Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?
Advice from the CEOs:
- The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
- The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
- If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
- In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
- Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
- If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
- The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
- Are you concerned that your current supplier might cut you off?
- The CEO is not sure, but has identified this as a risk.
- If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.