Rethinking Outsourcing: Emerging Quality Issues
Outsourcing problems have surfaced in developing countries, leading to the (correct) perception that it’s a risky business. But the focus should not be on nations. Rather, it should be on rethinking the outsourcing model to understand what works best
Issue Date - 15/12/2011
It is difficult to pick up a newspaper without finding articles showing how some firm has experienced serious quality problems due to outsourcing. Outsourcing to developing countries has been a trend for decades. But recent events show that outsourcing can be a risky venture. Mattel has recalled millions of toys due to leaded paint – when in fact, they had provided their standard paint to a long-term, trusted supplier who used leaded paint anyway. RC2 Corp., the company that makes Thomas the Train toys had to recall several models for leaded paint. Interestingly they rewarded affected customers with a free toy for their troubles and ended up having to recall the free toy for leaded paint!
It should be recognized that this is not just an international outsourcing problem. Similar things could happen to firms who outsource anywhere – across the street or across the world. The issue is not one nation. It is outsourcing. It is clear that we need to rethink outsourcing practices and implement new quality practices to mitigate the loss of control associated with outsourcing.
Changing the focus from cost to quality
In point 4 of his 14 points for management, Deming stated, “End the practice of awarding business on the basis of price tag alone. Instead, minimise total costs.” These words seem more prescient now than when they were first written. It appears that the primary motivation for many firms outsourcing production has been to take advantage of lower labor, land, and production costs. However, many firms have found that moving overseas is not always cheap when the entire array of life cycle costs for products and services are considered.
Firms outsourcing place tremendous pressure for low cost on their suppliers. This external pressure, when coupled with internal and external pressures to turn profits, will inevitably lead to cutting of corners. Realize that the same rules apply to suppliers overseas as domestic suppliers – these are partners. We do not want our partners to go broke. Otherwise, it is not a true partnership. Negotiated costs should include room for the supplier to succeed without cutting corners.
Firms who win in outsourcing internationally will be those companies who understand that quality is of primary importance – coupled with price. This is what is termed a value proposition. Customers will not return to a company or retail chain that provides a poor value proposition. To do this properly, you must know your suppliers and enhance their performance through development and partnering. Below are some keys to improving your results from outsourcing.
Know your cores
Core competencies: Business strategists have long maintained that the primary consideration in deciding whether or not to outsource was to know your core competencies. It’s suicidal to outsource a core competency as a firm would hollow itself out to the extent of becoming uncompetitive.
Core processes: Firms have core processes. They help to distinguish a firm and can provide a foundation for competitive advantage. When we outsource, we may lose capabilities or special inherent abilities that will not be recovered. Again, this may be a manufacturing process or a service process. Core processes can possibly be outsourced. But it can be detrimental to competitiveness.
Core products: Every company has signature products or services. These are flagships for the company that must adhere to the highest standards of quality and performance. For example, Harman Corporation of Sandy, Utah, a producer of special effects products for guitarists, chooses to make all of its new products in-house. They want to ensure that these products get to market with reliability and design conformance. Once they have proven their processes and their products are mature in the market, they have the option of moving production of legacy products to Korea or China. This also protects them from IP considerations that sometimes emerge from producing in countries where IP is less protected.
Core markets: We need to understand our key customers and take great care of products & services that serve them. Markets consist of customers in certain demographics who have supported the company over the years. A type of social contract exists with these customers. When trust and that social contract is damaged, customers are lost permanently, thereby damaging reputation & future prospects.
Know your quality costs
In the current interconnected world of outsourcing, the prevention, appraisal and failure (PAF) categorizations of quality costs may not encompass all of our quality-related exposures. Supply chain costs must be considered. Traditionally, supply chain costs have focused on shipping and total cost of ownership. However, supply chain costs must also include exposure due to loss of control. Therefore, we must comprehensively quantify costs of outsourcing. These may include increased liability, increased supplier development, increased monitoring and an increased probability of lost goodwill. If we outsource non-core processes, products & markets, costs will be less.
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