Brand awareness - Making the decision

Outsourcing manufacture is not a strange concept to the electronics industry; boards of directors have been making the 'shall we, shan't we?' decisions for many years. But it's not every day that you come across a UK based contract manufacturer which is contemplating that move. But the question has appeared on the agenda at Axis Electronics board meetings for the last while and, according to managing director Phil Inness, it's on the agenda again in October. Inness told a recent meeting at Intellect's London office that the move is being considered because of the company's product mix. Inness classified the products being made at Axis into three groups: runners, repeaters and strangers. Runners are regular business, repeaters come around every so often and strangers are, as he said: "Never seen before and not likely to be seen again." The decision of whether to outsource - and, if so, what - is informed by answers to a set of questions. The first of these is the strength of the company's order book. "About 85% of our business is repeaters and strangers," Inness explained. "These have a typical cycle of 12 to 16 weeks and batch sizes ranging from one to 30." Most of these products are high value; Inness said it's not unusual for a board to cost £5000. "But the runners are higher volume: probably 1000 a month." He gave an example of a typical month at Axis. "In September, we will have built 144 different complex high reliability products for 15 customers, with an average batch size of 23. In October, 26 of these products will repeat and there will be 130 new starts." Another important question is what is important to Axis' customers. "They want quality and reliability, service and communications, and the ability to make design and schedule changes," Inness professed. "Cost is not always an important factor." Products also need to be well defined; something that is not always the case with repeaters and strangers. Then there's security and quality of product supply, exchange rate fluctuations and – a theme which ran through the presentations – trust and reputation. Axis has, so far, concluded that outsourcing repeaters and strangers would be high risk move. "We considered offshoring our runners to Poland," said Inness, "but saw no real benefit. And because we use runners as a training ground in house, that is another downside." The seminar was held to launch 'A guide to offshoring; the total cost of manufacture', produced by the Electronics Technology Network in association with Intellect. The presentations reinforced the fact that manufacturing cost is only one aspect to be considered when thinking about offshoring. Consumer electronics is the typical market for which manufacture is outsourced. Two such companies presented at the seminar. Linn Products designs and makes high end hifi systems and components at its Glasgow site, while Marshall Amplification is the renowned designer and manufacturer of amplifiers used widely in the music business. The difference between the two is that while Linn maintains all of its production in house, Marshall has embraced contract manufacturing. However, Marshall's joint managing director Graham Young said the move had been made very much on its terms, not that of the contract manufacturer. Both companies stressed the importance of protecting their brand. Marshall's Young said that, even though it competes on price with low cost products, quality is paramount. And Linn's manufacturing operations director Brian Kennedy pointed out that while the company's clients are not always worried about cost, they are passionate about quality. "And Linn maintains its reputation by keeping manufacturing under its control." Kennedy said Linn faced similar problems to contract manufacturing. "We make components for hifis," he said. But the systems which Linn makes are not those found in the average high street electronics chain store; its top of the range system sells for £1million and its most expensive turntable is £20,000. "We don't compete on price, we don't compete on features. We sell to people who want the very best," Kennedy continued. All production is in house and Kennedy said that manufacturing is part of an integrated process, starting with design and ending with after sales service. "We can do all that because everything is done in one location and you can't be a market leader if you're using someone else's designs." Part of the Linn philosophy is continuous improvement. "Controlling product quality and implementing improvements quickly are core values and, because 90% of what we build, we build to order, we don't know what we're making from one day to the next," he said. Kennedy said Linn had learned its lessons the hard way; by deciding to outsource manufacture of a speaker system and regretting the move. "We needed to reach new customers with a lower priced 5.1 speaker system made from extruded aluminium. This was outsourced to the Far East for two reasons: cost and the fact we couldn't find the necessary suppliers in the UK." But the move brought problems. "Lead time was 14 weeks, including five weeks shipping," Kennedy recalled, "and other issues included forecasting, quality, inventory and changes and improvements. Our customers determined that the speakers were 'not a real Linn product." For his part, Young said that, while Marshall outsources, manufacturing in the UK means the brand can be controlled through design quality, innovation and manufacturing standards. "Knowing we maintain a manufacturing baseline and control the standards means we can offer a warranty on a product, no matter where it's made." So why has Marshall moved some production offshore? "It comes down to cost," Young admitted. "If we hadn't gone offshore for entry level products, we wouldn't have been able to compete. But we have been manufacturing overseas since the 1980s, even if it was under another name." Quality is one issue which Marshall has found with outsourcing. "But we try to get OEMs to follow the same procedures as we do in house," Young noted. "It has been known for components to be replaced, but not on a like for like basis. So consistent checking is needed; it's the only way to keep on top and supplies know what is expected of them. It also means something for them to have Marshall as a customer." Young also pointed to IP infringements as another issue. "Chinese companies are good at copying," he said. "One company we found copied everything in our design, even down to the date code and other marks on the pcb, so we strive to keep on top of this." Both Kennedy and Young are passionate about their brands. "We could make everything offshore," Young admitted, "but how long would it be before the brand would disappear?" But Kennedy made a telling admission. "Outsourcing can be done successfully, but you have to look carefully at your business model and your vision, strategy and channels. Ultimately," he concluded, "outsourcing damaged our brand." The Guide to offshoring can be downloaded from http://www.intellectuk.org