For 30 years, outsourcing electronics manufacturing has been common for the tech industry. Outsourcing design along with the manufacturing, on the other hand, has been building in popularity for only the past decade.
When brand-name companies distance themselves from their products' design and supply-chain management, they take a step backwards from corporate responsibility.
What types of electronic products are now designed by the manufacturer instead of the brand? At first, a cadre of Taiwan-based Original Design Manufacturers (ODMs) designed low-end computers and peripherals. Foxconn, Quanta, Compal, Wistron, Inventec and Pegatron are among these ODMs. Brand-name companies would choose among the models, then have the ODM build the products sporting the brands' nameplates.
Then the ODMs started designing phones, high-end servers, networking equipment, instrumentation -- all sorts of consumer electronics and even medical devices.
It sounds convenient: Why not get an outside manufacturer that can also provide your products' designs for you? You get a "one stop" supplier, without having to employ teams of design engineers and procurement managers. There's less finger-pointing than when one party designs and another builds the product: ("The yield problems are because of the design!" "No, it's the soldering process!") Executives like the cachet of some of the large ODMs, and the pricing is alluring. And, well, outsourcing it all just seems easier.
However, the brand-name company delegating design and supply-chain control to an ODM can lose competitive design advances including environmental efficiencies; as well as assurance of regulatory compliance, IP security; and visibility to supply-chain quality and worker conditions.
5 compromises to control and responsibility
Executives at electronics companies all over North America -- include HP, Apple and Dell -- have rushed to embrace the ODM model, feeling great about having been accepted by one of the large suppliers, and optimistic about reducing overhead and product costs. Then, their companies start experiencing these typical obstacles and facing these risks:
1. Designers aren't trained in Design-for-Environment principles -- The DfE goals, of reducing unnecessary product materials and processes and increasing energy efficiency, are stymied. That's because the ODM is not as well trained in Design for the Environment (DfE) principles as someone in-house would be, and therefore ignores much of the customer engineers' innovations. Or, isolated DfE benefits are offered without life-cycle assessments determining whether the changes are measurably better for customers' cost reductions and environmental health.
Risks: Being left behind by competitors' superior eco-designs, such as smaller, lighter, more efficient products; losing out on market share through reducing customers' electricity and cooling costs; and leaving on the table post-consumer revenue streams.
2. Environmental regulations managers face challenges in scrutinizing their products for the six substances restricted by the European Union's RoHS Directive, and the increasing number restricted by the EU's REACH chemicals regulation. They also need to report with confidence whether the components' metals are from "conflict mines" that the U.S. Securities and Exchange Commission requires companies to disclose. When asking ODMs for this information -- typically with numerous reminders -- the compliance managers often doubt the veracity of the product-content information they receive from ODMs.
Risks: Greater possibility of regulatory infractions, without an adequate due-diligence defense. After all, it's the name-brand company brand and market share at risk (with potential fines and even prison sentences).
3. Supply-chain and quality managers are at the mercy of the large and distant ODMs to verify the quality of parts received. Are counterfeits used? Are cheaper sources used in-place of approved vendors? Are all the parts to spec? What are the yields?
Risks: Lower quality, potential brand damage owing to egregious off-spec materials, product recalls. (Remember the lead-laced red paint in Thomas the Train toy parts and the melamine in pet food?).
4. What auditors see isn't what you get -- Auditors attempt to visit the ODMs to assess worker hours, ages, working and living conditions, and the right to organize. However, ODMs often resist surprise audits, and sometimes the auditors sense that what they are shown is staged.
Risks: Discovery of (and negative publicity) for using underage, overworked employees; and repugnant manufacturing conditions.
5. Long gone are the days that name-brand companies have total protection of their hardware-products' intellectual property, especially with the three decades of nearly ubiquitous manufacturing outsourcing. But when the design is controlled by the manufacturer as well, IP protection is nearly impossible to protect. Legal departments do the best they can, and in the end executives at some companies declare that their true competitiveness is in their software: "Don't worry about the hardware -- just drive down the manufacturing costs."
Risks: Your flagship product has sprouted copycat products all over Asia.
Examples of outsourced design
Three mid-sized network-communication equipment brands headquartered in North America had their entire product-design teams trained in DfE principles. Management was committed to being proactive in their products' environmental compliance and desired competitive edge and cost savings through smaller, lighter products and packaging; less power consumption; and easier disassembly for profitable reuse, refurbishment, and recycling.
But then the top executives migrated design from in-house engineers to China-based ODMs. The brands' product-launch teams sent to the ODMs design requirements including innovative DfE elements, but the ODMs incorporated few if any of them. The brands' compliance engineers -- who used to be on top of their products' content according to regulations' requirements -- now had to "beg" their ODMs for critical supply-chain information. When or if that data finally came in, they had some doubt about its accuracy. And whenever incidents of worker abuse and unsafe conditions were in the news (such as at Apple's ODM Foxconn in China), the brands nervously wondered if they should further audit their ODMs' factory conditions.
Getting back on track
The first step to mitigating business and responsibility detriment is for the executives at brand-name companies to become aware of those five compromises and risks. On that basis, they can consider overall business advantages when selecting a between models of controlling or delegating design. Perhaps they'll give an edge to delegating only the manufacturing, yet keeping product design and supply-chain control as part of their companies' core competencies.
Next, if going the ODM route, brand-company executives can insist that supplier-selection criteria include verifiable DfE expertise and life-cycle assessments. Executives can demand that an ODM team of material engineers and supply-chain analysts be assigned to work with the brand-company's regulatory and quality managers to ensure in a timely fashion that all regulations are met and parts are on spec. They can sign supplier contracts guaranteeing unannounced on-site audits as a condition for doing business.
As for protecting your intellectual property, choose a company you know extremely well and whose intellectual-property "fences" have actually prevented leaks for other customers.
Delegating company functions is fine. Just do so with corporate responsibility and risk-reduction in clear view.
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