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Outsourcing Offshore to China - A Case Study

By: Dr. Joe Greco

Outsourcing offshore to China works for Printronix, a company that for over 30 years has designed and manufactured a broad range of line matrix printers, ultra high frequency radio frequency identification (UHF-RFID) printers, thermal bar code label printers, and continuous forms laser printers. A market leader in the printing business, outsourcing allows Printronix a competitive cost advantage but also creates challenges in communication, lead times, and forecasting.

The company has been outsourcing since its inception, but they hadn’t done it heavily until 10 years ago. The increase in outsourcing is a direct result of market circumstances, since their competitors also outsource. They chose China as the main destination for their supplier base because cheap labor and supplies are readily available and because many of their suppliers have moved there. New suppliers are chosen via quality supplier surveys and pre-production pilot batches. ISO certification is preferred, but not required. China has been a fast growing market with “centers for excellence” offering abundant resources and skilled workers at the same place. Ultimately, outsourcing to China allows for an opportunity to penetrate into one of the world’s largest markets (I.E. China itself).

Major substitutes for Printronix’s products are laser printers and inkjet printers. The company considers that the propriety ribbons for its impact printers are a core competency that gives the company its competitive edge. The quality of the ribbon is essential for Printronix to compete head on with laser printers.

At first they had outsourced the manufacturing of ribbons to China. However, design and quality issues and the long supply chain of these important products made Printronix choose to move it to Mexico to be closer to the Irvine headquarters, as well as the Americas market. The quality issues, both in product design and process quality, could be given more focus in Mexico and are now solved. Ribbon products can be produced directly to customer orders and shipped in a day or two instead of weeks.

Financially, the company faces tough challenges due to their heavy investment in RFID technologies. Printronix operates in many different countries and will hedge against currency fluctuations where appropriate. Furthermore, the bulk of their outsourcing is in China, and since China’s currency is pegged to the US dollar, they do not feel threatened by the currency fluctuations between the US dollar and Chinese Yuan.

Printronix faces a number of outsourcing challenges including lead times, forecasting, and communication. Shipments from China and other Asian countries are brought to Singapore for printer assembly. Shipments from Singapore to Irvine and Holland are then made via cargo ships which typically 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 the spot. Rarely would the company fly the container back and have the item repaired in Singapore or China because of the time and expense involved. If the product is highly defective then the shipment is discarded, and a new shipment must be sent via airplane at higher transportation cost.

Forecasting of demand is crucial because of the long lead times, and a change in demand could result in the company dealing with too much or too little inventory. Too much inventory means high storage costs, and too little inventory results in an increased wait time and decreased customer satisfaction.

Finally, a problem when outsourcing is communication for several reasons including language barriers, time zone differences, and Cultural differences. Communication between the headquarters and the satellite locations worldwide is done via teleconferencing and videoconferencing. Even this is hard to plan considering the huge time difference of 15-16 hours. The language barrier is addressed by managing Asian suppliers using Singaporean management who speak the language and understand the cultures. The cultural differences such as holidays, beliefs, and traditions also affect operations.

As stated before, outsourcing is an essential component to Printronix’s business model, and it directly affects their bottom line. The key question that they face is how extensive should they outsource and where is the stopping point? By managing cost considerations along with quality issues, Printronix has shown an ability to effectively outsource given the current global conditions. With China’s economy growing and developing, the company may have to evaluate future outsourcing targets such as Vietnam, Thailand, Eastern Europe and Africa in order to maintain their cost structure.

Article Source: http://articleblender.com

Dr. Joe Greco is Director for the Center for the Study of Emerging Markets (CSEM) located in Fullerton, California. As part of the College of Business and Economics at California State University, Fullerton, CSEM was established to promote the flow of global information and technology between the academic and business communities. In particular, CSEM studies offshore outsourcing and it economic and cultural impact on US based emerging markets. You may contact Dr. Joe Greco at 714-278-2375 or www.csem@fullerton.edu

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