Here in South Norway we have a major crisis in the demise of thousands of industry jobs, mainly on shore. This is not just in the oil industry, the trend for companies to outsource abroad has hastened in the last three years, despite many of those companies actually being profitable at the time, or having been profitable for decades and reaching a crisis to sort out.
In some of the companies, outside the offshore oil business, which I have worked with I see that they have actaully quite thin gross margin. This is a big signal for any high wage, high skill economy that things are not going well. Production and engineering services companies need to have high value added products. The issue is that very often they are letting their customers have high margin products by continuing to respond to calls for more competitive pricing. They often loose a focus on cooperative innovation on costs in the supply chain, and instead go back to their workshops and start cutting corners with materials, manhours per unit designs for manufacturing ease rather than long term durability and ease of repair.
There are two alternatives here of course. You firstly offer innovation and not just some flashy USP type 'difference', but something which offers more to the end user. This is often more revolution than evolution! It is then the time to find out which customers are quick adopters and willing to cooperate on new technology introduction, or if you can achieve a branded draw-throuugh in the supply chain where customers down the line are specifying the innovation or brand. You can then command a higher margin, and perhaps in your innovation design you have included process and material savings- more being less, the main goal of margin-management.
The second is to find the customers who truly value your product by putting prices up in line with margin desires, and on a wide product range, reducing to the most sold, and the already highest margin products. High volume, low margin products in a Norwegian SME is just a route to dig your own grave, because you actually incur higher costs through out the company in the noise of making more stuff. To some this sounds like a viscious and respectless 'creaming strategy' but it is in fact for two companies at least I have advised on other matters, a survival strategy they should follow before it is too late.
Admitting defeat in production and completely outsourcing while having just an office based company in Norway is seemingly all 'knowledge economy' strategy and good stuff, but in fact for either a new innovtator or an established company it can be a road to hidden costs and crisis in customer confidence. For both companies, the switch to overseas production is usually to low cost countries like Poland, the North of Spain, Portugal, Brasil and the Far East with China being particularly popular a few years ago. In an ideal world you should be able to send a set of drawings, part lists and specifications to a contract manufacturer and let them get on with it, turn key, but for an SME in Norway what they have to understand, even at the larger end of medium size, is that on a world basis they may be a small customer to a large supplier. The reverse can be true, that the SME choose a small CM or one with sub suppliers who are small and do not have in particular the quality assurance infrastructure.
Qaulity assurance is the over riding main issue with outsourcing. Second to this is project coordination such that they are delivered in time. The two factors above work very much against Norwegian businesses abroad, who are not prepared to pay the cost for having an effective inspection and project management prescence on site. That costs a lot of money per head, per product. The supplier is often in a position in these countries where credit is less available and they live more from cash flow, and in addition working capital levered short term loans in the author's experience. This means there is a pressure to finish your project and argue about it later, especially when a larger spend customer has new orders or larger orders to be finished.
In essence for the offshore and shipping industries, the demands on quality for GL-DNW of American Bureau of Shiipping certification means that all production systems and all manufaddcturing procedures are qualified by the SME. In some equipment, for each item, every single critical stage of constrcution of every individual product has to be overseen and inspected, such as welding or electronic wiring for example.
Quality is in practice a combination of a quality system, excellent design, ownership, pride in work, experience on the workshop floor. In outsourcing you risk losing absolutely all of these, especially if you have taken several rounds of price negotiations. The negative side of forcing price down with a work shop to the lowest nearest bid, is that you risk being a cheap and quick customer. They operate in the same way as any business, man hours per project per unit, and that is where you risk losing most on the quality side. You also risk being the sacrificial cow for postponements if you are marginally profitable to the supplier.
Quality is one thing that can cost companies very dearly if there are deviation at factory-acceptance-test time, or failures in operation. It is very much related to practical on the workshop floor experience with a documentation system reflecting this. When you outsource, those two elements have to entwine with the supplier and that involves an investment.
One area of Quailty in terms of ISO systematic development and initial deliveries to customers stands very much in favour of domestic production in house or in geographically 'cosey' workshop. Even when this prototyping and and first-of-type-to-market stands at a loss in a larger serial production of the product or is a risk venture on outset, it is worth keeping production facilties local such that the degree of involvement with the practical realitty of the product is immediate and many employees can contribute with no travel costs. This type of lead engineering also can help integrate further into your customer's innovation processes and set you apart as a higher value partner rather than an also ran supplier on the three bid rounds process.
Quality is an unavoidable cost which in turn should be passed on to the customer in BOTH a higher out price and within that a higher margin than for lower qaulity assured production.
An area which is though a major source for revenue in Norway which is in danger of loosing traction due to the decimation of domestic production is life cycle servicing. There are some companies in specialist areas of safety equipment or other critical items for offshore, who make far more money from a delivery in its' lifecycle than when new, because that work is all then very high margin, up in terms of 50% on labour and travel costs and often quire astounding the matter of 80-100% for parts and other materials. Apart from being an income source from the customer, it is also a point to integrate to the customer on, and discover if they have new purchases, are interested in wider upgrades or innovative replacements. Additionally, if they have stopped buying, to then find out reasons as to why.
In terms of manufacturing experience on site this means that those who built it and designed it are very often best placed to be able to fix it or predict what will wear out on it first. Losing this knowledge base through cross board redundancies can be very costly when highly qualified service engineers with no product history are confronted with the on site complexities of ageing products.
Really quality and life cycle are the two areas which western manufacturing firms in general should be focusing on in terms of maintiaing about average margins. Instead of letting some customers determine a falling top line while the cost line increases, SMEs in Norway would be better finding not what new product to sell, but which new form of relationship to build and which bad form of relationship, the cost driven one, to walk away from. This may mean of course finding new customers on a global basis, but it means also better integrating to some existing customers and becoming a supplier who solves problems -at a cost - which then avoid costly mistakes down the line in terms of quality failures and poor serviceablility in the field.