Careful consideration must be given when choosing and working with an outsource manufacturing partner. Although each situation is unique, there are common characteristics that make for a reliable outsource partner.
One company that carefully analyzed the determining factors of a successful outsource partnership is VIASYS Healthcare, a global leader in health care technology. VIASYS manufacturers, markets, and services medical devices, instruments, and medical/surgical products for use in respiratory care, neurocare, medical systems, and orthopedics. VIASYS is known for its solid history of innovation, superior product performance, and a commitment to customer service, yet they achieved this success while outsourcing more than 75 % of the assembly of each of its product lines. To complicate matters even more, VIASYS currently outsources to Canada, Mexico, the United Kingdom, Germany, Italy, China, and Thailand. Their two biggest outsourcing facilities are in China and Guadalajara, Mexico.
Managing this many outsource relationships is a huge task and required them to create a criterion matrix to choose and measure their different outsource partners. After careful consideration, they focused on four major criterion: Quality (the most important), Cost Savings, Work Relationships, and Geography (the least important). Specifically, the criterion is defined as follows:
Quality: Within each outsourcing facility quality and control tests are done for each product by the team of Operations and a team of Supply and Quality engineers. If the products do not pass the control tests, the product is discharged. Product testing and inspection is very critical for VIASYS since they provide health care products that consumers rely on for life support.
Cost Savings: VIASYS studies the total cost of ownership when making a decision whether to outsource a product or not. For example, one high-volume consumable cost $5 to produce in California and in China it only costs $.50. In this case a 90% percent savings justifies the significant investment and risk of sourcing from a geographically remote supplier.
Work Relationship: VIASYS chooses to outsource with reputable companies. In addition, they maintain continuous communication with the outsourcing facilities through weekly program management and conference calls in addition to one on one telephone conversations, all of which are facilitated after hours to accommodate the different time zones.
Geography: VIASYS looks at the current economy of the country as well as the politics in order to give them an idea of the current status of the local health of the geography. In addition, they look at the local environment where prospective outsource supplier’s facilities are located to confirm not only that it is in good condition but also to be assured the location is safe.
Additionally, VIASYS chooses their facilities based on how well their manufacturing practices are, such as higher quality, faster lead time; whether or not they comply with Good Manufacturing Practices (GMP) and the ISO standards, company rating, profit capability, and last but not least, the employee-turnover rate. Also, VIASYS supply chain group outsources for a minimum of two years within each country for the longevity of each product. They feel that two years gives them a good idea of the type of service and quality they receive.
Still risk exists for VIASYS and they must mitigate this risk with vigilant measurement and management involvement. There are risks involved in all the industries, be it political, social, or economical. VIASYS follows various practices to mitigate their risks from unforeseeable factors. They carry safety stock for most of their products. For example, they store three-month inventory instead of one-month supply. VIASYS also carefully segments their market, which protects them by not assigning too much control to a supplier. VIASYS maintains frequent communication with their suppliers, and employs various methods to audit the facilities weekly to ensure appropriate internal control.
Additionally, VIASYS has a very open mind and is well aware of their social responsibilities. They work with the outsourcing facility to ensure that the workers are working under good working conditions and there is no child labor involved. VIASYS oversees the whole process; however, local customs vary from region to region.
This example of successful outsourcing is not necessarily unique but it is definitely a Best Practice. Outsourcing is a trend that continuously evolves and is driven by the relentless push for low cost, quality, and improved profitability. To this end choosing and managing your outsource partner is a critical element of a successful partnership.
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Dr. Joe Greco is Director for the Center for the Study of Emerging Markets (CSEM) located in Fullerton, California. As part of the College of Business and Economics at California State University, Fullerton, CSEM was established to promote the flow of global information and technology between the academic and business communities. In particular, CSEM studies offshore outsourcing and it economic and cultural impact on US based emerging markets. You may contact Dr. Joe Greco at 714-278-2375 or cs
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