On The Rise: Building Quality into Outsourcing

U.S. quality standards and offshore contract manufacturing is proving a winning combination for East West Manufacturing.

When East West Manufacturing CEO Scott Ellyson first started traveling to China in the early 1990s, freeways were just starting to be built and most of the buildings in Shenzhen were still four to five stories tall. Most nights, he slept in a factory office because it was often cleaner than the available hotels. "I would take food bars. Every time I went there, I would lose 10 pounds because I couldn't stand the food and half the time it would make me sick," he recalls.

Now, 100 or more trips later to Asia, particularly China, Ellyson, like many other business visitors, cites the "incredible amount of change" in China's major cities. "Shenzhen's skyline is twice that of New York's. I stay in five-star hotels for $90 a night and they are fantastic. Instead of losing 10 pounds, I might gain 10 pounds," he says.

All that travel has helped Ellyson build East West Manufacturing, a thriving contract manufacturing firm founded in 2001 that now has 500 employees and has seen its sales grow 64% so far this year. East West manufactures approximately 4,000 products in more than 80 supplier factories in China. The company specializes in manufacturing plastic, metal, rubber and electro-mechanical products for North American companies.

Ellyson got his start in manufacturing in south Florida building disposable surgical equipment. Quality was an overriding concern in that field and he soon realized that that quality was a function of the processes and controls employed, not where the product was made. He also decided that "no matter how much automation we try to put in place, we are never going to get to the cost structure China has available to it."

At the time, China was making low-quality products such as toys and stuffed animals. "My thought was, what if we took the quality controls I had learned in medical manufacturing and adopted them in Chinese facilities so that we could produce at the quality levels that our customers expected?"

While Chinese factories had a reputation at the time for turning out poorly made products, Ellyson said much of the problem was that customers failed to adequately communicate what their quality expectations were. Ellyson developed a process where his team set up the manufacturing lines, taught factory managers about quality and made sure they understood the quality requirements for product orders before they were produced and shipped.

"One of the first products we manufactured in China was a cruise control system that went into Toyota Corollas and Camrys. That gave us a huge leg up in that we could say we know about safety critical parts, we can make cruise controls in China and guarantee 100% good quality parts. Even today, that is our message: we know how to get things done over there and done right," he says.

East West project engineers are assigned to specific projects. "Everything we manufacture has a quality procedure associated with it that is developed by the project engineer in conjunction with the customer to define all the quality criteria, usually involving three areas -- dimensional, functional and cosmetic," Ellyson explains. "That is the living document for every product we make. Our inspectors use that document to inspect every shipment before it is allowed to ship to the United States."

Ellyson says constant vigilance is needed to ensure that products meet their quality criteria. He says it is critical to understand how the products will be used and do everything possible to independently verify their quality. For example, he said material certifications on products in China aren't always accurate. "A lot of times, they hand you the part, you ask for the material [certification], and it meets the requirement. But if you do the metallurgy test, you may find that it is something completely different. You have to independently verify everything," he cautions.

Chinese factory managers have been eager to absorb manufacturing know-how from Ellyson and his team. Asked what U.S. manufacturers can learn from the Chinese, Ellyson reflected for a moment and then replied, "You hear a lot of talk about how the cost of labor is much less in China, but what you don't hear is that the work ethic is probably double what you would see here. Go to a McDonalds in China, you get served twice as fast. They board a plane twice as fast as we do in the U.S. Once you get them lined up with an objective and how you'll get there, whether on an assembly line or moving a mountain, there is nowhere like it where you can make things happen that fast."

Branching Out

At first, Ellyson dealt with Chinese factories owned by Taiwanese or Hong Kong-owned companies. But after several years, he realized that he could obtain a 10% cost savings by dealing with wholly owned Chinese entities. Since then, East West Manufacturing has also entered into some joint ventures in China and has built its own factory in Vietnam.

In fact, while the vast majority of East West's business remains in China, the company has deliberately begun a process to diversify its manufacturing operations outside that country. The primary reason has been rising costs in China. Ellyson said the increased valuation of the yuan, higher VAT-related taxes, rising labor costs and new labor laws, and higher freight costs have combined to make China less attractive than in the past.

Ellyson discussed the increase in labor costs. "In the early days, we were paying folks $700 to $800 a year in salary. Today in our motor factory, we are paying folks $4,000 a year," he says. "On top of that, labor laws have become a lot stricter so you can't hire and fire at will. If you have someone on your staff for more than three months and you want to let them go, you're going to pay them a year's worth of salary."

Ellyson is quick to note that the infrastructure in China is unsurpassed and a huge supplier base makes it much simpler and cheaper to obtain materials and components for complicated products. For example, he manufactures a condensate pump for the air conditioning market in Vietnam. One of the components is a UL-approved circuit board. In southeast China, there are probably 250 suppliers for that board, but he could find only one supplier in Vietnam and their price was too high. As a result, he continues to buy the boards in China and ship them to Vietnam for assembly.

For simpler products, however, countries such as Vietnam are quickly becoming lower-cost alternatives. Ellyson is also exploring expansion to South America, most likely Brazil, and Indonesia. He also recently has had talks about Ethiopia, a country with low labor costs, high literacy and good access to ports. "That is probably a 10- to 20- year plan. If we did something there, it would be very simple," he says.

Ellyson has also made a number of trips to examine manufacturing in India, but so far has shied away from making a commitment there. "In India, we haven't been able to come up with costs that are much more competitive than what we can currently get out of China," he says. "It is usually a wash and when that happens, we say it's not worth it."

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