The Challenges of Overseas Manufacturing, Part III of III

This is the 3rd of a three part cross-post between Product Beautiful and Product Global about the challenges of using overseas manufacturing and design. To catch up, read Part I and Part II.

Truth or ConsequencesIn our first two discussions about using overseas manufacturing and design resource, Aston Udall of Product Global and I talked about the common problems you will face and tactics to overcome those issues. This final section addresses the strategic choices and hard truths you will face when making the decision to go overseas.

Part III – Truth and Consequences

Many people have bought into the myth that you can make the same product for less money overseas. Ask a random executive and they will rattle off the usual list of reasons: lower overhead, less salaries, less benefits, more competition, less regulation, et cetera. These are all true, but the truth cuts both ways.

Depending on the size of your company, your ability to attract and retain manufacturers will be very different. I speak from the experience of startup that if your volumes are not high, you will be dealing with “Mom and Pop” shops. In some cases you may be their #1 customer – or their only customer! They frequently go in and out of business, don’t have the cash flow to buy long lead time parts or keep inventory in stock, and often require prepayment up front to get started. Sometimes they scale up their operation just for you; I recently dealt with a design firm that grew by 10 engineers (50% growth to them) just for our project.

Lower salaries are an effect of the market in Taiwan, Korea, and Singapore, and you can benefit. However, it also means that these employees are very apt to jump at a better offer. Often they’ll have no qualms about taking your IP with them.

For example, we were meeting with a design and manufacturing firm in Asia last year who had just completed a 20+ month design project for one of our competitors. They freely gave us the information that our competitor spent $500,000 in NRE, and were completely willing to “design” a product for us based on our competitors design. I have zero doubt that the design effort would have been badge engineering. We turned them down.

Regulation is also a problem. If you plan on selling your products into the U.S. or Europe, you must meet strict guidelines, depending on the type of product. For consumer electronics, we need to have CE, UL, and C-Tick stamps, and RoHS/WEEE. You have to be very specific with your manufacturer about these; many of the subcomponents they use may include lead (although it is being rapidly phased out), or not pass the regulatory compliance bodies. Use caution.

Strategic Choices

The ThinkerAs a Product Manager, your job is to identify and outline problems for your business to solve with products or services. At some point in your process, you will need to recommend if you build the product yourself, buy it and repackage or add value to it, or partner. If you are considering building or buying, working overseas is a possibility. Globalization means that the question your executive team will ask is no longer “did you consider going overseas to do this?,” it is now “why didn’t you…” Answer the following questions to define your strategy:

  • Which is more important: Time to Market or Cost?
  • If cost, which is more important: Unit cost or NRE?
  • How high are your volumes?

Going overseas can be successful if cost is more important to you than time, and unit cost is more important to you than NRE. First, because of all the various communications and other challenges outlined in parts I and II, your project will drag down. 20-30% longer is a good starting point. You can “buy time” more efficiently overseas because of the relative cheap cost of labor, but there is a tipping point where adding additional labor gives you a marginal gain. That point will be very different on each project. Second, your NRE to do a project overseas may also be higher than locally, because if you are following our advice, you are doing much of your intial work locally but doing more iterations and prototypes. If you can get a rapid prototype done locally, overseas shops are usually very good at copying your work exactly. Ashton reinforces this point:

The education and cultural foundations of some cultures make them extraordinarily good at copying, memorization, and rote learning. … Generally speaking, they are experts in their fields and are familiar with the machines, materials, and processes that are available overseas. A product designed domestically may not be designed well for manufacturing overseas, thus their points are worth considering and sometimes changes will improve the product. Nevertheless, the quickest path to accurate manufacturing is to present the overseas vendor with a finalized design package, with the opportunity for slight modifications should they be helpful.

Finally, at a strategic level, don’t let cost be your only driver. Pressing and pressing to find the cheapest manufacturer really will net you the cheapest result. Find someone who has done your kind of work before and forge a mutually beneficial relationship on both sides. As a Product Manager, as you work more closely with the overseas team, you can start to educate them on your market and structured requirements, and slowly bring them into your product requirements process.

I hope you found this series useful; and I would also like to thank Ashton at Product Global for lending his expertise to the Product Management community. We welcome your comments!

Product Beautiful

Product Global

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2 Comments

  • Reply Product Beautiful » Blog Archive » The Challenges of Overseas Manufacturing, Part II of III August 21, 2007 at 10:15 pm

    […] The Challenges of Overseas Manufacturing, Part III […]

  • Reply Kathleen September 25, 2007 at 10:26 am

    I work in an industry increasingly characterized by offshore manufacturing; it’s not for the faint of heart. In the apparel industry, the barriers to entry are exceedingly low, it’s common that entrepreneurs usually lack the rigor and acumen in managing standards of the manufacturing process -much less introducing layers of complexity at arms length. For my part, I consider my role to be that of educator of the former, leaving the latter to people like you.

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