Making sensible outsourcing decisions

The UK has a global reputation for innovation. From pioneering research in biotechnology to the latest nano developments, the UK has been at the forefront of innovation: a position it retains. Behind these 'innovations' are countless small, highly skilled and creative companies developing new technologies. For many, success means turning their new creations into products they can sell – invariably an iterative process involving several development stages. For example, it could include the creation of a concept prototype, the production of models for market evaluation and preproduction models to assess manufacturability ahead of a commitment to volume. It can take months – sometimes years – to fully understand market needs and demand and to then create a stable, viable product that is ready for manufacture. For OEMs in this situation, an early move to offshore manufacture could be disastrous. During product development, the periods of honing design and preparing for manufacture are critical. It often needs careful dialogue with specialists to ensure that products are fully optimised for production, test and reliability. Many OEMs do not have electronics manufacturing skills or the resources needed to bring a product concept to market and seek third party help. Sourcing this level of support from offshore manufacturers can prove problematic. Different languages, cultures and time zones make it difficult to develop productive working relationships. Once in manufacture, some products never change. Because of their 'stable design' and repeatability, this type of product may be well suited to offshore manufacture. Conversely, some product designs are more fluid, changing regularly to meet the dynamic needs of end users. Products such as these are not well suited to offshore manufacture. Implementing changes to product design requires close dialogue and co-operation between OEM and contract electronics manufacturers. The communication problems highlighted earlier come into effect and face to face meetings are infrequent because of the expense and time involved. There is also an increased risk that changes can be misinterpreted or misunderstood and, therefore, more chance that something will go wrong. OEMs must also consider future supply patterns. Offshore manufacturers are geared up to deliver consistent, high volume production with extended shipping times and therefore cannot easily accommodate 'lumpy' demand. Companies that anticipate fluctuations in their supply patterns must look for supplier flexibility – CEMs with low inertia which can respond quickly and efficiently. OEMS that produce products which change frequently in design or have lumpy demand should build a relationship with a local CEM, allowing them to meet and discuss details as often as they need. Many OEMs using CEMs in the Far East and differences in culture seem to be the most common reason for relationships breaking down. A recent example is where a CEM in China decided to reduce its costs by sourcing a brass nut from a local supplier, rather than using the one specified by the OEM. Seemingly innocent, you may think, but this locally produced nut had a different pull-force to the one specified. A sharp rise in field failures led the OEM to investigate and the cause became apparent. This could have happened wherever manufacturing was sourced, but it helps to highlight the cultural differences. China, in particular, has a 'cost cutting' culture; if money can be saved or a local alternative part can be found, that's what they will do. In many cases, there won't be a problem – but if it happens, it may not become apparent until it's too late and this may happen on a safety critical device. These cultural differences are also apparent in approaches to IP. In China, knowledge has been shared for the greater good of the country. It became natural for people to share ideas and the concept of IP as a valuable asset was unknown. There are numerous examples of problems with IP which have occurred because Western companies have a poor understanding of what they are buying when they enter into a relationship with a Chinese firm. It is easy to hand over increasing responsibility for design and development, as well as for production, only to find that you have helped to establish a new competitor. Although the Chinese government is following a more market oriented social and economic policy and has introduced legislation to protect IP, it may take longer to change the culture than to change the law. It is also important to look at the total cost of offshore manufacturing – not just the unit price of the manufactured product. Many other costs need to be factored in; for example, the actual and lost opportunity costs associated with sending engineers to the Far East to discuss design changes or component obsolescence. The cost would be much lower if dealing with a locally based company. As consumers and companies become more environmentally aware, OEMs should understand how this might affect future business – particularly if they choose to manufacture overseas. In the future, consumers may become more influenced by the environmental credentials of their suppliers. Offshore manufacturing has its place but requires time and investment and the total costs of this should not be ignored. If OEMs require predictable volumes of stable products, where large batches of the same thing are being regularly produced, then significant savings and improvements in efficiency can be made. But if there is concern over IP and environmental impact, or if less predictable or smaller volumes are required, or product designs are liable to change at short notice – as is the case for many OEMs in the UK – companies are better off looking for a trusted local supplier. It is also important that OEMs look beyond the unit price of manufacture. There are many other costs to take into account when dealing with CEMs abroad and these need to be fairly considered when evaluating manufacturing services. It is not just an issue of cost – it is an issue of risk. There is simply a greater chance of things going wrong if design and production are separated by time, distance, language and culture. The most important question for OEMs to ask themselves is whether they are looking for a product or a service. If it's the latter, then sourcing electronics manufacture locally is likely to make much better business sense.