Managing Production Outsourcing Risks - Assignment Example

Critical analysis (Article): Managing production outsourcing risks Name Professor Institution Course Date Critical analysis (Article): Managing production outsourcing risks Question 1: Primary motivations of this research and what is the main argument put forward in the study This research was motivated by the need to provide solutions to apparel organizations which faced various risks in the production outsourcing course. Several apparel retailers were faced with competition, market demand and short life cycle of the product they were selling. Similarly these retailers had less capability to produce rapidly meet the market delivery time. China is growing very fast and some companies have some great plants and capability to outsource their production or services. The study carried on two companies CL China dealing in sports products and TY Apparel which were dealing in cotton cloths. According to Kam, Chen & Wilding (2011, p.429) in the fashion sector, customer’s need for newness variety so as to appear different has led to a shortened product life in the apparel production. The situation forced the two companies to seek outsourcing production. CL China Company pursued ‘abstention-oriented outsourcing’ to exploit of Chinese producers’ current asset such plant, human resources and information technology. On the other hand, TY Apparel wanted to take advantage of established production facilities and the technical competence available in China. Production outsourcing unavoidably made TY Apparel susceptible to several risks such increased cost of operation and loss of control and flexibility. The article was also motivated by the need to look at different approaches used to minimize these risks. The article has reviewed different literatures to come up with a common stand on the production outsourcing. These researches provide different management strategies which could confuse on which one to embrace and at which particular time. As such the author has tried to bring out the relationship between the production outsourcing managing factors. Platts & Song (2010, p.324) argue that if these risks are not managed appropriately they could lead to losses to the retailers in the apparel sector. Some of the reasons which have led to outsourcing by China apparel dealers are foreign exchange instability, inconsistent and poor product quality, complex and cumbersome legislative trade regulations, complicated terms of contract, complexity in carrying out quality inspection, unreliable and late deliveries and custom, language and , cultural issues (Kumar & Arbi 2008, p.81). However, outsourcing production also has its own risks. The article provides an example where on a research that was conducted on the US companies that have outsourced apparel production. The finding held that most of US firms failed to understand the anticipated benefits of outsourcing. While some were contented with the performance of the vendor for the outsourced information and communication technology initiatives, some attributed sold products at marked-down costs to the challenges emanating from production outsourcing. Olson & Xie (2010, p.79) claim that partially, this is due to a range of unobserved risks which are frequently hidden in the outsourcing contracts. According to Sousa & Voss (2007, p.197), partially, this could be as a result of selecting unsuitable outsourcing strategies. The research was also motivated by literature gap that existed. These literatures acknowledged that there are risks but failed to categorize those risks. Kam, Chen & Wilding (2011, p.429) emphasizes on seven risks on outsourcing production. They include selecting an unsuitable vendor, negotiating an unclear contract, ignoring employees; custom, cultural and language concerns, losing control of the process of outsourcing, ignoring the hidden costs and failing to plan the exit strategy. In apparel sector, Dev, Caprihan & Swami (2011, p.196) claim that outsourcing production may lead rise to loss of clients and the share of the market, complexity in shifting or developing new products in reaction to the demand in the market, losing important skills, getting longer lead time and meeting quality unpredictability problems. Oh & Kim (2007, p.21) also think that outsourcing production may slow a company’s reaction to changes in the market because the generally longer lead-times of apparel production. Off-shoring outsourcing could further extend a company’s manufacturing lead time, reduce its supply chain rapidity, and decline its rapid-reaction capability to the changing market situations (David & Desheng 2011, p.403). The research was also motivated by the need to provide solutions for managing of the outsourcing risks. Managing outsourcing risk might be explained as an action in value protection, the purpose of which is to reduce chances of failures. Factors used in managing outsourcing risk include internal enhancement before outsourcing, selection and management of the supplier, selective outsourcing, contact management, business risk management, relationship management, information technology infrastructure aid (Kam, Chen & Wilding 2011, p.429). All these factors are embedded on a principle known as Guanxi. In Chinese world of business, Guanxi offers a means for relationship which bring together business partners through voluntary and regular mutual benefits of both favors and obligations (Kam, Chen & Wilding 2011, p.432). Question 2: Relevance of the article to chain management and outsourcing strategy The article is all about managing outsourcing risks, and from the definition, outsourcing involves the company and the supplier of products or services. In a nutshell, the article is about the supply chain management and the outsourcing strategy. Outsourcing is very crucial in the cost-effective supply chains, and involves numerous inherent risks. Handley & Benton (2013, p.111) emphasized that due to the risks, 30-50% of outsourcing programs do not attain their full potential. Wiengarten, Pagell & Fynes (2013, p.630) argue that the major reason why people outsource is because of the short life product life cycle prompting desire for a new product. In such situation, some companies do not have the capability to produce rapidly. Therefore, they try to contract with the capability to produce fast for quick market delivery. Apparel production outsourcing process has the chain system involving people, information, activities and resources which move a product from supplier to customer. In this aspect, the customer is the apparel retailer (Castelli & Brun 2010, p.24). The article warns both the company outsourcing and the supplier that if the outsourcing is not managed properly could result to loss which outweigh the anticipated outcomes (Kam, Chen, & Wilding 2011, p.428). From the study conducted on two companies CL China and TY Apparel established two different results based on what drives the value for each one of them. For Instance for, for CL China which depends on the assets of other firms to outsource, the engineers must often visit that plant to ascertain its capacity and capability to produce on time. TY Apparel which relies on technical know-how must conduct employee’s appraisal to be sure of their competence to produce high quality apparel. Some of the risks that face outsourcing firms also face suppliers. These risks are selecting an unsuitable vendor, negotiating an unclear contract, ignoring employees; custom, cultural and language concerns and ignoring the hidden costs, may lead rise to loss of clients and changing product due a change in the market (Kam, Chen & Wilding 2011, p.429). The quality of products and service a supplier provides normally improves its image and market its services. With competition increasing in the business sector, should any apparel company realizes that it selected a wrong vendor who produces poor quality cloths, it may not renew its contract with the company, but move to work with another supplier. Unclear contract often complicates terms of supply, and this may make the company withdrawing (Barthelemy & Quelin, 2006, p.1775). Similarly, the research provides the poor supply chain management may result to longer lead time. As such, the company outsourcing will lose customers to the competitor and eventually lose market share. Analysis of the article also reveals three strategies which are supply chain management. Such strategies consist of product life cycle, demand variation and market mediation costs (Barthelemy & Quelin 2006, p.1779). Most apparel companies outsourcing production are doing so in order to increase delivery time and beat the product life cycle which is currently short due to innovation. In such case, suppliers must improve their capability so as to be contacted to provide various products. Ellram, Tate, & Billington (2008, p.149), contend that apparel markets are more and more identical to rapid changes and thus, the success or failure of a business is majorly determined by the responsiveness and flexibility of both the retailer and supplier. Hence, this researcher focuses its attention to supply chain management. Certainly, product lifecycle which is addressed by this research is a determinant driver for supply chain management and outsourcing strategy at the platform between the supplier and its customer (Ellram, Tate & Billington, 2008, p.151). Similarly, as a trendy industry, which changes quite often, when a new arrives, demand is always high. Hence, the supplier must always have the capacity and be efficient to meet the demand within that time. The demand change quite often, and new product are getting into market, meaning suppliers must be flexible and ready to accept change (David & Desheng 2011, p.405). These points out that lead time matters a lot to supplier in a bid to get to the market within the demand time frame. The Research is relevant to the fashion retailers who are outsourcing production because it cautions them of a poor relationship with the supplier. Poor relationship and poor communication channel could cause delay in the delivery hence leading to excess stock of shorter lifecycle and other seasonal products (David & Desheng 2011, p.408). This will ultimately cause write-offs or increased discounting including the risks of missed opportunities of sales. The research also provides different ways of supply managing chain management and outsourcing risks. Kam, Chen & Wilding (2011, p.431) maintain that the supplier must improve its internal systems and competencies so as to manufacture efficiently and effectively. Other ways of supply of managing chain management and outsourcing risks are contract management, relationship management and IT infrastructure improvement (Kam, Chen & Wilding 2011, p.431). Question 3: Lessons learnt and implications of findings There are several lessons that suppliers and general companies can learn from this research. According to Oh & Kim (2007, p.246) the apparel sector has drawn the interest of numerous researchers for a number of years. The focus in the industry has gone up lately, mostly as a result of the rising complexity within the dynamic environment. This is one sector in which the competition has become stiff, particularly in the retail situation (Oh & Kim 2007, p.248). The remarkable change in power and scale of key apparel retail chains in the marketplace, the arrival of brand retail networks and nature of outsourcing and supply chain decisions that are increasing in nature are some of the challenges which have added to the complexity. In the same industry product life cycle is changing so fast due to globalization and technology. The article claims that managers in the apparel industry more so in China have been compelled to increase their market delivery time. Apparels have seasonal demand and require short order lead time; therefore, production outsourcing must find a balance between supply chain responsiveness and efficiency (Kam, Chen & Wilding 2011, p.434). Within this perspective, coordination of the activities between supplier and the apparel retailer outsourcing production along the supplier chain is a critical issue. Supply chain framework must give a great concentration to the reduction of lead time for products with high unpredictable demand. As started the aim of this research was to assess how Chinese clothing dealers manage their manufacture outsourcing risks and why their managers choose to manage these risks in a particular certain way (Kam, Chen & Wilding 2011, p.428). In that way, the research was conducted among two Chinese apparel company. According to Kam, Chen & Wilding (2011, p.433), the research divided clothing into three categories of products including basic, seasonal and fashion. However, only two companies CL China dealing in basic product and TY Apparel representing which is dealing in fashion (Kam, Chen & Wilding, 2011, p.433). From the risk management perspective, the disparities between the manufacturing outsourcing risk management strategies implemented by the two firms can be observed as two dissimilar positions to manage the risk of the delivery failure. Kam, Chen & Wilding (2011, p.439) postulates in CL China’s case, the risk relates to the wearing away of its idiosyncratic product quality that gave the firm its competitive advantage in a marketplace in which demand for quality products and positive performance determines the success. In the situation of TY Apparel, the major risk the firm underwent was failure to attain speed-to-delivery to the market that would hold back fast product change-over, hence reducing the company’s product shine on variety and newness Kam, Chen & Wilding (2011, p.439). Performance-improving quality products became the value determinant of the CL China, whilst the variety and newness were comparable to TY Apparel. From the study, it can be argued that the outsourcing risk management approach, in the perspective of Chinese apparel sector, depends mostly on what clothing retailers perceive to drive their product value (Kam, Chen & Wilding 2011, p.440). It is also noticeable that important managing outsourcing risks can be of great benefit to the company. It enables the company to assess its competence and put an elaborate plan for selection of the best supplier among the existing ones (Kam, Chen & Wilding 2011, p.432). Internal competence means the company does not lose control of its production to suppliers, but in the mean time build capability to be able to produce internally in the future. Oh & Kim (2007, p.247) state that the business is a competition for increasing customer base, speed of market delivery and improving market share. Therefore, selecting the best supplier in the market is a step further to the mentioned factors and determines the business success. Barthelemy & Quelin (2006, p.1791) posit that contract is very important in the outsourcing process negotiation. However, if key important factors like costs are hidden, it becomes very difficult to proceed with the agreement and even to make it successful both to the supplier and the company outsourcing production. Hence, companies must disclose every issue regarding the contract and emphasize on managing its relations with outsourced producers to get their support to achieve production flexibility. The research is a good indicator to the any company that is dealing in apparels. While the study was just about the two Chinese companies, the sector players in any country must understand that some every most factor in this industry such as rapid change and short product life cycle remains that same. Hence, they must always be prepared to manage the risks that come with production outsourcing. Some global supplier chain management is very poor in terms of planning and controlling (Handley & Benton 2013, p.110). Company facing such problems has failed to understand the demand in the market, resulting to failure to stock in time (Ellram, Tate, & Billington 2008, p.149). Those firms have lost customers to their competitor. Some managers have learnt from these forms of failures and try very hard to employ competent employees. References Barthelemy, J & Quelin, B.V 2006, Complexity of outsourcing contracts and ex post transaction costs: an empirical investigation, Journal of Management Studies, Vol. 43, No.8, pp.1775- 1797. Castelli, C.M & Brun, A 2010, Alignment of retail channels in the fashion supply chain: An empirical study of Italian fashion retailers, International Journal of Retail & Distribution Management, Vol. 38, no. 1, pp.24 - 44 David. L.O & Desheng, Wu 2011, Risk management models for supply chain: a scenario analysis of outsourcing to China, Supply Chain Management Journal, Vol. 16. No. 6, pp.401-408 Dev, N.K, Caprihan, R & Swami, S 2011, A case study on redesign of supply chain network of a manufacturing organization, Journal of Advances in Management Research, Vol. 8 No.2, pp.195-212 Ellram, L.M, Tate, W.L, & Billington, C 2008, Offshore outsourcing of professional services: a transaction cost economics perspective, Journal of Operations Management, Vol. 26 No.2, pp.148-163 Handley, S.M & Benton, W.C 2013, The influence of task- and location-specific complexity on the control and coordination costs in global outsourcing relationships, Journal of Operations Management, Vol. 31, No.3, pp.109-128 Kam, B.H, Chen, L & Wilding, R 2011, Managing production outsourcing risks in China's apparel industry: a case study of two apparel retailers, Supply Chain Management: An International Journal, Vol. 16, no. 6, pp.428 – 445 Kumar, S & Arbi, A.S 2008, Outsourcing strategies for apparel manufacture: a case study, Journal of Manufacturing Technology Management, Vol. 19, No.1, pp.73 - 91 Oh, H & Kim, E 2007, Strategic planning for the US textile industry in the post-quota era: achieving speed-to market advantages with DR-CAFTA countries, Journal of Fashion Marketing and Management, Vol. 11, No. 2, pp. 246-69. 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