pitfalls that should be carefully explored before outsourcing include

Initiation

Handshake Outsourcing is a way of living for physics manufacturers and many would not survive the marketplace without this option. Original equipment manufacturers (OEMs) hind end not only offload manufacturing but tasks like materials management, excogitation and testing, rate fulfillment, and logistics can also be handed over to a contract manufacturer (Cm). Disdain the significant benefits that come with outsourcing, there are also risks and challenges for OEMs to count. Outsourcing, by definition, leads to loss of control.

Placing manufacturing activities in the hands of a manufacturing partner makes information technology increasingly important to supervise tasks through echt business concern processes, written agreement agreements, and software tools. Without building new processes and infrastructure to financial backing this supply Ernst Boris Chain approach the benefits of outsourcing will be offset by new introduced costs and risks.

Through our years of experience in working with electronics OEMs and CMs, we take in observed seven common pitfalls that impact manufacturing outsourcing success. In each case, the bear upon on revenue, cost of goods sold (COGS), quality, inventory levels, and clip-to-market can exist easy measured. In that article, we will offer more insight into the septenar to the highest degree inferior outsourcing mistakes and steps that can be taken to plow them.

1. Selecting the Wrong Condense Manufacturer (Curium)

Working with the wrong CM is at the root of many problems that we take note in outsourcing. An OEM selects a handful of contract manufacturers — or worsened yet, a individual CM — and starts discussing line of work without having a clear understanding of the seize option criteria. Key inputs such every bit geographic location, technical capabilities, materials management capabilities, quality control, strategic fit, and financial wellness are overlooked or discussed too late in the valuation process, as cost or schedule overrides all other concerns. Cutting corners like this is often justified in a variety of ways: by pointing to an active operational problem; out of foiling with the current CM; in time for a new product launch; in response to immediate security deposit pressures; Oregon a compounding of these factors. While these are relevant issues to deal, a John Roy Major undertaking such American Samoa establishing your CM relationship must be based along a buirdly strategic foundation.

Prior to starting any sourcing project, fully image your idea of a successful abridge manufacturing relationship. Scathing sourcing projects are usually spearheaded by the operations/manufacturing organization. Merely be careful not to exclude major stakeholders so much as engineering, product management, quality mastery, and finance. Outsourcing your manufacturing is non a traditional buy in/sell organisation, and it must be managed in a strategic manner. Your CM is an extension of your business and has personnel that must interact cross-functionally with your company. Determine what role much factors as size up, technical expertness, financial speciality, and trade name reputation roleplay in your selection criteria. E.g., a tier-one CM whitethorn broadly speaking non make up a suitable touch for a get down-ahead or small OEM merely based on size. The mindshare associated with an period spend in the depleted millions of dollars is minimal for a large CM when compared to the hundreds of millions or billions spent along outsourcing by larger OEMs. Nonetheless, both start-ups Beaver State small companies are in unique recession markets where a large Curium is investing to become the compress producer of choice. The potential revenue that the CM can substantiate as a result of this partnership may, thus, overshadow the immediate revenue at hand. Therein case, IT may be worth pursuing a tier-one result. Eventually, buzz off references from similar-sized customers within a related technology market. Keep in mind that all situation is different and requires thoughtful consideration of triplex factors.

In front making any decisions, spend time to spring up a clear set of selection criteria, understand your short-term and long requirements, and cast a wide net to evaluate multiple options. Develop a shed light on plan and follow a methodical process until you have narrowed down your choices to at least two finalists. Refrain from award business until you have, at a minimum, finalized your key contract damage and agreed to how your products will be priced — nowadays and in the future. Even if you are not planning on embarking on any new relationships, validate your existent resolution from time to time to ensure current alignment with the direction of your business or product roadmap. This will reduce the likeliness of a hasty selection process when the need arises.

2. Using a Quote-and-Go Come on

The first formal exchange between an OEM and CM is typically the submission of a request for quotation (RFQ). Merchandise specifications are provided via electronic or newspaper agency, CMs move back through their quotation process, and the output is a product price that is sent back to the OEM in order to defecate a decision. In our opinion, thither are four potential problems with this "quote-and-go" approach:

Component pricing ambiguities.

The OEM and sometimes even the CM do not clearly read what assumptions are built into the pricing quotes. For example, what role has volume played in the pricing received from the component suppliers? How will purchase price variances personify managed? Which component suppliers have been contacted to obtain pricing? What minimum order quantities apply to each component? Consume whatever sanctioned vendor list (AVL) or approved manufacturer list (AML) substitutions been made? Does the component pricing used in the CM quotation assume any one-time purchases from brokers? The top-grade way to catch misquotes and accidental errors is to get the detail and look for discrepancies.

Lack of visibility to production pricing structure.

Some CMs are hesitant to provide an surgical dislocation of cost to a detailed level that specifies material cost, cost of acquisition (or material mark out-dormie), labor, test, manufacturing overhead, and profit or overall gross profit. But without clear profile to the cost breakdown, how dismiss you know what assumptions were used in quoting your product, or what price improvement opportunities on that point may be in the future? What assembly and test times were used every bit input for determining the test and labor components of your pricing, and, more importantly, are these multiplication dead-on? What are the toll drivers in your bank bill of materials (BOM) so that you can plan for cost reduction initiatives? How are cloth mark-high and manufactory overhead allocated to your products, and are they are proportionate with the rates in the geographic region in which your products are factory-made? How will virgin products be priced in the future? Is the Cm giving you a Mary Leontyne Pric they can sustain, or are they "purchasing" your business at the start and expecting to raise prices when they accept your business? Lack of price transparency is a mislay/lose situation for some the Cm and OEM, ahead to a strained human relationship between the two parties.

Unknown details regarding the supply mountain chain model.

Unless you have had the proterozoic discussions direct on what your supply Ernst Boris Chain model will aspect like, your CM quote can increase operating room decrease substantially. Equally an example, what "inventory turns" were assumed during the quoting process? How is the CM exploitation vendor managed inventory? How do they handle Kanban, including ABA transit number sizing, engine room change grade (ECO) management, and buffers? How is the buying regularise policy organism managed: direct the traditional ABC categories, or by a more modern approach? At what point in the append chain does the ownership of the ended goods inventory transfer? Are all transportation costs such as loading, taxes, and duties included, or will they be invoiced separately? All of these can deliver a observable touch on along your product price.

No attention to non-toll issues.

Added to the skill price are a host of factors that can drive your monetary value up Oregon down depending on how well you complex body part your understanding with your CMs. What is the scope of your CM's warranty, and for what point of time are your products cloaked? What is the cost structure for repairing products that are inaccurate of warranty? Is the inventory for warrant repairs at a different location and nether a different cost structure? How behave quality-related metrics such as yield and part-per-million failure rates meet into your total cost of ownership? Transportation, duties, tariffs, prototyping costs, applied science services, and RMA (take back incarnate authorization) services are among critical cost factors that are often overlooked. As we noted above, the RFQ should be reserved for the shortlist of contract manufacturers that you bear spent time educating about your short-terminus and long-terminal figure business requirements. Do non waste your time and resources analyzing quotes from more than a handful of CMs. You will not only create unnecessary piece of work for yourself but in a turnkey manufacturing model, you also strain the resources of your component suppliers that are suddenly contacted by multiple CMs requesting information and pricing. Limit this activity to a subset of contenders that have incontestible a strong willingness to earn your business. Allow yourself enough time to cut into through the details in a credit reception, asking precocious questions about the information provided to you. Make believe yourself available to answer questions and gauge each contending CM's thoroughness and attention to detail as it relates to your products. Finalizing price should not exist based on info perio from the Cm to the OEM; it is a collaborative effort by some sides to order a mutually agreed-upon framework of assumptions more or less the numbers.

3. Negotiating a Weak Contract — Or No Contract At All

Although contracts are tedious to negotiate, there are three key reasons why they are like a sho more carping than ever before. First, corporate governance requirements such as Sarbanes-Oxley ask that companies utilize much more rigor than before in reportage their financial numbers. The life-size dollar purchases associated with manufacturing outsourcing put together your CM relationships on the radar screen for any financial listener. Second, a well-structured contract forces discussion happening key business terms that would otherwise be overlooked. In the absence of a sign on, rarely do companies get into a detailed discussion of "what if" scenarios until crises occur. Finally, a contract negotiation and signature process itself serves as a vehicle to perpetrate in senior-level managers from both sides to build relationships. You testament postulate these relationships once in a while Eastern Samoa you navigate finished the impact of unsteady business conditions. While most OEM-CM contracts are structured to offer sufficient aggregation protection, we birth found them to exist generally light happening influential operational terms so much as:

Armory liability definition and reporting, particularly at the component level;
Supply/order flexibility and buffer programs for demand upsides;
Price structure definition and adjustments;
Warranty coverage and ownership/liability for pandemic failures;
Intellectual property (IP) ownership, especially with respect to manufacturing process improvements initiated by the Cm;
Engineering alteration management, documentation, and transfer of product between CM facilities;
Picture of responsibility for compliance with environmental regulations, in particular, the Continent Union's Restriction of Hazardous Substances (RoHS) directive;
Post-termination obligations, especially in relation to inventory liability, persistence of supply, and records retention;
Reversion provide chain services and toll complex body part;
Delivery commitments and amend provisions for delayed deliveries;
The price structure for services such As design, fulfillment, repair, prototyping, and examine ontogeny.

Antecedent to sending boilerplate contract drafts back and forth, spend meter identifying your requirements, assign degrees of grandness to the terms that you will negotiate, and quantify them in dollars wherever possible. This internal preparation will allow you to posterior up your requirements with a solid rationale. Mean win/make headway and remember that "negotiation," by definition, means mutual compromise. Identify cay players on both sides and hold them accountable for meeting the timeline that you jointly define. Instal a prelim meeting with your contract manufacturer to discuss the distinguish terms (such as those noted above) that will get in your contracts. Make over alignment connected what each side's obligations will be in those areas and begin mapping impermissible a not-binding term piece of paper. Once you agree along the depicted object of the term sheet, use that as the baseline to make over a contract that defines these and other terms in farther detail. The goal is to drop enough time upfront, with all the right parties, so there are no surprises when your Centimeter receives the contract draft from you. Every bit you submit redline drafts in reply and forth, piddle sure each side clearly explains the reasoning rear the proposed changes. We recommend that an OEM non laurels business, and, by the same souvenir, that a CM not consent the business until the contract is communicative. We are aware, however, that some business sectors so much as the electronics industry move at lightning speed. If it is not practical to wait for each documentation to get finalized, be in for that at least the key terms are agreed to and documented on a term sheet.

4. Poor NPI Visualise Management

A key process faced aside both the OEM and the CM is revolutionary product introduction (NPI). New product introductions are complex projects, incorporating numerous activities associated with multiple components and subassemblies subordinate a mathematical product's BOM. A new product containing a hundred new parts involves a hundred sub-projects to design, source, qualify, and release all unitary. And from each one hoagie-project involves coordinating activities of threefold functions, such as design engineering science, component technology, compliance management, sourcing, manufacturing engineering, and quality control. Most companies depend on "left-to-right planning", using a tool such as Microsoft® Project to get an approximation of the squealing-level tasks, dependencies, and timeline. However, it's the lack of visibility into the various tasks related to each of the parts that ofttimes delays an NPI project. In an outsourced environment, coordination of these activities gets evening more complex, and we regularly hear about NPI-related pitfalls such atomic number 3 the following:

Poor quality of product configuration and manufacturing data.

Uncompleted operating theater incorrect BOMs lead to assumptions by the OEM around how and when certain tasks will be completed by the CM, while the CM may be finding their own solutions to work around the missing information.

Centimetre amour in NPI "overly little, too late."

This often occurs because the OEM doesn't give profile to the Cm regarding unreleased or work-in-progress information. CMs are discovering manufacturability, cost, or sourcing problems so late in the sue that correcting them causes clock time-to-food market delays.

Poor communication of product change during NPI.

The CM can't seem to keep up with the numerous changes that take plac, and may nonetheless be allocating resources to tasks that are zero longer critical priorities. Of course of action, a seasoned NPI project manager who has worked on various product introductions in your organization for a long time is priceless. But instead of relying along the knowledge and experience of an individual, you should also incorporate best practices through documentation, training, task lean reviews, and tight-laced supporting information systems. As a start, coiffe functioning a shared data direction infrastructure to communicate the product configuration and associated files, all under revision control, directly with the CM and component suppliers. Integrate your systems to incorporate supply chain data and partially/vendor preferences from your CMs to improve archaean aim-in decisions. Open up your project tax list to involve your CMs as integral members of the NPI contrive team, freehanded them overall visibility into the condition and potential risks. Plan for—and put through on—early and gymnastic coaction between downstream functions in the product ontogenesis process to identify manufacturing and testing problems. Build a process and infrastructure for the rapid communion of modifications ready-made during the NPI process with your CMs and the suppliers affected downstream so that completely levels of the supply chain are functioning in concert to incorporate changes. Last, follow out a process with supportive systems that efficiently becharm and process feedback from your CMs and part suppliers.

5. Inadequate Change Management Processes and Substructure

Managing change inside a company is a labyrinthian challenge that requires careful coordination. This complexity increases drastically in an outsourcing model, A the OEM and CM are following different but interlocked business processes and making use of different information systems. The challenge with communication intersection changes to a CM during NPI is non so much the book of data, just rather the frequency and complexness of change. Continuous excogitation revisions, new manufacturing process instruction manual, and updated AVL/AML information all require the CM to oppose and frequently deviate from antecedently made execution plans. IT requires people to pay attention, assess the setting of the change, and determine when and how the variety impacts their specific tasks. The financial impact of hapless change management with your CM is simple: you either end up with to a fault galore of the wrong parts leading to surplus and obsolete (E&O) inventory, not enough of the right parts resultant in payload delays and potential loss of revenue, or, even worsened, defective products shipped to your customers. Even when an OEM has an internecine engineering change order (ECO) operation, the CM is often non involved early enough to respond efficiently to the change. For small and sized manufacturers, the common method to communicate BOMs and changes is still manual, utilizing phone, fax, Oregon email. The fact that these manual ECOs are thus hard often drives people to cut corners in documentation, communication, or gathering input to evaluate the impact of the change. When this occurs, you risk the loss of young visibility into the effects of the modification as well. In fact, recent research shows that a majority of OEMs inform their CM of changes only after the changes cause been authorised. It is critical to restrain in mind that ECOs should provide direction in advance of change — they must not become accident reports. The change process itself is 1 of the near critical factors in reducing time-to-volume. Once a product is in production, the largest impact to cost comes from issuing an ECO resulting in not-continual engineering (NRE) expenses, inflated element costs, inventory write-offs, and soh forth. The change process has a high aptness for error referable the heavy number of people involved and in some cases, due to the technical complexity associated with the commute. Here are some approaches you can conceive to manage this process more effectively:

Ensure that the complete ware record is available to complete committed in change implementation. When communicating a change, the change should be shown inside the context of the full product disc, and non even as a series of "bullets" that summarize the changes. Modern mathematical product lifecycle direction (PLM) systems, for example, show changes as redlines within the actual BOM.
Define and document a vigorous fit of "change management" rules supported best practices such as form-fit and-function-based revision change. Ensure that these rules get a common language betwixt the engineering team and the Atomic number 96.
Before implementing changes, involve your CMs and obtain their feedback happening the change and its encroachment, as well as prospective avenues to melt off any negative impact. Providing the CM visibility into the ECO while information technology even is under development enables a structured discussion. Again, modern PLM systems testament allow suppliers to have this visibility into pending ECOs.
Set prepared the change process to involve dual tiers of the issue chain in the interchange, even beyond the Atomic number 96. Changes to made-to-specification parts sourced from upstream suppliers, such as printed circuit boards in a written board assembly, should be reviewed aside some the upriver supplier and the downstream CM.
Build a change "audit drop behind," detailing exactly what change was approved, on what date stamp, by whom, and what the disposition actions were per stock placement. This provides a strong basis for discussions some the monetary value of change and any excess and obsolete inventory.

It is important to point come out of the closet that effective alter management will enable your CM to reduce the overhead cost structure associated with managing your products, thereby quoting you a more competitive terms.

6. Broken Environmental Submission Direction

Although OEMs are required to take ownership for their products' situation compliance and drive it end-to-end the supply chain, they often put on't take the time to do so in enough profoundness. A cavalier approach to these regulations and the assumption that the Curium "has it covered" puts you on the path to failure and your company at risk of non- compliance. As the owner of the design, you must assess, document, and manage the conformation of your product, surgery earnings your Centimeter or separate outside resources to do this for you. In an outsourced manufacturing surroundings, an OEM relies on its manufacturing partners to perform a pasture of activities, from procurement, inspection, and prevarication, to assembly, quality assurance, shipment, and sometimes evening table service. Single of these activities are part of the "compliancy controls" that are necessary to minimize compliance risk. We have observed the following common mistakes that run along to a broken compliance process, and with that, an increased compliance peril:

OEMs cover compliance as an quarantined province often delegated to someone in engineering, rather than as a serial publication of controls across the uncastrated design and manufacturing process;
Deference is managed as a "flag on a part number" rather than integrated into the configuration management processes. The people who are causative compliance are often leftfield to their own devices when it comes to support systems. Without visibleness into the larger compliance treat, these controls are implemented in disjunct spreadsheets that don't interact with other processes. To boot, these manual methods are not very scalable when it comes to emerging regulations, and can't handle the flush of material declaration and exemption contingent that needs to be managed.
The OEM doesn't have one central, complete and accurate product record, and hasn't completely verified sourcing for all parts and materials in the rich BOM. The CM may, therefore, be using old operating theatre gray grocery store inventory for non-mere parts, OR "open AML" parts that English hawthorn not be willing.
More OEMs are using hand-operated systems alike spreadsheets and file servers simply because those are the tools they've e'er used. Generating a compliance or due industry story becomes a fire drill, especially for an earlier product build that has long been placed in the work force of customers. This approach is rattling disruptive and costly for the organization.

To conduct efficient tracking, documenting, and reporting on compliance, implement a compliance management solution that is directly integrated with your engineering configuration management organisation. Caterpillar track the compliance status both by your company split up numbers and/or manufacturing part numbers likewise Eastern Samoa by requirement (e.g. RoHS 5/6 Oregon RoHS 6/6), which testament facilitate efficient design reuse. Text file the conformation rationale — i.e. why the part is compliant — with same corroboration that serves every bit evidence. For off-the-shelf parts, this whitethorn represent a combining of a certificate of compliance, a material declaration, and, for questionable parts, an independent qualitative analysis report. For made-to-spec parts, this may be a requirement called exterior on the face of the drawing combined with material declarations for all materials used, and influent review reports founded XRF (x-ray fluorescence) examination. Manage compliance by part/assembly revision thus that compliance crapper be demonstrated passim a product's lifecycle. Independent of the progress-date of the shipment under investigation, this level of tracking enables you to evidence that in that location are controls approximately production changes and that the mathematical product has been kept in compliance from rescript to revision. Aver and document the impingement on compliance for all changes implemented by an ECO. Once your internal data management structure has been established, execute a risk judgment on all outsourced activities to discover failure modes, implement the necessary controls, and include the documentation to engender an inspect trail. Take the metre to ensure that there is one full-dress and revision-controlled BOM that is shared in true-clock with the CM. Put up up a courtly process to contain the CM's use of substitutes on the BOM. Typically this includes an engineering change postulation process, and an ECO cognitive process to approve, document, and stage in the transfer. Admit material substance testing, such as XRF testing equipment, at incoming inspection for bad parts. Implement controls around the repair of a production that was improved later July 2006, profitable special tending to swap-pools, repair inventory, and repair tools, including solder library paste.

7. Ignoring the Hidden Costs of Loss Offshore

Transferring production offshore is not for everyone. There is no doubt that the lower cost of labor and overhead in countries such as Communist China, Malaysia, and Taiwan makes sea manufacturing attractive, especially for OEMs that have a low mix of products with very soaring volumes, and that sell—Beaver State expect to betray—their products in the region in which they are manufactured. The "offshoring" job in the electronics industry is that most companies hastily transfer production to operating room source from Asia in front they have had a chance to foul their determination with numbers. This spells trouble for many a small and middle-size of it US firms that lack a clear strategy, deliver pocket-size influence with the CM payable to a small spend, have limited knowledge of how to act stage business in Asia, and stimulate no access to local resources to manage the day-to-day operations. Transportation and logistics are high-stepping on the list of challenges faced by companies that go sea. Using sea freight and thereby extending the lead time by four weeks reduces your flexibility to respond to postulate changes on shortstop notice. The exercise of air-freight reduces the lead-time but is cost-prohibitive for large operating theater heavy products. Communication challenges due to dissimilar time zones and speech communication barriers are not fiddling and often cause frustration and delays. Social factors impact how business processes are executed, how pricing and price are negotiated, and how conflicts are resolved. Executed correctly, offshore manufacturing works best if you have through your preparation and have robust business controls in place to manage it. Before you pretend any decisions about manufacturing outsourcing in China or elsewhere in the region, travel thither and visit some suppliers that you have identified through trusted contacts. Leave the quotation and price negotiations for a later point in the discussions. The purpose of your first visit should personify to understand the region's capabilities, meet suppliers that can build your intersection, and anatomy relationships. As the Book of Numbers stream in, develop a cost model that focuses on the tot cost of offshore sourcing rather than the purchase toll alone. In other words, your cost model should capsulize not merely the price you pay for the product but also:

The transportation strategy (air versus ocean) that you will employ settled on your production lead-time and demand profile;
In the case of ocean freight, the cost of carrying inventory due to an extensive chair time;
The cost of cater buffers that you will need to barge in place at respective points in the supply chain in order to react to demand upsides; and
The overhead required to manage an offshore manufacturing partner.

Above all, however, make non misplace sight of your increased level of inventory liability attributable the endless transportation lead clock time. In a recent consulting engagement for a set-top boxwood manufacturer that built its products in China and ocean freighted them to the US, we found that the cost modelling showed parity in the landed monetary value when we compared Mexico and China. However, when we calculated the inventory liability supported the client's exact profile and upside requirements, we found that the liabilities were five multiplication higher for China than for Mexico. Therefore, our client elected to transfer production from China to Mexico to profit from a shorter lead-prison term. In another cost model we highly-developed for a telecommunication equipment manufacturer, a simple calculation showed that when arsenic some as 10% of the total units manufactured were shipped by aerate, all be savings joint with offshore manufacturing would be completely eliminated. If your cost model justifies going offshore, build a resource base on the ground in Asia, supplemented by US-settled staff that can rely on sufficient travel budget to build and maintain relationships with their overseas counterparts. This allows you to use lower-cost resources in the region to manage the operational activities with the locals while creating a conduit to the faculty in the US that makes the strategic decisions. Last not least, live sure that your USA faculty is educated on the cultural sensitivities that will without doubt influence the mindshare you receive at your manufacturing spouse. Your power to in effect socialise and establish ad hominem relationships in Asia will be as important as the dollars that you pass. Every bit you build your sea partnership, keep in thinker the time zone and communication challenges that are underlying in this new relationship. You may not have the option to pick up the phone to explain a product change or to drive across townspeople to perk the initial prototypes. It is essential to set back in situ the apt tools to collaborate effectively across metre and words barriers, and the disciplined processes to see that hand-offs and changes are understandably communicated. This will become essential in the NPI phase of new products, and, once a product is in production, for managing the myriad of changes that are inevitable in fast-moving product ontogeny environments.

Succeed in your manufacturing outsourcing strategy

An outsourcing model enables numerous OEMs, primarily those that are small or mid-size, to get ahead more competitive. However, this business model carries risks that unmitigated, can have a significant shock on a companionship's financial performance and long-life term success. Implementing solutions to these common mistakes is not trivial, cannot be rushed, and mustiness be pursued with a strategy in mind. In the remnant, outsourcing can be successful if you have the right strategy, processes, people, and tools to maintain verify of your business.

pitfalls that should be carefully explored before outsourcing include

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