manhole
Manufacturing and Process Management

Quality: Blueprint to Globalization and Market Competition

The manufacturing business model of the 20th century was largely structured by what a company owns, manages and how it directly controls its assets. In the 50’s and 60’s, it was all about diversification and economies of scale. In the 70’s and 80’s, it was about global competition which resulted in bloated management structures.

As part of the growth and diversification efforts, manufacturers worked to identify core competencies and outsource the rest. True outsourcing started in the 90’s as a business strategy, with the focus on outsourcing commodity or ancillary services. This evolved to services and manufacturing of the core business activities. What was the true motivation? Globalization of the market place and lower barriers to entry allowed for foreign competition which led to cost competition.

In the early stages of outsourcing, cost was king.  As companies found ways to expand their breadth and depth in their given market, they concentrated on gaining market share, usually as a low cost entrant. Quality took a backseat, e.g., Hyundai

Outsourcing requires a lot of planning, management and execution. When manufacturers outsource, they do not necessarily have appropriate controls in place for their lower tier suppliers. Typically, outsourced companies rely on the suppliers at the tier one level to manage their supply chains. They do not have visibility into the quality processes, traceability of components and reliability of designs.

Let’s take a look at some challenges two major companies faced when manufacturing overseas:

Apple

When Apple’s iPhone 5 hit the market in September 2012 with much fanfair and huge pent up demand from consumers, it was faced with several quality and supply issues such as: a shortage of the new ‘incell’ screen technology, scratchable anodized aluminum casing and a supply shortage.  What precipitated these issues was simply a manufacturing difficulty of incell screens at three suppliers due to greater quality control demands placed on those suppliers and Foxconn EMS. This initial issue lead to more problems, leading to Apple rejecting 8M iPhones in April 2013, costing Foxconn $1.6B.

These problems hit Apple in a hard way. Some major implications included reduction in margins from 40% down to 33% with even lower margins in the coming quarters. 

As Apple lost 26% of market value in 2013, their closest rival, Samsung, gained 13% during the same period. In addition, the stock price valuation showed the pessimism of the investors with a PE of only 9, which is well below the industry average of 15.

This example explains how managing suppliers, controlling quality and bringing products to market at the level of excellence consumers expect, can make or break margins and ultimately the shareholder value.

Shareholder value isn’t the only challenge with Apple’s overseas partners. Apple has reports of ongoing supply chain issues with underage workers. Though Apple itself does not have underage workers, its primary manufacturing partner was found to be in violation. Despite this not being Apple’s responsibility, the effects risk brand and reputation erosion due to the issues at its supplier.

Boeing

As part of the cost management structure to gain financial advantage and spread the risk across the supply chain, Boeing outsourced 60% of the B787 Dreamliner to partners. This compares to < 30% for the B777 program. However, supply chain failure, poor estimates of technological capabilities of the supplier/partners and loss of control of the suppliers, led to almost four years of delays, cost over-runs and poor quality product. Boeing ended up buying out some critical partnerships, manufacturing facilities and collaborating closer to bring order to the chaos. These are complex products requiring capable suppliers, global processes and technologies. Consider this for complexity - another new Boeing product, B747-8 has 6 million parts, 550 suppliers from 30 countries!

Now in 2013, the new trend is reshoring—bringing back jobs that were once outsourced or offshored. More companies are moving their services and manufacturing operations back to the United States to gain back the visibility and transparency lost to overseas manufacturing.

However, the U.S. is not equipped to produce large volume, rapidly changing products such as consumer electronics efficiently. The U.S. does not have the manufacturing capabilities for these types of products or the adequate levels of man power. Asia (specifically China) has the capability to quickly build up the needed manpower and production infrastructure in short notice. In the case of consumer electronics, this type of manufacturing requires a lot of people because they are not that automated—it requires a lot of human hands.

Here are a few examples of companies that brought production back to the U.S.:

Google Glass is intended to be a very low quantity production to grab and own the market, so it might be Google’s reason to manufacture in the U.S. Secondly, it is not initially going to be a mass market product, so a soft launch in the U.S. would be sufficient with U.S. production.

Dell moved its customer support from India to the U.S. This was mainly due to the cultural mismatch and customers not getting the issues resolved adequately. Once the cost structure starts to creep up due to excessing demand and limited supply in countries like India, there reaches a point that the cost of performing the tasks in the U.S. becomes more attractive. Add this to the state incentives, Dell decided to move the corporate customer support function back to the U.S. K’Nex brands moved manufacturing from outsourcing in China to the U.S. K’Nex said, ‘by moving production closer to the U.S. retailers, K’Nex can react faster to fickle shifts in toy demands and deliver what is needed faster.’ The Company now has greater control over quality and materials, which is crucial to product safety. As discussed earlier, Boeing bought out the manufacturing partnerships, capital equipment and personnel and brought some critical B787 assembly production back in-house. This was part of control, quality and risk mitigation after eight lengthy delay events.

The common factor: quality

When you have lack of control or visibility of your suppliers, partners or the supply chain, you will end up with inferior products while suffering from reliability and safety issues. There needs to be consistent processes, a harmonized approach to safety, and risk-based management of issues, suppliers, standards and collaboration.  Quality should be touted as a competitive advantage.

So what have we learned from all these shifts? Quality is non-negotiable no matter what the product is, what its value is or how it’s used by businesses or consumers. Quality is a process that is continuous, built from the ground up and transcends the value chain. To effectively manage quality in the current global marketplace, global supply chain and complex product life cycle, you need to have people, process and technology. People – you need to have a culture that is top down, with the employees trained on the quality paradigm or blueprint. This should include your partners, suppliers and outside manufacturers. Process – you need to have defined processes to manage every step during a product’s life cycle.  These processes are not one-size-fits-all, and they need to be flexible as part of the continuous improvement as per ISO and provide mechanisms to comply under regulatory and quality requirements.

Supplier management, in your backyard or overseas, has a direct impact on a company’s margin, bottom line and ultimately shareholder value. Today’s global supply chains are wide, and broad. Managing suppliers, incoming material quality, and controlling the visibility to process tasks are the staples to any blueprint for globalization and market competition.

 

PREVIOUS ARTICLE

« Overcoming the Enterprise Networking Challenge Through Smart Investments

NEXT ARTICLE

News Roundup: Fat Pets Vs Tech, iWant Smartwatches and Bitcoin ATMs »

Recommended for You

Future-proofing the Middle East

Keri Allan looks at the latest trends and technologies

FinancialForce profits from PSA investment

Martin Veitch's inside track on today’s tech trends

Amazon Cloud looms over China: Bezos enters Alibaba home ground

Lewis Page gets down to business across global tech

Poll

Do you think your smartphone is making you a workaholic?