chinese factories are far from centrally located. According to Don DePalma, president and chief research officer at Common Sense Advisory, a research and consulting firm based in Lowell, Mass. that aims to increase the quality of international business, “The reality probably is, the factories that you’re operating in are not in the first-tier cities … but are probably in the third- and fourth-tier cities where labor is cheaper. And those are places where ‘you can’t get there from here.’”

Although Ellis manufactures his entire product line in the United States, he has a sense of how the recalls will affect promotional products suppliers and distributors, whether they import or not. “First, companies with very high brand equity values may be reluctant to trust our distributors to provide products that are free from defects. This may result in reduced demand …” He went on to say the potential for injury as well as significant financial liability for those involved in a recall will also contribute to a modicum of instability in the industry moving forward. However, he has hopes that China will respond from the market pressure to develop higher standards.

Yet, until that happens—and even after it does—the burden of stewardship falls squarely on the shoulders of the company that puts out the product. DePalma maintained that it will cost more for companies to adhere to more stringent corporate principles, but in the long run, the potential for brand damage is too great not to.

Outsourcing Infrastructure

Whether you’ve already gone overseas, are weighing the advantages or considering a partnership with a company that is doing either of the above, the tips below are good starting points to ensure safety and quality assurance at every turn.

• Develop a code of ethics and stick to it. This step is simple. If your company does not have corporate moral code, create one. Determine the values upper management wishes to uphold and keep the line firm through every offshoot of the company. Alexander discussed some common elements in the factories he uses that ensure the working conditions are above reproach—that they are safe, clean, pay fair wages and are free of child labor. This is an important way to do due diligence with regard to offshore manufacturing, and as an added benefit, it helps maintain brand integrity.

• Keep quality control stateside. While numerous suppliers readily admit to allowing their Chinese manufacturers to take the lead in testing and product safety, some matters are best done in the homeland. Companies should have a usability lab, a safety lab and quality assurance lab in the United States, DePalma said. “It all comes down to the sorts of things that you hope are part of every company’s design and product-review process. … You want to make sure whatever you’re manufacturing does no harm.” Build quality assurance into the equation.

• Maintain an iron-clad “process.” Though quality needs to be a domestic concern, documenting standards for overseas manufacturers will leave corporate expectations unambiguous. This process of checks and balances, said Alexander, is “cradle-to-grave.” He added, “This means creating a documented paper trail outlining all specifications and requirements for a product from inbound raw materials inspections, in process quality systems, all the way to packaging and shipping.” Bear in mind, the process also must be correctly translated.

• Bring a third-party inspections company on board. Companies such as Alexander’s BaySource Global have overseas teams that can handle the ins and outs of global sourcing so you don’t have to. Among other things, Alexander reported that companies trying to do this on their own typically make mistakes in the following: “Not performing quality audits at factories …, making broad assumptions that what was said was understood, leaving anything to chance, not having someone present during manufacturing runs, [and] … not managing the process.” Similarly, if the third-party contractor has locations overseas, conducting unannounced factory checks is a more practical possibility.

• Expect to pay more. The catch-22, of course, is that while suppliers of promotional products might go to China because the price can’t be beat, cementing responsible business practices will add to the bottom line. While Alexander maintained that the extra costs incorporated into the product are far outweighed by the benefit of his company’s services, at the end of the day, whether or not a company can allocate its budget to accommodate these extra expenses is a choice, not a law.

Stories that relate to this series:

CCTV International—

“China: New quality standards cause toy recall”

http://www.cctv.com/program/bizchina/20071030/102525.shtml