Offshore manufacturing has become a popular strategy for many Australian operators but hidden costs can make for an expensive move, warns commercial law firm Cowell Clarke.
“Many local manufacturers have taken advantage of cheaper overseas production costs in the hunt for greater efficiencies and profits,” says Brett Cowell, Chairman of Partners at Cowell Clarke. “While the practice has become commonplace, that doesn’t mean it’s simple. Done right, it can be a very astute move and help open up new sales networks into global markets. However, offshore manufacturing is not the silver bullet for every Australian operator under cost pressure.”
Through its membership of ALFA International, the global legal network Cowell Clarke utilises its local relationships worldwide to support Australian businesses transacting and operating in foreign countries. Cowell said for some companies, cheaper base production costs in offshore manufacturing may be offset by a number of unexpected expenses.
“Difficulties in communication, blow-outs in set up costs, additional ‘political’ or administrative requirements and large minimum quantity demands can add significantly to the cost of offshore production,” adds Cowell. “Offshore manufacturing can also expose the company to greater intellectual property (IP) theft risk and quality control inconsistencies. In some cases, when you crunch the numbers, the company may have been better off remaining on home soil.”
Based on experiences of its clients, Cowell Clarke has produced a list of the top ten behaviours of successful offshore manufacturers.
- Shop around
“Establish a relationship with an offshore manufacturer using a similar process, but a higher level of caution, as you would use to build a relationship with any local supplier,” Cowell advises. “It pays to research the right partner that will deliver to your requirements, support your goals and protect your business interests. Don’t just default to the first manufacturer that shows interest or the manufacturer someone you met in the pub said was good.”
- Seek out inbuilt expertise and experience
“If your offshore partner manufactures products similar to your own, it will already have a level of in-built expertise and experience, implying fewer growing pains in adapting to your manufacturing requirements. The downside risk may be that they are better able to knock off your IP so protect your IP as best you can.”
- Retain tight quality checks.
“You will have your own expectations and specifications for your product outcomes; the finish, the workmanship, the precision. Hands-on checking of samples and products made by the manufacturer is important in determining if the quality meets your standards. In general, the greater level of control and interaction you need, the higher the cost is likely to be.”
- Social proof
“Speak with other customers who use this manufacturer to find out what it’s like to work with them. Read as many reviews and recommendations as you can. Who else do they work with that gives you confidence in using them too? The manufacturer won’t give you the contact details for a customer that had problems so you may need to do your due diligence.”
- Protect your design and ideas
“Think about how you should protect IP before you enter the relationship or even before you start talking. Confidentiality agreements are essential but bear in mind you need to find out about a breach before you can enforce the terms. You may also need to deal with a legal system that is not as helpful to your cause as you would like. Patent, design and trademark registration is important, as is consideration over how you will protect any trade secrets. In any manufacturing contract, make sure that these are protected, as well as any IP developed as a result of working together.”
- Be aware of pricing inclusions and exclusions
“Be across production of samples, including the cost, before proceeding with full run production. The cost implications of additional product refinements and minimum run quantities can erode margins. Look beyond manufacturing costs towards in-market delivery. It’s obvious but the cost of getting your product to market can be significant.”
- Keep in close communication
“You’ll need to work closely with your manufacturer for new stock orders, lead times, product quality issues and delivery. A comfortable two-way communication channel that is responsive and timely is vital.”
- Understand cost of time
“Production lead times can make or break a business or product launch, impacting cash flows, customer relationships and reputation and giving competitors an edge. Be clear on best case and worst case scenarios and plan your marketing and management around this.”
- Contract the right business
“Make sure that you are entering a contract with a proper foreign entity and you have measures in place to protect your interests. ‘Off the shelf’ or ‘Off the Internet’ contracts are rarely the right choice. You want a contract that properly addresses the terms important for making the relationship work well.”
- Be prepared for problems.
“Whether working across borders or within your domestic environment, product liability and warranty needs to be addressed in your contract and via insurance policies. Indemnity provisions are common, so consult with an experienced lawyer to ensure that you get this right. Also think about how you will address potential contract infringement, where will a dispute be decided and whose law and language will apply. People often think these terms are just the agreement boilerplate clauses but they can have a major tactical impact in the event of a dispute.”