The relationship was falling apart. Even though both parties had been careful about choosing a partner and they had both invested a great deal in making it work, nobody was happy. It was no secret he had started meeting other partners. After one final ultimatum wasn't met, they broke up in a brief, terse phone call, and he left for someone else. The next six months were spent sorting out what stuff belonged to whom, and how much he still owed on the bills.
No, I haven't started writing an advice column for couples; that is the story of a failed manufacturing outsourcing relationship -- one that I witnessed painfully up close because I was one of the parties involved. The relationship between customer and service provider in outsourcing is similar in many ways to a committed relationship between two people. When outsourcing relationships fail, it is not unlike a divorce: complicated, emotional, time consuming and expensive.
Fortunately, major disasters in manufacturing outsourcing are uncommon if you do a good job of entering the relationship properly, managing the relationship carefully, and -- if there is a time when you have to part -- exiting in a fair and professional way. Here are some of the issues that can lead to failure in an outsourcing relationship.
In my example above, the source of the failure was a customer who expected lower start up costs, and a service provider who expected simpler product configurations. Both felt short-changed when the supplier recognized the complexity of the work, and the customer saw the bill that came with it. There are always two sides to the unmet expectations problem: one is the level of performance, which may fall below par; and the other is management of the original expectations, which may be unrealistically high. The business development process too often involves overselling that ultimately leaves everyone disappointed. Both parties' goals and limits for the business should be shared so there are no unreasonable expectations left unaddressed.
Another common problem is a simple lack of understanding of the business terms of the deal. I have heard many customers say, "Why can't they do XYZ as part of the price I already pay?" and service providers say, "I assumed you knew it would cost extra for that." Hammer out a detailed service level agreement early on -- usually these are more specific and operational than the legal contract. Don't assume that the person on the other side of the table understands your business or what is important to you unless you have laid it out clearly.
Lack of Trust
The customer has to believe that their products will have good quality and ship on time, and the outsourced service provider has to believe that they will get paid and be treated fairly in negotiations and evaluations. When trust erodes, it leads to inefficiencies such as increased oversight, inauthentic communication, and actions done solely to cover your own backside. In the extreme, lack of trust leads to an "I'm gonna stick it to you before you have a chance to stick it to me" attitude.
As in all relationships, lack of trust results from one party being caught withholding the truth - if not lying outright. Unfortunately, when negotiating price, the customer very much wants to know true underlying cost data, and the service provider very much wants to withhold it. Therefore, this business is prone to create trust issues by design. Riverwood recently hosted a seminar with a panel of EMS providers and customers. The longest and loudest debate was about trust in pricing models.
The solution is to be honest about those areas where you can't be honest. Too many pricing models are presented as if they are "open book;" when in fact, the supplier is not quoting true costs. It is far better for the service provider to explain the real business and pricing model before the customer has his trust shaken.
As any marriage counselor will tell you, good communication is one of the keys to success. Poor communication, conversely, leads to the issues of unmet expectations and lack of trust. In outsourced manufacturing relationships, it is difficult to over-communicate, but easy to fail to set up the structures and practices of good communication. Establish a relationship matrix and escalation paths so everyone knows who should be talking. Define standing meetings, such as a weekly project status, a monthly forecast meeting and a quarterly business review. Establish and maintain a relationship at the top management level. Plan to meet frequently face to face, and meet at least occasionally in more social environments to talk without the pressure of the work environment. Be aware of cultural differences, which are common in global supply chains. Avoid assigning blame. Ask for feedback and be appreciative of being told the truth, even when it's bad news.
Replicating the In-House Model
Companies that have a history of manufacturing their own products can have a particularly difficult time with outsourced manufacturing relationships. Often such companies have an expectation that the outsourced service provider will operate and interact with the rest of the company in the same way as the in-house factory - but cheaper. It is common to have many of the same former in-house manufacturing managers take on new roles managing the outsourced manufacturer. The result is frequently a duplication of resources, micro-management, and unrealistic expectations as the customer tries to recreate "the way we've always done it."
I tell clients that it is usually easier and cheaper to work out their problems with their current service provider than to find, quote, qualify and transfer to a new supplier. The grass is not always greener, as they say. Indeed, this is the last point on my list because it is the least likely to be the true cause of a broken relationship. However, service providers and customers can grow apart. In fact, a significant percentage of break-ups are initiated by an unhappy supplier rather than an unhappy customer.
The most common mismatches are in the size of the business (one party has gotten too big or small for the other); location of the business (one party wants to move to a different region and the other doesn't); or site focus (the factory's business is dominated by activities different from the customer's). In these cases, it is best to address the problem early and openly, and move on as rapidly as possible while giving the other party as much notice as you reasonably can, regardless of what rights you may have in the contract. Staying on good terms during the disengagement can be tricky, but it makes the separation far easier and cheaper.
I hope your outsourcing relationships are successful and you don't have to experience your own painful breakup as I did. This article borrows heavily from earlier Riverwood Solutions articles, so I offer much credit to my colleagues for their help. I welcome your feedback.
Jeff Wallingford is vice president, Supply Chain Strategy for Riverwood Solutions.