02 Aug top 10 mistakes in OFFSHORING
Top 10 mistakes made in offshore manufacturing
With international offshoring numbers impossible to count, we know only that the trend of offshore production is increasing, with no end in sight.
Though thousands of companies begin an offshoring program every year, it’s astonishing to hear some of the horror stories and the large amount of dissatisfaction.
Experts say offshoring dissatisfaction rates range from 10 percent all the way up to 100 percent.
Once a critical back-office process is farmed out, things may indeed go wrong. But avoiding these 10 pitfalls will greatly increase a firm’s chances of offshoring success.
The top 10 mistakes to avoid:
(1) Having the mindset that the customer is always right.
Therefore, since we are the buyers, the sellers must do everything our way. They need to adapt to us. This flawed thinking assumes that the factories are in fact customer-oriented, when they may owe their allegiance to political parties or factory managers. Additionally, they may have no idea how you define customer service and client adaptation.
(2) Relying solely on low labor costs to decide where to produce.
Can you get the goods delivered in time? Are supplemental services available to you? (These can include other suppliers, good transportation, livable hotels, working telecommunications, supporting banks and a legal system that makes sense). If low labor cost was the sole determinant for offshore production, then all that work in China would be produced in Tanzania.
(3) Using inappropriate people, and having no project champion.
Often the wrong people are chosen to manage offshore projects. Many cultures respect seniority, need continuity in whom they’re dealing with, get confused when the client changes staff and don’t express their concerns.
A true project champion will receive training in the culture in question, visit frequently and get to know the people who are running the factories as well as the local business people and government figures. And that champion is expected to be involved and working on the project for many years.
(4) Thinking in short-term time horizons and paybacks.
Anyone who has enjoyed offshoring success knows that the startup and transaction costs are huge, and it will take many production runs to amortize those costs.
If we assume a 30 percent to 40 percent savings in manufacturing lawnmowers, how many will have to be built to justify startup costs of, for example, $500,000 to $1 million?
(5) The belief that, “We signed up a factory, so our work is done.”
A relationship has to be established and nurtured so that questions can be asked, progress reports can be made, samples can be examined and improved, and quality-control issues can be addressed in a timely manner. Firms can’t engage in these activities when their business partners are strangers.
(6) A lack of commitment.
Commitment is shown in the resources a firm will dedicate to a project. These resources come in four ways: money, the involvement of the correct people, a true cultural understanding and patience. A shortage in any these ingredients could lead to disaster.
(7) Adhering to the adage that “A deal is a deal.”
This assumes no tolerance for different ways of doing business, and no flexibility. If that’s the case, what will a firm do when a supplier needs to change the price two months into the project? What will you do when the factory’s prices on raw materials suddenly increase? How will you work with your factory to defend against competitive threats?
(8) A “one-country” approach.
What happens if there’s political or economic risk? What if a large competitor comes in and buys your factory? What will you do if a large tariff is placed on your offshore country’s exports?
Examples of political risk include a change in government — perhaps a new dictator — a nationalizing of assets (India did this in the 1970s), or something as mundane as import or export quotas.
(9) Belief in any IP protection at all.
Forget IP defenses, because there are none. Instead of adopting a coercive litigious mindset, take the money you’re spending on legal fees and use it for relationship -building business trips to get to know your partners.
A relationship built on mutual benefit and trust is your best bet to protect yourself.
(10) Using offshoring as a substitute for innovation at home.
When offshoring becomes the sole emergency measure for a firm’s survival, the firm is doomed. When firms don’t innovate, learn and re-learn their markets and customers’ needs; revamp their advertising; hire the right people; and expand into new markets, then offshoring to a low-labor country is only a temporary solution.
Remember that the low-cost producer niche is tough to defend, as there always will be a cheaper producer lurking in your market.