Outsourcing to China - Avoiding the Hidden Costs

By Robert Badner

In boardrooms across the country, executives are frenzied about the opportunity provided with outsourcing products from high cost, high overhead manufacturing facilities in the United States to the low cost region of China. In an effort to contain costs, many organizations are flocking to China to harvest the fields of low cost labor. When you think that they pay $150.00 per month to an employee working six, 10 hour days you shake your head in disbelief and say "sign me up". The outsourcing strategy to China is a sound one and needs to be utilized by anyone who is involved within manufacturing. The decision to outsource is one that should be analyzed thoroughly and to realize the true savings is to understand the true costs.

There is an unbelievable number of factories in China capable of producing all kinds off different products, with new plants going live everyday. Past experience has proven that the contract manufacturers in China have a definite niche within manufacturing and there competitive advantage is insurmountable within their niche. Their niche centers around the mass production of an easy part. An easy part is the product manufacturing equivalent of a slam dunk in basketball. An easy part has low complexity, a static design and tolerant to special cause variation. Tolerance to special cause variation indicates a product produced that is not to design intent will perform as intended without, a significant reduction in reliability and is not noticed by the customer.

The characteristics of a complex part is the basketball equivalent of a three point shot. The part is complex, has a dynamic design that continues to change and improve and worse yet offers little latitude for process variation. The fluctuations in process variation and introduction of special cause variation translate into noticeable reductions in performance and reliability. If your strategy is to outsource a difficult part to China, you can do it successfully, you need to modify you current quality system to ensure success.

As quality systems evolved in the United States, a transformation occurred from a vertically integrated inspection based operation to a systems based core competency operation. Years ago, the quality initiative was a dedicated group of inspectors who policed a production focused environment where designs were completed in obscurity and tossed to manufacturing at the last minute to meet launch dates. We have matured to the point where most of the problems are identified and corrected in the design phase by incorporating FMEA's, Design for Manufacture and the input of all affected functional areas. We incorporate metrics to monitor our processes and indicate when improvement or corrective action is needed. Not all US manufacturer's quality systems are at the same level, but on average the maturity and effectiveness of them has increased over the years. Subsequently, when dealing with a domestic supplier you have a general understanding of what you can expect.

A Chinese supplier has a quality system similar to those prevalent in the United States in the 1960's. They are extremely production motivated, heavily inspection based with little or no effort focused on process improvement, data driven decisions or process control. These obstacles are not insurmountable with adaptation of a quality system to counteract these issues.

A system must be in place to monitor the process and product constantly, from design phase through launch and throughout production. The design phase requires a group to work with the Chinese supplier to gain an understanding of their process capabilities and key features of the design. At the launch or pilot build, you should have representatives there to monitor the product and process. Evaluation of process capabilities, test results, data analysis and process improvements is the focus of this team. Once production is approved, you must execute some level of surveillance that includes periodic visits to review the quality system, data reporting, test results, process change validation and component changes.

In order to facilitate the successful launch of a difficult product with a Chinese contract manufacturer, you must allocate various resources to their facility to execute the quality activities that would normally be completed at your own facility. Doing this minimizes your added costs of outsourcing to a Chinese manufacturer.

There will be numerous costs added when doing business with a Chinese supplier. Cost number one is inventory. You are not shipping this stuff from two states away, it is literally on a slow boat from China and there will be lots of it. Cost number 2 is sort and rework. Depending how well you execute the quality activity mentioned above determines how much cost you absorb here. If you neglect communicating and interfacing with the Chinese during the design, pilot run and ongoing production and allow their quality system to drive the results, you should budget generously in your sort and rework account.

Cost number 3 is shipping. Again, this is not coming from across town, are you accounting for that cost or is it buried in your abyss of overhead. Cost number 4 is obsolescence. With a dynamic design, the changes are inevitable, however the Chinese are not purchasing components on a small scale and when a change is made they cannot react quickly without obsoleting already purchased components.

Sourcing a difficult part to China can be achieved with the same quality system approach you would utilize at your facility. You must go over there and see it through. It will not happen on it's own and they will not utilize the tools and techniques necessary to ensure a new product launch and ongoing design changes occur without issues.

Robert Badner is a freelance writer for Innovations for Quality, LLC, who specializes in live, interactive, online training. You can visit their websites at http://www.iso9000training.org and http://www.asqcertification.org.

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