The Risks Of Using Offshore Contract Manufacturing

Make Some Noise

Make Some Noise

For many companies in North America, overseas manufacturing has become increasingly attractive, and in some cases essential. Escalating domestic labour costs mean that many businesses simply would not survive market pressure without the option of offshore contract manufacturing. However, despite the benefits, going down this route also brings many risks and challenges. To help minimize risk and make offshore contract manufacturing both an accessible and successful venture, we have assembled some recommendations and best practices here.

What is Contract Manufacturing?

To take advantage of lower labour costs in developing countries, a manufacturer may simply set up its own manufacturing facility in one or more of these countries, but the difficulty and expense of doing this are enormous. A practical alternative is to contract the work to an existing facility, establishing a client-supplier relationship. The facility will manufacture the products to the client’s specifications, and the client company will market the product under its own brand name, not that of the company doing the manufacturing.  One of the most well known contract manufacturing / brand relationship examples is Foxconn Technology Group and Apple.

Control of your Product

There is one immediately obvious risk in this kind of arrangement, and that is the question of quality control. If you, as the OEM (original equipment manufacturer), are marketing the products under your own brand name, it is absolutely crucial that they should meet the quality standards for which your brand stands. Any defects, however minor, could damage your brand image beyond repair.  Simply hoping a quality product will be produced properly is a recipe for disappointment.

Establish a Quality Standard for Your Product – by creating formal documentation that establishes what is acceptable and what is not in terms of appearance, function, dimension, performance, etc., you will at least have a starting point to argue what is a good product and what is not. Without a formal quality standard documents such as detailed drawings, test plans, process control plans, etc. product quality can quickly become a war of opinions with no winners.

Ensure the Manufacturer Has Quality Management System in Place. Before we commit to any contract manufacturer, we visit them in person and ask a ton of questions. Do they have a quality management system in place such as ISO9001? How do they measure their quality and performance as a company? How do they build quality checks into every step of the manufacturing process? We ask to see real examples; and do not simply accept a blanket statement of “this is how we do this or that”.

The problem is that quality can be a very real issue with offshore contract manufacturing and only extensive in-person supplier interviews and evaluations can root out whether a manufacturer has the chops to meet your product requirements. We’ve found time and again that people have been disappointed with their previous offshore manufacturing experience and 9 times out of 10 they have not set appropriate expectations nor have they done the due diligence.

Allied to quality is the risk and concern of product piracy and IP (intellectual property) theft. There are strategies to protect IP but it really comes down to trust and previous experience with a contract manufacturer. Like anything in life, future behavior is best predicted upon the performance of the past. But how can you gain experience with an off-shore manufacturer when you haven’t worked with them before? Easy, find someone who has. Over the past 10 years, we’ve built up a large network of quality manufacturers and have helped many customers successfully launch products offshore. With a little head-start help and coaching from Inertia, you can then take over the reins of managing the contract manufacturing yourself.

Barriers to Communication

Of course, some of the major problems of offshore contract manufacturing will always be around communication. Sometimes these problems are masked by the fact that management in most of the facilities will speak basic English, which is the common language of commerce in many parts of the world. However, this doesn’t mean that they will understand colloquial North American English, especially when spoken at normal speed. It can be much more difficult to explain major or minor product defects, or to convey the rationale behind a product’s engineering, and managers will often have no idea how to digest a document that sets out formal requirements, such as an PRD (product requirements document).

In addition, it’s not only language but culture that can present major obstacles to communication, and thus, to efficient productivity. Concepts of speed and timeliness will usually be vastly different — there is not necessarily a high priority placed on punctuality at meetings, and there will not be the same emphasis as in the West on having everything “done yesterday.” Cultural factors can affect the way business processes are executed, the way conflicts are resolved, and the way terms and prices are negotiated.  Inertia’s team, both local and offshore, know the language, understand cultural subtleties and can help to expertly navigate you through effective communication of your intentions, goals and concerns.

Extra Costs Elsewhere

It’s also important to bear in mind that the lower labour costs of offshore contract manufacturing may well be offset by higher costs in other areas. Shipping by ocean freight is needed for all but the smallest and lightest products, which can extend lead times by several weeks, and reduce flexibility to respond to demand changes at short notice. Customs and insurance costs must be factored in, and currency fluctuations can make budgeting difficult.

Overcoming the Risks

Outsourcing your manufacturing operations overseas certainly has the potential to bring huge competitive advantage. However, for a company with limited overseas experience, there is a danger that the benefits could be cancelled out by the challenges and risks involved. One way of overcoming these could be to have your operations managed by an expert partner company like Inertia, which could enable you to reap all the advantages of offshore contract manufacturing while avoiding the pitfalls, and to focus your energies on developing and marketing your product.

Interested in learning more about contract manufacturing? Have a bad experience and want to do it right? Click Here to learn more about our process or Contact Us at Inertia to learn how we can help you successfully manufacture offshore.

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