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The 8 Risks When Outsourcing Offshore

Jul 30, 2018

Biggest outsourcing risks

A major decision within your supply chain strategy lies in whether you will be producing in-house or outsourcing certain functions. Offshoring some areas of your product development are viable options due to cost optimization, time efficiencies, and local specialization. In addition to that, it brings back focus to your core business.

However, despite the benefits, caution must still be taken as a lack of due diligence could cost your organization both from a financial and reputational standpoint. Before making the decision to outsource offshore, it is important to understand the risk you are undertaking to avoid surprises down the road. Here are the biggest risks to prepare for:

1. Bottlenecks in Critical Processes
When sourcing internationally, risks associated with your supplier of choice are higher due to less direct contact and visibility. Especially in cases where your offshore supplier may be your single source for a critical process of component, thorough research and risk assessment must be conducted when vetting potential suppliers. Choosing wrong in a situation like this could mean causing bottlenecks in the supply chain that could delay time-to-market.

2. Hidden Costs 
Different suppliers lay out their pricing structure differently. Don’t get drawn in by seemingly low prices. Make sure to find out on the front-end what your total cost will look like. E.g., tool/die/mold costs (some of which might be amortized), shipping costs, tariffs, and anything else the manufacturer might include in the final price. On top of that, be sure to gain visibility on potential price changes. What happens after the end of a contract term? How does volume of order affect pricing?

3. Quality Control
The implications of a quality failure offshore can lead to major disruptions and cost overruns. Some foreign production centers do not adhere to western quality standards, which is why companies need to ask for references as well as conduct their own factory walk-through before jumping into business with them. Even in cases where factories have sufficient quality standards, care must be taken when conveying product specification. During the prototyping stage, nail down every detail to ensure mass production goes smoothly.

4. IP Protection
Be sure to look into the country’s regulations about intellectual property rights. Do they favor local companies? Do they pressure release of proprietary information in exchange for market access? Are there laws in place protecting your trade secrets? Different countries call for different methods of IP protection. You need to arm yourself with up-to-date information on these laws in order to protect your assets and remain competitive.

5. Compliance and Regulation
Especially in developing countries, a common concern is on whether or not your supplier’s values are aligned with yours. Does their factory meet health and safety standards? Are their employee rights being respected? Can they provide documentation to prove compliance? Doing business with a non-compliant supplier could open you up to regulatory action which could damage your company’s hard earned reputation. On top of that, when operating on foreign land, it is not uncommon for companies to get tripped up on unfamiliar local regulation. Due diligence comes in again – do your research on local laws before setting up operations on foreign land.   

6. Supplier Scalability
What are your business’s goals? What is the YOY growth rate you hope to achieve? Your supplier may meet your needs now but do they have the capability to scale orders to your business growth? Having to change suppliers midway through production could cause unnecessary setbacks. Find out up front what your supplier’s maximum production capability looks like.

7. Communication Misalignment
Aligning on communication can be difficult especially when doing business in a country where major cultural differences exist. Beginning with language barriers, you might need to hire a translator to ensure operational instructions do not get lost in translation. Cultural differences run deeper than language, you’re also bound to run into issues like unreturned emails or loose project management. To top it off, time differences also add to the burden, as it oftentimes delays communication and causes project setbacks.

8. Exit Strategy
There are many reasons why your relationship with your supplier may come to an end. Regardless of what those reasons may be, a common mistake is to not prepare for it. When negotiating your contract, it is important to include what follows should either party choose to sever ties. For instance, what is the notice termination required? Will your supplier still honor purchase orders? How will your intellectual property be handled? These are issues to iron out up front as failure to do so could cause major delays in your lead time and potentially damage areas of operations.

Offshore outsourcing can be a great solution to optimize your supply chain. However, if not executed with due diligence, it can end up costing your organization time and money. When the stakes are high, it’s especially important to make decisions based on accurate and updated facts. Find out how you can leverage our decades of experience to aid your outsourcing process.

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Topics: Manufacturing, Thought Leadership, Risk Management, Operations