How to mitigate your outsourcing risks with planning and preparation.

Too many companies jump into offshore outsourcing without carefully analyzing their expectations and planning for risks. I remember the dot-com recession for being brief and shallow. It started in March 2001 and ended in November. In December, China officially acceded to the WTO and then in an unprecedented frenzy all US companies invested in China, moving millions of jobs first to southern China (Shenzhen, Guangdong) and later to the Shanghai area (Suzhou, Kunshan, Wuxi) and to Hunan province (Changsha). The reason? They could make everything more cheaply and export it to the world. Simple arithmetic. The US electronic manufacturing industry was decimated. The domestic PCB industry shrunk from $11 billion in 2000 to less than $4 billion today. Nowadays business analysts look back and realize that the US is not “electronic manufacturing independent” anymore. We transferred enormous amounts of know-how to Chinese companies to the extent that the US does not have the necessary expertise to make complex PCBs anymore. So how to go about outsourcing the right way? 1- The first question should be “why?” Take the time to thoroughly examine your company’s strengths and weaknesses, your market position, the competitive landscape and your long term strategy. Is offshore outsourcing meeting your company’s objectives or is it simply about saving costs? We have seen technology companies that outsourced part of their manufacturing to foreign countries, quickly lose their competitive edge, spiral downward and finally close doors within just a few years. On the other hand one of my Japanese clients set up a sourcing office in Singapore to learn how to do business outside Japan because their long term strategy was to sell overseas. 2- After answering why comes “what?” I have seen companies successfully outsource non-essential activities, processes and component manufacturing but fail to set firm guidelines for employees. Before they knew it the company was shifting core competencies to foreign suppliers with little control. Even if you trust your suppliers you should not underestimate the risk of your supplier employees - trained in your more secret processes - starting their own business and turning into fierce competitors. Outsourcing can be a terrific weapon for savvy entrepreneurs but it’s also a double-edged sword, and poor management can be very costly. 3- The next obvious question is “where?” When choosing a country to outsource you need to consider (in this order): Political stability Skill sets Cost of living Social relationships Communication That’s right, cost of living shouldn’t come first. In 1989 I went to Bulgaria to train engineers to follow western European standards and it all fell apart when revolutions swept East Central Europe. Political stability is a must. In 1996 I transferred technology to a poor area of the Czech Republic and the project was rescued by the ingenuity of the local engineers. The city of Ceske Budejovice, other than being known for its breweries (Budweisser beer is originally from South Bohemia), has always been a center of trade and crafts and in the 19th century it became an industrial hub. Schools and Universities focus not only on theory but on applied knowledge. Mechanical engineers are truly hands-on and don’t mind getting their hands dirty. In 2006 while in China I fought to hire the best Singaporeans and Malaysian managers because most of them can speak fluent English and Mandarin and they turned out to be tremendous assets in our efforts to communicate with the local workers. Communication, if overlooked, can be your number one obstacle. 4- Weigh the costs and benefits.

Another big mistake is to focus too much on the savings and to ignore the costs. All people see are dollar signs wave before their eyes with little consideration for what it will truly cost them. Offshore contractors require more time to manage due to differences in time zones, language and culture. Your best employees will have to travel overseas and spend extended periods of time to get acquainted with local people, perform long training sessions and monitor the execution. Shipping and import duties will add to your costs and if you choose marine transport your lead time will greatly increase. 5- Unintended casualties.

Some of your employees will see outsourcing as a clear signal that you are not committed to growing the business locally. Be prepared to lose important positions. Conversely not everyone is fit for international business travel and I have seen many colleagues affected by long family separation with various consequences, anything from divorce, depression, job dissatisfaction and oftentimes job termination. In this first article of a series of 5 our goal was to outline what we call the Preliminary Steps of your offshore sourcing process. Outsourcing is not a mere operational or cost reduction decision. It is strategic and requires a lot of work, research and preparation and we, at Kusu, are committed to assist you in your effort to re-balance your supply chain footprint in Asia and be less dependent on China. Our next article will be about “Going for the long term and not falling for short term reward”.


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