Offshore Outsourcing to China: A Case Study
Outsourcing in China works for Printronix, a company that for over 30 years has designed and manufactured a wide range of Line Matrix Printers, Ultra High Frequency Radio-Frequency Identification (UHF-RFID) Printers, Thermal Code Label Printers of bars and laser of continuous forms. printers As the market leader in the printing business, outsourcing gives Printronix a competitive advantage in cost, but also creates challenges in communication, deadlines and forecasting.
The company has been outsourcing since its inception, but hadn’t done much until 10 years ago. The increase in outsourcing is a direct result of market circumstances, as your competitors are also outsourcing. They chose China as the primary destination for their supplier base because cheap labor and supplies are readily available and because many of their suppliers have relocated there. New suppliers are chosen through quality supplier surveys and pre-production pilot batches. ISO certification is preferred, but not required. China has long been a fast-growing market with “centers of excellence” offering abundant resources and skilled workers right on the spot. Ultimately, outsourcing to China provides an opportunity to break into one of the largest markets in the world (IE China itself).
The main substitutes for Printronix products are laser printers and inkjet printers. The company views proprietary ribbons for its impact printers as a core competency that gives the company its competitive advantage. Ribbon quality is critical for Printronix to compete head-on with laser printers.
At first they had outsourced the manufacturing of tapes to China. However, design and quality issues and the long supply chain for these important products made Printronix decide to move it to Mexico to be closer to the Irvine headquarters as well as the Americas market. Quality issues, both in product design and process quality, could have more focus in Mexico and are already resolved. Tape products can be manufactured directly to customer orders and shipped in one to two days instead of weeks.
Financially, the company faces difficult challenges due to its heavy investment in RFID technologies. Printronix operates in many different countries and will hedge against currency fluctuations where appropriate. Also, most of their sourcing is in China and since China’s currency is pegged to the US dollar, they are not threatened by currency fluctuations between the US dollar and the Chinese yuan.
Printronix faces a number of outsourcing challenges, including lead times, forecasting, and communication. Shipments from China and other Asian countries arrive in Singapore for printer assembly. Shipments from Singapore to Irvine and Holland are via cargo ships which usually take 3-5 weeks to arrive. If there is a problem with the product when the container is opened, additional time is required to repair the items on site. Rarely would the company return the container and repair the item in Singapore or China due to the time and expense involved. If the product is severely defective, the shipment is discarded and a new shipment must be sent by air at a higher transportation cost.
Demand forecasting is crucial due to long lead times, and a change in demand could result in the company having too much or too little inventory. Too much inventory means high storage costs, and too little inventory results in longer wait times and decreased customer satisfaction.
Finally, a problem when outsourcing is communication for a number of reasons, including language barriers, time zone differences, and cultural differences. Communication between headquarters and satellite locations around the world is via teleconferencing and video conferencing. Even this is difficult to plan considering the large time difference of 15-16 hours. The language barrier is addressed by managing Asian vendors by managing Singaporeans who speak the language and understand the cultures. Cultural differences such as holidays, beliefs, and traditions also affect operations.
As noted above, outsourcing is an essential component of Printronix’s business model and directly affects its bottom line. The key question they face is how far to outsource and where is the stopping point. By managing cost considerations alongside quality issues, Printronix has demonstrated its ability to outsource effectively given today’s global conditions. With China’s economy growing and developing, the company may need to evaluate future outsourcing targets, such as Vietnam, Thailand, Eastern Europe, and Africa, to maintain its cost structure.
Dr Joe Greco