..."A visit to China will convince Kelly that he must engage with outsourcing sooner rather than later - not a question of 'whether' but 'how'"
EXPERT:Drewry Pearson, managing director, Marco (Marco is a beverage systems design company which outsources manufacturing to India).
CURRENTLY, IRISH manufacturing is under pressure not only from low-cost economies but also from devalued sterling and dollar which make Irish manufacturing increasingly less competitive. As a result, Kelly’s margins will come under increasing pressure in his existing markets, and he must adapt his business if he is to survive in the long term. While being in an excellent position to benefit from outsourcing, Kelly’s approach should be progressive and measured, which, if properly implemented, will not necessarily reduce his work force.
The first thing Kelly should do is to “go see”; make a pre-planned visit to China, including a visit to a relevant trade fair. He will realise that China has a vast industrial infrastructure and competence, with high education levels, and an exceptional work ethic, all offering up to 80 per cent cost savings. This visit will convince him that he must engage with outsourcing sooner rather than later. The question will not be “whether?” but “how?”. I would recommend that he starts by outsourcing the non-critical components. It may take some time to find suitable supplier partners and a new supplier may not get the product right “first time”. This approach allows for mistakes without significant cost and without compromising quality.
I would recommend finding and employing a local Chinese, English-speaking engineer, qualified in sourcing and quality control. This keeps you much better informed, ensures greater quality and costs relatively little. This engineer can be trained in Ireland to understand the company’s requirements and values. This approach is much preferable to a professional “outsourcer” who does not fully understand your business.
By continuing to assemble in Ireland, Kelly can assess the quality of supply and always has the alternative to make “in-house” if the quality of a supplier is unsatisfactory. It must be recognised that the above process has costs associated with it. There are the costs of employees in China, the cost and time of frequent visits, additional stock and working capital and duplicate tooling. There is a danger of product “copying”, but if no one supplier makes all the components the danger is relatively small.
The greatest difficulty is the length of the supply chain and the lead time to delivery. Kelly will be well advised to maintain his Galway tooling and equipment as a back-up, but he will probably find that the increased margins achieved will lead to expansion of his business, and more employment in Ireland, due to the extended range of clients and products to which the outsourcing will have opened doors.
EXPERT:Tony Treacy, managing director, Axiom Enterprises Limited and mentor with Enterprise Ireland (Axiom provide subcontract services, technical support and embedded software design to the medical device and electronics industry from operations in Ireland, Poland and Hungary.)
THE INITIAL problem Michael Kelly faced about whether to stay in a multinational or leave is one faced by many middle- or high-ranking employees in multinationals. Having made the decision and gone on to build a profitable company with his father, Kelly has to decide whether to export manufacturing and lose some of his control. There are several valid reasons for moving to low-cost manufacturing locations, but many multinationals which had previously moved production to China are now moving production back to Central and Eastern Europe for cost and supply reasons.
It takes a long time to build up a relationship within the market in China or India, and it is very important to have someone on the ground with a western outlook to protect one’s interest and investment. This is not simply sending an employee out to liaise with the subcontractor, but someone who can speak the language and is familiar with the issues. In China and other low-cost regions, “profit maximisation” is the mantra and “customer concerns and quality” come a poor second.
Quality assurance is one of Kelly’s major concerns, and he is correct to have this concern, especially in the medical device arena. Insurance costs may increase dramatically if there is a failure, and all product quality from a subcontractor must be verifiable. If there is some part of the process which is not verifiable, then there will be a need for someone to be present to ensure the total process is controlled and adhered to. Intellectual property protection is also a major concern, especially in China, where there is very little control on counterfeit product.
Kelly has identified that RD is key. He has a good production team and maybe he should concentrate on high-end products where he can afford a little more in production costs, which is offset by better profit, improved control and shorter lead times. Engagement with the team and encouraging them to come up with innovative ways of avoiding the transfer to lower-cost regions will be key in this.
There is a case for using the lower-cost manufacturing locations for non-critical components, but it is important to keep in mind the “total cost of ownership” and this includes cost, quality control, flexibility and most importantly, customer satisfaction. A combination of both low-cost and local manufacturing may be more appropriate, but if he does decide to move all production out of Ireland then quality assurance has to be a key criteria.
EXPERT:
Garrett Cronin, partner, Consulting Services, PwC
MICHAEL KELLY clearly faces a dilemma – he can either do nothing and see his business decline or he can explore options to reduce his manufacturing cost, generating profits to fund future product development. His biggest issue is fear of the unknown.
The process to outsource production typically involves a number of phases. These include an initial business case to assess the costs, benefits and risks. Once the business case is validated, Kelly can move to a full sourcing strategy, aimed at selecting a supplier and negotiating contracts. Finally, he needs to transfer production and exit production in his own facility.
The business case involves a detailed analysis of all aspects of outsourcing: the current cost of operations, such as production, warehousing, shipping and inventory holding costs; the cost of outsourcing production and the associated shipping and inventory holding costs; and the cost of exiting current production, including redundancies, closure of premises, inventory write offs, depreciation, and so on. The business model also needs to address concerns around product quality, certainty of supply, maintaining customer service commitments, etc. Kelly should initiate a selection process if the business case justifies the identified risk.
Having identified a potential provider, Kelly will need to prepare a formal request for tender. This needs to articulate production specifications; current and forecasted volumes; service levels; quality control; logistics; communication structures; invoicing, etc. Responses need to be evaluated, sample production tested, terms of business negotiated, and risks evaluated before a final supplier is chosen.
Once a supplier is selected, Kelly needs to agree an approach, which will involve the orderly transition of production to the supplier. Given his concerns about quality, consideration needs to be given to a phased transfer of production to the supplier ensuring all identified risks are addressed and resolved prior to the full transfer of production. In parallel, Kelly needs to plan the orderly exit of production from his own plant ensuring that all costs identified for elimination are realised. Throughout the whole process, Kelly needs to manage communications with his own staff, ensuring key staff remain engaged throughout the process.
To succeed, Kelly will need expert advice throughout this process in relation to identifying suppliers overseas, understanding the issues and risks associated with outsourcing production, managing contract negotiations, planning the transfer of production, staff communications, etc. Where this advice is not available internally, Kelly needs to source it from trusted advisers experienced in the process.
