China is the world’s global manufacturing capital. Notable businesses like Apple, HP, Microsoft, and more will continue or have at some point looked overseas to source, design, or assemble crucial components in their flagship devices.
There are many advantages to sourcing parts overseas. The Asia-Pacific region boasts of scale, expansive supply base, and advancement in technology. The high level of industrial competitiveness also helps ensure that businesses get the best deals that are balanced amidst leadtimes, quality, and pricing. There is also the higher value that currencies like the dollar, euro, or pound may carry overseas.
On the downside, freight, tariffs, time zone differences, communication, and IP theft risks exist when doing business abroad. How then can you reap the benefits of overseas manufacturing and mitigate accompanying risks? Today, we discuss key strategies to help you and your business when dealing with an overseas supplier.
PROS AND CONS AT A GLANCE
| Pros | Challenges |
| Production scale | Communication |
| Indirect labor cost | IP theft risks |
| Vast supply base | Time zone and Communication gap |
| Advanced technology |
MITIGATING THE RISKS
INTERNATIONAL LOGISTICS
A lot can happen between the departure of your shipment and arrival at your home country—the risk of losing your products before arrival is always existent. From cargo losses on the sea to custom impounds, you must conclude on where responsibility for your shipment is transferred before concluding on a supplier. For instance:
• Who is responsible for shipping the products to the docks?
• At what point does the shipment become your liability?
• Will it be delivered to your doorstep?
• Are the logistics costs inclusive of cost and freight or cost insurance and freight?
• Who covers the insurance costs?
As highlighted above, one way to mitigate these risks is the use of insurance covers to secure your shipment. Another solution is to have a security certification from the appropriate authorities to reduce bottlenecks at clearing and cargo inspections.
QUALITY CONTROL
Relying solely on your supplier can be a recipe for disaster. This is even more true when it is a first time business with the supplier. You can mitigate quality control risks by training your suppliers to comply with your quality standards. Another route to explore is working with suppliers who already have relevant ASO and ISO certifications. The best method recommended at Firstpart is to conduct quality inspections before the product is packaged and shipped outside the supplier’s country. You can do this by requesting that samples are shipped in one or two units to your location for detailed inspection before mass production commences. Some companies may also choose to send a representative to evaluate the product quality before mass production or shipping.
IP THEFT RISK
Intellectual property and patenting is a crucial aspect of business protection. When working with an overseas supplier, ensure that you vet their credibility by asking these 4 major questions:
• Are you ISO 27001 and SOC2 certified?
• How is your data managed and shared?
• Do you anonymize customer data?
• How are your final products or prototypes stored?
• Do you outsource any parts of my product production? If yes, how trustworthy are your contracted suppliers?
• Is there a non-disclosure agreement (NDA) in place?
The answers to these questions, coupled with a rigorous review of NDAs and contractual liabilities in instances of leakages, can help you protect your business and product ideas. At Firstpart, we recommend paying visits to supplier sites from time to time to ensure that your parts are being produced at specified facilities.
CULTURAL AND COMMUNICATION DIFFERENCES
Language and cultural differences can also play a significant role in the success or failure of your product. Communication and clarity are imperative to ensuring that your supplier designs and produces your parts to specifications. Where you do not speak the same language as your supplier, misunderstandings become highly likely. To mitigate this risk, ensure that your team has someone who speaks the supplier’s language, and the supplier has someone who speaks English. Having these parties on either side of the business means that all ambiguity is eliminated. Another strategy is to keep a transcript of meetings and communications and professionally translate it for both parties’ perusal.
In countries like China with rich cultural heritage, you will need to factor the myriad of holidays into your production schedule and see how these will affect your project timelines. We shall discuss this in the next heading.
LEADTIMES
Delivering quality products on schedule is the dream of every customer. When an order or shipment arrives later than expected, the consequential costs can be monumental. One way to reduce the risk of delay and extended leadtimes is to understand the critical factors that allow for smooth operation.
Anticipate and discuss potential delays around raw material sourcing, holidays, factory downtimes (if any), packaging material, and labor constraints. When working with urgent production, consider alternatives to fast track production such as overtime work, alternative suppliers, or increased labor strength.
TIME DIFFERENCES
Time zone differences can spell disaster when interfacing with an overseas supplier. Your work hours may fall within the close of business for them, meaning they’re asleep when you’re awake and vice versa. This can cause you to lose hours and days of leadtimes waiting for hours and effecting agreed solutions.
One way to mitigate time zone challenges is to have an in-country representative or an employee from your organization, specifically to the project. Your in-country representative can facilitate all communications on your behalf. At the same time, you may afford your employees flexible work hours to allow them to meet up with the supplier time zone demands.
REGULATORY
Operating in foreign terrains may mean some aspects of your business becomes regulated by the supplier’s local authorities. Before embarking on any business overseas, research the laws, regulations, and unwritten business practices in the area or industry. Also, query or investigate the supplier’s legal record with regulatory agencies and evaluate whether they comply with their locales’ code of conduct and good manufacturing practices.
Failure of your supplier to comply with environmental, social, legal, and safety regulations can affect your brand and public perception. Audit of your suppliers is a crucial strategy to mitigating regulatory risks.
Dual Sourcing
Dual sourcing refers to the use of two suppliers for procurement or production processes. This is very important when working with tight timelines and overseas suppliers. The key to dual sourcing involves diversifying both suppliers’ geographic, political, cost, and capacity factors.
Dual sourcing helps prevent total failure to meet commitments on projects, fosters competitiveness, and prevents costly market failures.
