The 4 biggest risks you face when outsourcing

04/08/2016

Biggest manufacturing outsourcing risks

Biggest manufacturing outsourcing risks

When it comes to doing business in international markets, there are so many variables to plan for. In some circumstances, it might make sense for a company to manufacture a product from sourced raw materials or components.

In others, companies might find it more profitable to pay another company to perform the manufacturing process and then sell the finished product.

A major component of planning a supply chain strategy depends on a company’s decision as to whether it will make a product, purchase the product to sell to customers or supply a service. Outsourcing can easily seem like a viable option, saving time, on-site costs, and providing a local level of expertise. But before you can go any further with the decision to outsource or not, consider the biggest risks you could face and plan ahead.

Deloitte’s 2014 Global Outsourcing and Insourcing Survey found that:

most issues are derived from the service provider being reactive rather than proactive” (49% of respondents) “or from the provider delivering poor service despite achieving service levels” (48% of respondents). The least commonly cited issues are “cost related metrics and culture compatibility.

The following sections discuss the diverse outsourcing risks which must be examined in the course of a make or buy decision:

1. Supplier risk

Any arrangement with suppliers has elements of risk involved with it; however, risks associated with sourcing internationally are often higher. With sourcing, the company must thoroughly investigate (i.e. carry out due diligence on) potential source markets and suppliers, making an in-depth risk assessment and checking the business practices of potential suppliers to identify any possible problems.

Issues to investigate are outlined below.

2. Quality

The implications of a quality failure from an international source are much more severe than a quality failure from a domestic source. With the lead times involved with transporting goods from international sources, serious disruptions can occur and it can take several months to rectify the problem. To help minimize this risk, many companies prepare detailed product specifications for suppliers and insist on independent quality control inspections.

See the following Case Study in quality control:

Some years ago, a small U.S. company obtained a contract to supply character dolls for a famous entertainment conglomerate. The proprietor found a supplier in China that offered excellent pricing and showed pictures of samples they had produced to specifications provided. Because the supply contract was very important for this and future business, the proprietor decided to visit the plant, where he found that the samples were the only suitable models of many the manufacturer had produced. The proprietor decided to stay at the plant to supervise the entire six week production run. The end result was a successful, high margin transaction with a satisfied buyer and many other similar contracts to follow. Summers in Southern China, product ready for Christmas!

3. Intellectual property protection

When companies share information with suppliers in countries that have less stringent regulations about intellectual property rights, proprietary information is often leaked. For some products this may constitute an insurmountable obstacle to outsourcing. In others, where the product is constantly evolving, the company may decide to dispense with patent protection, confident it can develop new products faster than the market can reverse engineer them.

4. Reputational risk

To avoid negative impact on the brand name, supplier human rights issues (e.g. hiring underage workers, poor treatment, and environmental violations) must be carefully investigated to ensure compliance with the company’s code of conduct. Other important considerations with global sourcing include the following:

☑ Transport time, costs and risks are usually higher than with domestic sourcing as a consequence of the longer routes;

☑ Cultural differences may complicate business communications or cause shipping delays;

☑ Documentation for international sourcing is complicated and may require research, consulting costs or in many cases outsourcing to a brokerage;

☑ Supplies might be interrupted by political instability, requiring identification of alternative sources; and,

☑ Weather could be a factor, creating shipping delays.

Ideally, to minimize their risk exposure to the above factors, companies should investigate a balanced sourcing strategy in which a mixture of global and domestic sources are used.

Want to learn more about the pros and cons of outsourcing product manufacturing or services? This article is an excerpt from our new FITT International Business Guide: FITT International Business Guide: Pros and Cons of Outsourcing Product Manufacturing and Services funded in part by the Government of Canada’s Sectoral Initiatives Program. Head to our resources page to read the rest of the guide today for free! 
Disclaimer: The opinions expressed in this article do not necessarily reflect those of the Government of Canada.

About the author

Pamela Hyatt

Author: Pamela Hyatt

I am a Content Marketing Specialist for the Forum for International Trade Training (FITT). You can find some of my work on TradeReady.ca. My background is in copywriting, journalism and social media. My passion lies in connecting people to the stories that are most important to them.

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