Outsourcing Essentials 2 - Supplier Selection

Outsourcing

Lets assume you have thoroughly reviewed your products and processes as outlined in the preceding "Getting Started" article and you have also identified what your key priorities will be in selecting a supplier for manufacture of your products and the break even cost you require for this venture to be profitable and beneficial from your company's perspective. The next problem you will face is " How do you find a suitable supplier and when found how do you then make the decision about which supplier you wish to engage to manufacture your products.

A first inclination may be to send a delegation to attend a few regional trade shows near to the region you are intending to outsource your manufacturing. This may be a good "eye opener" for your delegation to see the variety of products and services that are on display, but as far as yielding any substantial direction for selection of your future supplier, Trade shows can be a bit of "hit and miss". While there are some legitimate manufacturing companies attending the Trade show you will also find a plethora of trading companies that appear to be legitimate manufacturers but are actually little more than a few people in an office space attempting to market manufacturing services for companies with whom they (often) have little or no formal commercial relationship.

The second issue with trading companies is the "hidden" cost involved in getting a middleman to handle all of your orders. Lets assume you are ordering 0000 of products over a year from your selected supplier and the trading company is taking a paltry 5% margin on all orders (a realistic figure will likely be significantly higher if not 100%). If your product has a relatively short life cycle of 5 years and you continue to buy from the trading company instead of directly from a manufacturer, you can expect to have parted with 5000 over the five year period to cover the margin imposed by the trading company.

If you are looking at obtaining a significant saving over the domestic alternative and reducing the amount of unnecessary spend incurred in the process the best alternative is to identify, qualify and engage directly with the manufacturer. You then know where your IP information is being transmitted and have already established NDAs** in order to protect the security of your IP from copying and competition. The direct price will invariably be lower than that you are receiving from a trading company and you can develop a working relationship with the company that actually manufactures your products instead of with a third party.

Assuming that you are looking to work directly with the manufacturer instead of through a third party the next issue you are faced with is the identification of potential suppliers. While there are many searchable databases that will likely provide you with an extensive list of potential suppliers (Alibaba, Tradekey, GlobalSources to name a few) the actual validity and authenticity of suppliers listed on these B2B search engines can be random. The verification process also seems to be flawed with these sites as there are often numerous complaints regarding verified suppliers accepting payment and not delivering. So  you need to have a system of double checking your suppliers prior to moving forward. This can initially be by double checking the supplier company using a generic search engine (e.g. Google) If you find a company listed on the B2B site that does not return a hit using Google then you should probably continue looking at other potential suppliers and leave this supplier in a dubious category. Unfortunately the combination above does not serve to identify which "suppliers" are actually manufacturing facilities and which are trading companies.

If we return to the optimistic calculation of the fees you are going to incur if you end up using a trading company, it would probably make sense at this stage to send a company representative to perform site audits on the potential suppliers to ascertain which suppliers are legitimate manufacturers and which are simply posing as a manufacturer and skimming their profit from the difference between the fees they charge and the actual.  manufacturing costs. The representative should have a knowledge of the products and services you are looking to outsource and the requirements and equipment needed at the supplier in order to be able deliver on these products and services. You also should use a representative that has some outsourcing experience and is able to anticipate where there are going to be potential future issues through the current procedures and equipment being used by a particular supplier and suggest if contingencies or adjustments to procedure can be implemented with the supplier to circumvent these potential issues.

Following the site audits of potential suppliers you should look at sending a quotation / tender package to 2-3 top ranked suppliers for submission. It will be beneficial to use more than one supplier in the quotation stage so you have a comparison of pricing from unrelated vendors and can identify where there are potentials for further negotiation with a preferred supplier prior to awarding a contract. Additionally having more than one potential supplier allows you the avenue to "walk away" from a negotiation (or give the appearance to be doing so) should talks be stalling around a particular aspect of the contract terms.

 

** NDAs (Non Disclosure Agreements). A caution should be expressed here regarding the level of compliance that you can expect with your NDA with some LCC suppliers. While it is relatively easy to enforce and litigate against a violation of an NDA with another first world country, The same is not always true for LCC countries. While some countries will actively enforce violations of an NDA from an OEM by a local supplier due to the potential negative impact it can have on local industry and future investment, others may see your NDA as little more than a novelty item that they can keep for posterity or send immediately to the recycle bin and rest safe in the knowledge that local authorities are unlikely to enact on any complaint or attempt to litigate on the terms of the NDA. It pays to be knowledgeable in the selection of a LCC supplier country and be aware where you should look to manufacture if loss of IP and the resulting competition is of a major concern to you commercial viability.


Brian Le Mon

Principal at

Isn't it time you re-evaluated your International Supply Chain setup? If there is one thing 2020 taught the world, it is how fragile supply can become when the majority of the world's manufacturing is conducted in the same country. If we are being honest with ourselves, China has not offered a significant financial or capability benefit for several years now. Ever increasing wages and operating costs compounded with the desire for those traditionally employed as factory staff to better their life and livelihood has pushed manufacturing costs up and the inherent IP risk has never really been resolved. Now with trade wars and retaliatory "anti-dumping" fees / embargos for Australian products imported to China coupled with growing consumer resentment around the "Made in China" tag, it is becoming more and more the time to re-evaluate. There are a multitude of options outside of China as well as the possibility of return to local manufacture for some products but it is best to have a definite plan on your future strategy and actions required to get there. EQP can help you to plan and execute your future sourcing and manufacture strategy by working with you and potential manufacturing partners either locally or offshore to ensure that any move away from China does not result in a drop in capacity or quality whilst potentially saving you money. There is no better time to plan for the future than today. Get in touch to explore your options and resolve some of your Supply Chain headaches.


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