The Problems With Outsourcing Manufacturing

I’ve never been a fan of outsourcing manufacturing, especially to overseas providers, for a couple of reasons.

For one thing, you can very quickly lose control of the quality of your product. Your supplier can make several thousand units but slip on the specs even a little. Something’s a little off, or they used a different material thickness, the color is wrong, or it’s just not made very well.

So what do you do when you get a container load of parts that don’t quite fit the other piece they’re supposed to connect to? What are you supposed to tell your customers when those parts aren’t as good as the ones you promised? Do you send them back and go without any parts until the next batch arrives? Or do you try to make it work and just hope that nothing goes wrong?

Second, in outsourcing production, it’s very easy for your vendor to reverse engineer your product and create a knockoff. In essence, you can create your own competitor and end up competing with someone who can sell your best products just as good as yours, but cheaper.

Or, they could go to your competition and offer them your specs, formula, and product, which eliminates the quality separation between you and your competition.

Finally, it’s almost impossible for you to control an overseas vendor’s environment. You don’t know if they’re using child labor or prison labor, or are paying a fair wage. You don’t know if they’re following the same safety requirements you require for your own associates, or what kind of raw materials they’re using. How many stories have we heard about Chinese-made products that contained lead paint and had to be recalled?

As someone who has overseen several manufacturing operations, I can tell you that the two biggest issues around outsourcing is that you’d better have 1) a very tight quality control system and 2) a way of monitoring that vendor so you’re not creating your own competitor.

These are issues with both overseas and domestic vendors, although the difference is you can put both systems into a form of contract for the domestic supplier. Because the U.S, is such a litigious society, you can sue the hell out of the domestic supplier if you ever caught them, and you can seize the assets because the assets are in the country. But it’s often too cost-prohibitive to try to sue an overseas supplier, especially if you don’t know anyone who can help you navigate the legal system.

Even so, there still may be instances of your supplier making and selling your parts to your competitors as well.

This has happened to me several times, particularly overseas. Some ex-employees of mine decided to go into competition with us. They were familiar with the vendors and the production methods because they set them up originally. So when they decided to quit my company, they were in business within 90 days. Of course, they had all the IP of the organization in their head and on file, so they became a competitor overnight. (Well, 90 overnights later.)

I tried to take them to court, but the legal system being what it was, they managed to get away with it because the actual manufacturing was being done in China, and we didn’t know anyone to be able to help us in the Chinese legal system.

So in response, I repatriated all of our outsourced products from overseas. They were able to reproduce what they already had, but they no longer had access to any future improvements we might make. So we were able to make several improvements and left the other business in the dust.

The other thing we did was made sure that our specs became the industry standard. If you could get owners and project managers to specify products and companies with certain accreditations — accreditations which we made sure we had — you could own the market.

We were able to do just that, and we bought a couple of other companies, and we made sure they had all the same accreditation that we had. So we were able to shut our new competitor out of the marketplace because they didn’t have those accreditations and the product specs they stole from us no longer met the new industry standards. There were only three brands that met those accreditations, and we owned all three of them. If they hadn’t stolen our specs and plans from us, they might have survived. As a result, it pushed us into a new direction, which resulted in us dominating the marketplace.

I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business, including pivoting within their industry. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.

Photo credit: Voltamax (Pixabay, Creative Commons 0)