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The Global View: Can’t Beat Them? Make Them Your Partners

Posted By Everette Phillips, July 23, 2012 at 12:21 PM, in Category: Global Value Networks

In a blog last year, I described an experience a friend had while traveling for business in China. While visiting a supplier, he decided to open some boxes that he found suspicious. Although these boxes were roughly the size and shape of those containing his own product, they carried Chinese labels. In the box, he found his product packaged and ready to sell under a different brand. Naturally, he felt cheated. He wanted to know how this happened and what he could do about it.

Outright cheating, as in this case, can only be avoided with a "trust but verify" action plan. Having a staff member who makes regular work-in-progress (WIP) reports for each production stage, for example, will tell you if your product is being diverted. It is hard to hide diverted production when it is counted weekly. That’s especially true when product is counted at “choke points” such as a machine for some special process like welding. WIP reports also have the benefit of helping you manage periods of growth and periods of drawdown.

Your trust-but-verify action plan should also include monitoring the consumption of any limited resource such as components you consign to the manufacturing facility. For example, if you require a specific OEM connector that is harder to come by in Asia, you may have to consign it to the factory. One should be able to reconcile the output from the factory with the limited number of components supplied.

In addition to taking these steps, you can also distribute production across multiple suppliers in a way that prevents one vendor from easily becoming a competitor.

But in addition to monitoring suppliers and reducing your exposure, you may also want to consider harnessing the energy behind the copycat-type of cheating that most people fear, and turning it to your advantage. I know of factories in China where the management is given the option to sell “excess production" or production of lesser quality to markets within China or under a different brand.

This is not a solution for everyone, but some potential benefits of this approach include improved productivity, improved quality, and giving managers involved a vested interest in stopping others from copying or pirating a design. This approach, in some instances, also has the advantage of getting factory management more focused on quality and productivity than they would be if you simply created a scorecard.

This is an approach that needs to be monitored closely as it is being set up, because it is possible to create unintended consequences in the form of economic incentives for the factory to behave contrary to your wishes. For example, it is tempting to offer the factory management the option of selling products that do not meet your quality standards. By doing so, you can artificially improve your yield by keeping the highest quality in the narrowest acceptance band for your needs and offering the factory management product with wider acceptance criteria. If the market is limited for this lower-quality product, the management of your Chinese supplier will work hard to improve quality.

But it’s easy for this approach to backfire. If, for example, there is a significant market for the lower-quality product offered by your supplier, the management might have an incentive to allow more product to fail the quality inspection.

Products that can be sorted by quality and packaged and sold based on performance, such as electronic components, have the greatest potential for this model. The ability to sort by some testing standards allows for a trust-but-verify method of brand owner-supplier collaboration.

Yield can be a tremendous drain on a business that makes and sells these types of products, especially if you have a brand where quality is extremely important. If product that would be lost to one quality standard can be used in a different market segment that accepts a slightly different standard at a lower price, you may be able to use this model to avoid outright scrapping and to improve your competitive advantage.

If you elect to enter into such an agreement with a supplier, you must lay out the rules carefully. It is important to develop an agreement as to what happens if the "off brand" becomes more successful than you anticipated. If the market segment has a higher tolerance than you expected for a lower-quality product at a lower price, you need to have agreements up front as to how that will play out and how profits might be shared.

Everette Phillips is CEO and president of Global Manufacturing Network, a provider of contract manufacturing, sourcing, and logistics services for products and components with a focus on items with special engineering requirements.

Written by Everette Phillips

Everette's experience includes robotics, advanced manufacturing, supply chain management and international manufacturing. After a career path as a robotics engineer helping automate plants in North America, he became a manager of European Operations for Factory Automation & Robotics in Europe for SEIKO living an expat in Brussels then returning to the US as GM for Advanced Mfg Technologies in North America. Currently, as President of Global Mfg Network, he is involved in coordinating production of highly engineered parts, assemblies and products across a wide range of industries in manufacturing facilities located in Asia and North America and Europe. Everette is a regular speaker and panelist on topics related to manufacturing, international business and technologies such as robotics and advanced manufacturing. He has a BS Bioengineering from Cornell and an MBA from the UCLA Anderson School. Everette serves on the board of Cornell Engineering Alumni Association as a Regional VP and on the Advisory Board for Entrepreneurship@Cornell.

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