Lessons from outsourcing
When I was in China last month, I saw something that I would never expected: The closing of some manufactures in Shanghai and Shenzheng. According to the local newspaper, facing with rising costs, GE is moving its production of its water heater manufactures back to the U.S. Other companies such as NCR, Caterpillar, and Ford are also moving some manufactures back to the U.S too. The main reason: Chinese wages and shipping costs have risen quickly while U.S wages have stayed about the same as several years ago. Although cost is cited as the main reason, a senior manager told me that actually quality is the main issue and long production time make it less responsive to market demand.
Because I stayed in the same hotel with several managers who are managing the transition back so I had chance to talk to them. Thomas, a senior manager explained: “The quality here is inconsistent, sometime it is good but many times it is not acceptable. We have to hire additional quality inspection people in the U.S to check their shipments. Last year, we sent many shipments back which was very costly. No matter what we do, how much we train them, it is always the same: They like to do whatever they can just to get their cost down and profit up, regardless of quality. They cheat on quality tests so they can put it on paper, get the products ship out and get paid. They do not care what will happen to their customers. We are in the electronic business where everything must be of high quality. We found low quality products such as poorly soldered cables, defective connectors, torn flanges that put together in a sloppy way. We have to scrap million dollars worth of products last year. We came here to take advantage of cheap labor but if you calculate the total costs of production, shipment, quality and time for delivery then it is NOT worth it. That is why today we decide to bring all works back to San Jose and that is over two thousand jobs lost here in China”.
Charles, another manager from England also told me: “We have to ship about 20% more than our needs because it takes several months to ship things. We have to keep about $ 4 million dollars of extra products in our warehouse in case of shipping delay. If products are defective, we have to ship them back to replace them. Of course, it means several arguments before we can replace defective products and we have to spend extra time to review new shipments. Basically, after three years of outsourcing we learned that it is NOT worth it. We are NOT happy with the work here so we are bringing everything back to Manchester”.
I asked: “So how many people here lost their jobs?”
Charles shook his head: “I do not know, probably several thousands. We are hiring about five thousand people back in England now”.
Mike, another manager went into more detail: “Most of our products are seasonal. We sell them during Christmas so we order products at least a year in advance to fit into the production schedule and plan for shipping lags. We have to spend a lot of time to forecast market demands, sale volumes in advance before we have products manufactured here. That is a lot of works and we have invested hundred million dollars to build the manufacture here. Of course, we are “locked in”. If things do not work accordingly than we are in trouble. One year, products were late and we did not receive them until a week before Christmas, we lost several million dollars. Another year, the quality was so bad with many defects and we lost another million dollars. Last few years, we found so many counterfeits in the market that compete with our best selling products. The investigation revealed that they all came from China. After we invested here and trained them on how to build these products, they took advantage and created the counterfeits to compete with us. With no enforcement of the intellectual property laws, counterfeits are another way to make money. Finally, we decide to close our manufactures here and bring everything back to the U.S. It was a major lost but we learned a lot about outsourcing”.
Few years ago, outsourcing was big. Almost every companies had plan to outsource to lower cost countries but recently with the financial crisis, and the problems with outsourcing, many began to rethink their strategies. The local newspapers announced that as foreign companies began to pull out, many manufactures had to close, millions of workers lost jobs in Shanghai, Shenzhen. They had to moved back homes, to small villages in Eastern China with no hope to support their families. This situation could reach a crisis soon if the closing of factory continues.
As I had previously wrote on this blog, globalization can open business opportunities but it can also close them quickly if you do not pay attention. To maintain the business, lower cost is NOT enough, you must also focus on quality, ethic, and most of all - customer satisfaction.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
