The Risks Of Outsourcing

Thursday, April 19, 2012 10:56
Posted in category From the Factory Floor

For many firms looking to outsource, understanding the risks of their decisions can be a difficult process, and there are more than enough firms who have found themselves in the news lately for a failure in their outsourced supply chain.

Failures that lead to a product recall

Failures that had a negative impact on the brand

Failures that left the firm looking for a new supplier on the fly

.. and in doing some research for a paper I am writing on responsible leadership in this area, I came across the academic paper Managing production outsourcing risks in
China’s apparel industry: a case study of two apparel retailers
where the authors looked at the different processes that two retailers employed when understanding and mitigating the risks in their outsourced supply chain.  IT is a paper that includes the above charts, which I found highly useful, and provided a concise example of how one of the firms (they have named CY) planned for the risks they faced, and put in processes that would keep the supplier in line:

Besides short-term contracts, CL China used long-term contracts to manage its relationships with manufacturers. CL China regarded short-term contracts as a prelude, a trial marriage, to a longer-term relationship.  [...] CL China considered long-term contracts not merely as legally binding, but also essential in relationship development.

All CL China’s long-term contracts included clauses that:

  • would safeguard the confidentiality of technical specifications and design requirements imparted to outsourced manufacturers;
  • mandated outsourced manufacturers to take full responsibility for product quality, including after-sale quality assurance;
  • and dictated conditions for transportation and distribution of finished products, including procedures to deal with product damage during transit.

These contracts were also very specific about penalties to be imposed, should an outsourced manufacturer breach its contractual obligation. These included mandating the manufacturer to:

  • transport all products by air should a production delay occur;
  • provide payment discount to CL China for goods that failed quality checks or were delivered late; and
  • compensate CL China for losses arising from low quality products or late delivery.

Which was backed up by a robust testing/ sampling process:

The trial typically involved giving prospective manufacturers small quantities of orders. During their trial period, outsourced manufacturers had to submit random samples of final products to CL China for checking and approval prior to commencing full-scale production. During production, each batch of products would also go through a multi-step approval process, which required manufacturers to provide product samples of different sizes, colours, and materials for continuous quality testing. CL China had in place detailed technical specifications for each process to check manufacturers’ compliance with its distinctive quality standards throughout production. When production was completed, CL China would carry out yet another sample quality inspection before book-to-bill to ensure the percentage of defective products in each batch fell within an acceptable threshold. This was additional to requiring manufacturers to establish their own quality control system.

In reading this article, and in some recent cases that have garnered press, what is clear to me is that there are firms who actively (proactively) accept that there is a difference between responsibility and accountability when it comes to outsourcing.  for some firms, outsourcing is a decision made purely on the spot price that a supplier gives them, and they will go to great lengths to burn an in-house supply to save money.  A decision that will come, based on my experience, with 6-8% in savings.. at the time of quote.

It is a decision often made without fully thinking through the risks and then turning those risks into costs that will ultimately be borne by the buyer.

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