Offshoring works best for stable designs and predictable demand.
“We need to try to bring the price down some more,” the customer told me over the phone.
It was 2005 and the company I worked for was a custom OEM primarily serving the telecommunications industry. After the telecom collapse, everyone wanted the lowest cost possible, and no one was able to forecast sales beyond three months. Long-term purchase orders that helped with downstream planning were a thing of the past. We already had squeezed the supply chain as much as we could; without longer-term planning, I was unable to get additional volume discounts on material. The customer was a startup, though, and was attempting to hit a price point that it was sure would sell decent volume. We were looking at around 2,000 pieces per year, which for us was high volume.
After management review, we decided to attempt to outsource the board for cost savings. I had some experience with Chinese manufacturing, and our company was in the process of setting up an office in India with an eye toward offshoring certain engineering operations and assembly. The thinking was, by having our own office in a low-cost country, we would be able to better manage the offshore suppliers. I sent RFQs to China and to our Indian office. Even at the lower volume, I was able to find cost savings: 35% in China and 25% in India. For various reasons, the Indian supplier was selected, and the customer was happy with the cost savings. Now it fell to me to manage the supplier.
I had heard the horror stories associated with offshore sourcing, mostly related to product quality. I had one customer that set up a closed-circuit camera in one of its offshore partners’ facilities. When boards were completed, the manufacturer (in India) placed the finished product on a table under the camera. The US customer logged into the camera and inspected the boards remotely before permitting shipments. This situation seemed overly involved to me, and was one I was determined to avoid. Worldwide shipping services had largely eliminated cost concerns I had previously heard about in early offshoring discussions. I no longer needed to wait for a container to be full to get product shipped at an acceptable cost. Sure, it was more expensive than my local supplier delivering the boards, but that cost adder had been factored in my sell price to my customer. I also had been warned of language barriers and time zone delays as potential issues. I found the majority of my contacts in India spoke English nearly as well as I did – accented English, to be sure, but still very understandable. The Indian companies we did business with had also set their mid- and upper-level management personnel on second shift. This allowed them to work with our normal first-shift hours in the Eastern time zone. We also had local representatives who could be sent to the manufacturing facility to oversee our needs.
Initially, the relationship worked rather well, despite my reservations and fears. As time elapsed, however, we began to run into issues, primarily with on-time delivery. The supplier was unable to efficiently adjust to our needs, based on either material availability in country, or assembly capacity. We needed releases of 200 pieces, but they would run 500 at a time. Units would fail test, and instead of asking for help troubleshooting, they would push them aside in favor of other customer demands. We’d make engineering changes, and they would neglect to update their assembly documentation, or make us take previous revision boards due to their overruns. We had never discussed minimum lot quantities, nor were they a condition of the contract. The supplier also purchased material at much higher quantities than needed for the orders we had placed, and then asked us to cover the material overage costs, another item that was not a condition of its quote, the contract or our purchase order.
Most issues we encountered were similar to issues encountered with local suppliers, but were aggravated by the distance. I was unable to effectively manage the issues with the time zones involved while maintaining adequate lead times. The stateside overhead required to manage the product was not factored into a landed cost analysis of the product, and quickly absorbed any cost savings. In the end, we were forced to bring the product back onshore so that it could be efficiently produced and managed.
As with all outsource evolutions, planning is essential to successful offshoring. If the design is not stable, or demand not relatively predictable, the odds of success decrease. Stateside management costs must be factored into the landed costs, more so with volatile demand products. I believe offshoring could be an effective solution for the right product and volume mix. However, offshoring is not a viable option when demand is variable and the design is not stable. Stick with a flexible onshore supplier for these sorts of products.
Rob Duval is general manager of SPIN PCB (spinpcb.com); This email address is being protected from spambots. You need JavaScript enabled to view it..
