Hidden costs can hurt manufacturers moving production offshore, says law firm Cowell Clarke A growing number of Australian manufacturers are considering the option of moving their operations offshore in search of greater profits. Image credit: Cowell Clarke Facebook page Attracted by the considerably lower base production costs in underdeveloped countries, many Australian businesses opted to shift production offshore without properly assessing the risk involved. While the move has worked out handsomely for some, others didn’t have it easy. And according to commercial law firm Cowell Clarke, this is down to the ‘hidden costs’ that many manufacturers fail to anticipate. “Many local manufacturers have taken advantage of cheaper overseas production costs in the hunt for greater efficiencies and profits,” Cowell Clarke Chairman of Partners Brett Cowell said. “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.” He said the benefits of lower production costs can be easily 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,” Mr Cowell said. “Offshore manufacturing can also expose the company to greater 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.” The Adelaide-based law firm – which provides support to Australian companies operating in foreign counties through its membership in the global legal network, ALFA International – has produced a list of Top Ten Behaviours of Successful Offshore manufacturers based on experiences of its clients. Shop around “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,” Mr Cowell said. Seek out inbuilt expertise and experience “It your offshore partner manufactures products similar to your own, it will already have a level of inbuilt expertise and experience, implying fewer growing pains in adapting to your manufacturing requirements.” Retain tight quality checks “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.” Protect your design and ideas “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.” 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 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.” Be prepared for problems “Product liability and warranty needs to be addressed in your contract via insurance policies. Indemnity provisions are common, so consult with an experienced lawyer to ensure that you get this right.” Australian Manufacturing