Outsourcing Disasters Put Consumers at Risk

Outsourcing manufacturing and even development to overseas companies became a fact of life with international agreements and the economic globalization which quickly followed. Foreign export subsidies abroad and lowered import tariffs at home offer a powerful case for simply sourcing what we want from somewhere else. The benefit to consumers are cheaper display prices. However, the products themselves can have hidden costs which total much higher than the display price. Here are just three costs not on the price tag:

Safety: September 2009 saw the latest chapter in a long string of expensive and time-consuming product recalls of items manufactured in China. Just the other day one of our staff found themselves face to face with this reality in their own home, having narrowly avoided possible injury when the powder metal blade retainer for their new, one-day-old imported lawn mower cracked a large chunk off after just ten minutes of operation. This safety-critical part was stamped from powder metal and probably given insufficient oven time to bake - which means there are hundreds - thousands somewhere just like it. Back at the store our colleague watched as the entire model line seemed to have a similar flaw and started immediately getting pulled from the floor. How much could that have cost someone?

Economic: Training overseas personnel has opened the door to a flood of skillful black-market copycats, counterfeiters, patent and trademark pirates who apply inside knowledge to cleverly reproduce almost any product illegally, which becomes expensive and difficult to police. Local jobs and skills are lost overseas forever. Eventually, the local economy finds itself borrowing from China to buy from China.

Human Rights: Those employed overseas in the manufacture of low cost goods for export often discover their original expectations wrong, working in appalling conditions, with no way back out. Middlemen, business brokers and investors receive the entire net profit from the supply-demand relationship.

The real differential in the final consumer's decision is actually not cost, but timing. When presented a choice between "pay now or pay later", MBA 101 states that credit-based consumerism such as what is encouraged in the USA will pick "pay later" - even if it means paying more. Darwinism 101 responds that if cutting out fierce business competition could therefore be timed early, it technically justifies almost any other consequence in quality, ethics or community interest. Darwin knows that consumers will still have opportunity to pay their fare share of it all, just a bit "later".

Uncontrolled serial product outsourcing can be a disaster. Not surprisingly, there is growing understanding about the importance of highly selective outsourcing, supplier evaluation, certification and inspection by qualified local staff and agency, while maintaining tight product control, domestic R&D, and a healthy ratio of credible domestic suppliers and know-how at home.

CAD Designers: Are Your Jobs Still Going Overseas?

Businesses in Beijing and Bangalore believe they have discovered a gold mine. But the same experience for many of their foreign investors has exposed land mines in return. Aside from the obvious local employment concerns, companies often discover outsourcing to be far more expensive than originally estimated. Businesses which were first enticed with seemingly low hourly wages find themselves committed to paying more than they ever bargained for.

As one example United Technologies, an acknowledged leader in developing offshore best practices, was saving just over 20 percent by outsourcing to India in 2003 (and wages are higher there now). That's still substantial savings, to be sure. But it takes years of effort and a huge up-front investment. For many companies, it simply may not be worth it. "Someone working for $10,000 a year in Hyderabad can end up costing an American company four to eight times that amount," says Hank Zupnick, CIO of GE Real Estate.

Google metrics for outsourcing searches have dropped 50% since then. According to the Black Book of Outsourcing, western firms such as CENIT, IBM Global and Infosdys still sell as many PLM outsourcing services to the world as do Indian firms Larsen & Toubro, Siri Technologies and Satyam. This is bad news for a country carrying perhaps the world's largest surplus in manpower. Such regions, through poor management and cultural barriers, are often too slow with creating domestic markets of their own. China faces similar problems.

A backlash trend to outsource to Europe or the USA is actually emerging now. Many investors, once burned, are looking for better long-term partnerships with contractors and suppliers. This is good news for engineering and design companies in the more developed nations. Stay alert. Opportunities exist for skilled designers in developed countries to demonstrate their value added. Suggestions for remaining competitive: keep resources, skills and training certifications updated, invest in innovation and R&D.

If you have a recent experience about your company's design work being outsourced (or not) feel free to post it HERE.

Four Reasons Economic Downturn is Good Timing For R&D

Global economies run in cycles. What goes up must come down. Likewise, we hope that what goes down must come back up. When we understand economic cycles we see, however, why a downturn is a good time to invest in R&D. Obviously cuts are in order during a downturn, this article explains four reasons why R&D shouldn't be one of them.

1) R&D is a better bargain. Economic downturn is a buyers market. Corporate lay-offs and budget cut-backs can yield a multitude of redundant professionals for cherry picking. The well known Bersin & Associates encourages "Rather than 'freezing all hiring', you should use this as an opportunity to upgrade your own organization. " Supply vendors, also under increased financial pressure, may lower prices for you to maintain sales. For those with cash, downturn is time to buy up, not sell out.

2) R&D keeps businesses internationally competitive. Most companies would agree with this. Some examples are Taiwan, North Ireland, and the USA. R&D also finds smarter and cheaper ways of doing things internally, thus directly saving companies' capital. Some governments award subsidies to product innovation, especially to innovation that will be exported.

3) R&D investment is easier to focus. Poor R&D investment quickly becomes manifest. Durable brands and quality products distinguish themselves from gadgets that consumers start doing without when belts tighten. In times of financial crisis, well focused R&D spending can really make products stand out from the crowd. Develop products and services still appealing to the buyers who do have money, not those who don't.

4) R&D discovers new markets. A recent Business Week article entitled "Innovate Out of the Economic Downturn" called R&D related activity "the single most important condition for transforming the crisis into an opportunity". An example of this is seen in the American Biomedical industry. "The CHI and PricewaterhouseCoopers 2002 report, "Biomedicine: The Next Wave for California's Economy," showcases the importance of medical and biomedical research, development, and manufacturing to California's regional economies and ultimately, to the nation's health." - Business Wire

The afore-quoted Bersin & Associates went on to state, "Downturns should be expected, so plan for them. Do not be surprised or panic." Financial downturn can be a reckoning to see who really has planned properly - and who hasn't. Those who have planned for rainy days should reap these rewards of innovation at lower costs than during periods of economic growth, resulting in more competitive products and services to offer for the economic cycle's next financial upturn.