The Evolution of Quality in Manufacturing: Outsourcing, Off-Shoring, & Re-Shoring

March 19, 2013

By Sparta Editorial


The Evolution of Quality Management Systems

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’ plan was 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 the outsourcing, cost was king.  As companies found ways to expand their breath and depth of the market, they concentrated on gaining market share, usually as low cost entrant.  Quality took a backseat. 

Take a look at early foreign entrants in the automobile sector (Hyundai Excel, Lada, Yugo, Renault, etc.). Even though they gained market share, reliability and quality suffered. This eventually led some manufacturers to cease operations, while others changed strategy completely, giving quality their highest priority.  Again, Hyundai is a fine example, and so are Ford, GM, Nissan, Peugeot, etc.  Another industry example is consumer electronics. When you consider the personal computer, laptop, TV or cell phone market, you see similar trends. Samsung changed its entire corporate strategy from being a cost leader to providing quality and reliable products.

Manufacturing Moves Offshore Creating New Quality Challenges

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 1 level to manage their supply chains. They do not have visibility into the quality processes, traceability of components and reliability of designs. Outsourcing critical areas of business allows the suppliers to gain technical know-how, hence, they eventually become competitors. This was the case with AsusTek which started as an outsource manufacturer for major computer companies, eventually gaining enough capabilities from design, manufacturing, logistics and marketing to become a computer company, now known under the brand as Asus.

Outsourcing was not just limited to the electronics segment. Almost all manufacturing has been outsourced and offshored; look at textiles, apparel, furniture, automotive parts, and even aerospace. Case in point here is 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. However, supply chain failure, poor estimates of technological capabilities and loss of control of the suppliers, led to almost four years of delays, cost over-runs and poor quality products.

Eventually, outsourcing led to offshoring.  Again, this was caused by competitive demands including low cost for labor using developing worlds with ample resources, low cost capital and government policies to build specialist industries. This was the case in Taiwan, and now Taiwan leads the global market for semiconductor foundries. Or China, which leads the electronics industry for outsourced manufacturing. Offshoring is even more challenging due to different regulatory jurisdictions, labor laws, control of the supply chain and communications.

Manufacturing Sites Are Coming Back

Now in 2013, the new trend is reshoring. More companies are moving their services and manufacturing operations back to the United States. Caterpillar moved operations from China to Mexico and the US.  Dell moved its customer support from India to the US.  K’Nex[1] Brands moved manufacturing from outsourcing in China to the US. K’Nex said, ‘by moving production closer to the US retailers, K’Nex can react faster to fickle shifts in toy demands and deliver what is needed faster’. It also has greater control over quality and materials, which is crucial to product safety. Reshoring provides tax advantages but also has its own set of difficulties. What are these? Difficulties of sourcing certain parts due to the long term effects of moving production off-shore. Boeing also moved some assembly production back in-house.

How is Quality Affected?

The common factor of all these trends is 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 is touted as a competitive advantage – look at the number of TV commercials with the J.D. Power & Associates quality award, or Malcolm Baldridge Quality award. Businesses have discovered the hard way that the reliability and quality of their core product or service remains non-negotiable, even in this most imaginative and image-saturated of marketing eras. Lawrence Green wrote recently on UK Telegraph[2] that ‘product, after all, one of the famous “Four Ps” of marketing, along with price, place and promotion’.

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 the 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. Some critical processes are supplier quality management, audit management, CAPA, failure analysis, non-conformance/deviation, and customer complaints.  Lastly, technology – to effectively and efficiently manage for quality, you need to have the tools that can provide repeatable and predictable results, and to provide information in timely manner to the appropriate personnel to make effective decisions.

[1] Source: Wall Street Journal, ‘A Toy Maker Comes Home to USA’, 3/11/2013 [2] Source: Yahoo Finance, ‘Think Tank: Brand is nothing without Quality’, 3/9/2013

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