22 Feb 2023 Are your Technical Departments Re-sourcing Enablers?
The case for near–shoring has gained momentum, considering the events surrounding the pandemic and its’ continuing impact on world trade. Inflation and rising interest rates are driving up the cost of capital. Wage equalization pressures are driving up labor costs in China. Logistics costs are surging as ocean carriers eliminate excess capacity and railroads in the US are struggling with traffic imbalances. This is pushing the Total Cost of Ownership (TCO) of China and Southeast Asian sourced goods to unattractive levels at a time when the ability to pass on cost increases through retailers to the end consumer faces stiff resistance.
Bias Against Near-Shoring
Supply chain executives have been responding to the changing market pressures by identifying near-shoring alternatives in North America with a particular emphasis on Mexico. However, cultural bias, combined with the lack of knowledge of production capabilities south of the border, has caused the transition to these new sources of supply to be delayed or sabotaged by internal resistance from the engineering and quality departments. Years spent developing relationships with Chinese factories, refining quality performance expectations, and in some cases, abdicating new product development initiatives to those suppliers has increased complacency within the technical side of the organization and manifested as a reluctance to change suppliers.
The difference in the new supplier’s flexibility concerning labor availability, line layout, and supplier management is viewed myopically against the current supplier’s operation. The assumption is often made that the Mexican supplier will operate in the same manner as the Asian supplier in their approach to operational, supplier, and project management. A consequence of this protectionist approach by Engineering and Quality is to discount the ability of the Mexican supplier to apply their expertise to design and manage an efficient operation that continually seeks to increase productivity and reduce cost.
Resistance During the Evaluation of Potential Suppliers
Engineering and Quality functions are key partners with Supply Chain and Operations in evaluating the capabilities of potential new suppliers. During this evaluation stage, resistance often appears with the technical functions that demand the potential supplier be able to recreate the current supplier’s operation. Having the potential supplier recreate the same factory footprint and line layout as the established supplier in order to be considered as a viable potential source of supply is an unrealistic expectation. Any pushback from the potential supplier about these onerous requirements and the potential problems arising from space, equipment, and or labor constraints only serves to validate that the supplier is difficult to work with. This sets a precedent for providing negative feedback to the executive stakeholders on the potential danger of changing suppliers.
Technical Bias in Product Evaluations
Engineering is an applied science, and technical departments often have a bias toward evaluating new supplier capabilities within a very narrow spectrum of dimensional and cosmetic parameters that often do not reflect the reality of consumer expectations for the performance of a product. Deviations from cosmetic standards considered acceptable from the current supplier become a reason to disqualify a potential new supplier when those same deviations appear on prototype samples. For example, surface marring on the underside of the base of an assembled unit, designed to stand upright on the base was highlighted as a critical supplier defect by the technical department and reported as such to the executive stakeholders. It did not matter that product performance, or the cosmetic appearance of the operating unit was not affected by the marring. It also did not matter that the same type of marring existed on samples from the current supplier.
Assuming the Supply Chain and Operations departments counter these initial objections and move forward with a compelling cost and service argument, Engineering and Quality will then set stringent dimensional performance standards for the products being targeted to be moved to the new supplier that exceed the current standard delivered by the established supplier. I witnessed this practice on a project for a large manufacturing company looking to diversify its supplier base. Engineering and Quality had approved part deviations in place for the established supplier to use screws identical in size and type but different in color to secure electrical components to the inside of the frame of a product. The new supplier proposed to use the very same part deviation when they encountered a supply disruption for the originally specified screw color. Lo and behold, the technical departments raised concerns with Sales and Product Management that the new supplier could not meet the specified product requirements, which could result in their customer refusing to accept the product supplied from the new source. Would a retailer reject the new supply because the internal screws, only visible if the unit is disassembled, are of a different color than those previously supplied? Would the end user care what color the screws are on the inside of a unit if the unit performs as advertised? Sometimes the applied science standard is set to exceed a product’s functionality requirement to raise barriers to make a supplier change.
As the objections presented by the various departments were overcome, tooling and equipment were relocated to the new supplier, and parallel production began. Engineering and Quality worked to erect another barrier to making the change by resurrecting archaic testing regimes for product acceptance which had been deemed superfluous by the prior supplier. The testing requirements were imposed as they raised concerns about the form, fit, and function of the product supplied by the new supplier as evaluated against newly established, more stringent standards developed by the Engineering and Quality departments. It appeared as if the technical departments had decided to justify their own existence by raising issues with the product supplied by the new source, which had previously been ignored or accepted for development from the previous supplier. Again, the points presented by the technical departments had to be addressed and disproven by Supply Chain and Operations in order to move the project forward.
Overstepping of Technical Boundaries
The increased scrutiny of the technical departments also extended into areas outside of their purview. Inventory levels and logistics capabilities were reviewed, and efforts were made to apply the same requirements that were in place with the previous supplier. This was extended to include the tier 2 supplier base as well, with supplier lead time expectations and delivery schedules set to meet the previous supplier’s production schedule. As had happened previously, any deviation from these requirements was brought to the attention of the executive stakeholders as a risk to the success of the supplier change project, which had to be addressed by Supply Chain and Operations.
Is your organization resistant to near-shoring initiatives? Do you need assistance with Mexico sourcing? There is third-party assistance available through Shoreview Advisors to help steer your organization’s technical department efforts in a more positive direction through objective supplier evaluations and focused project management to keep groups from interjecting an institutional bias based on situational complacency. Contact us for more information on near-shoring.