Estudios centrados en el ámbito de carga térmica

Company Six – water treatment equipment

Introduction

This case study focuses on Company Six’s inter-firm business problems and solutions, as well as its business success factors in outsourcing components of water treatment equipment to China. Following the completion of a questionnaire and an interview with the manager of commercialisation of Company Six, a transcript of the interview is analysed, together with information from the company website to provide evidence for answering the research questions.

Background information

Company Six is a Victorian state-owned manufacturer, located in West Sunshine, Victoria, with its own systems engineering operations for research and development. It is one of Melbourne’s largest water equipment companies. This company provides water treatment equipment plus comprehensive solutions for all water treatment situations including groundwater cleaning, drinking water plant production, and recycling industrial process water including rinsing, condensation and wastewater discharge. Company Six is a leader in the innovation, production, and marketing of water treatment equipment in Australia with a pre-tax profit of A$63.4 million in 2008/9, an A$5 million increase from the previous year. One of its 2015 visions is ‘Expanding our core function to offer a range of leading products and services to meet customers’ needs in a supply-constrained world’.

Company Six provides service internationally for organisations including the World Health Organization and some public utilities. Its main focus is to provide

communities in developing countries with access to safe drinking water. The final manufactured products are sold to countries including China, Thailand and Bangladesh. In addition, it also has sales markets in Australia and the USA.

Manufacturing restructuring and outsourcing to China

To support its strategy of lower-cost production, Company Six has outsourced many low-end labour intensive components including water tanks to China for the past seven years. It has a representative office in Ningbo City, China. Its staff work with local engineers in China on its procurement and production projects and maintains business relationships with its suppliers.

Other than production cost saving, another objective of the outsourcing operation is to save shipping costs. Company Six outsources not only components, but also the assembly of final products in China. It is important to conduct the final assembly in China so that the staff of Company Six can ship the final products from China directly to its overseas customers. The reason is that shipping costs are lower in China compared to Australia and water treatment equipment is heavy. If Company Six ships them to Australia first, then to other countries from Australia, the shipping costs will be very high and the shipping time will be longer. In this way, both its production and logistics are outsourced.

Company Six outsources some high technology components in addition to labour intensive components. The current suppliers in China have their own technology to produce the components and conduct assembly. Their understanding of design, product quality and delivery performance is acceptable, so that long-term strategic alliance relationships with partial production in China are sustainable to Company Six. However, while outsourcing most non-core, labour intensive components to China, some crucial core components are made in Canada, Germany and Australia. These components are shipped from these countries directly to China for final assembly.

To achieve high-quality products, Company Six has increased management control over its business partners by monitoring production, including quality inspection. The company’s staff in China specify documents and manage every process of

production to ensure product quality and conduct inventory control including physical counts and checking the documentation of all products prior to shipment. It also hires the Swiss SGS company to conduct product-quality inspection. Further to these, Company Six withholds part of its payments until the receipt of products and total satisfaction with product quality.

The payment terms utilised by Company Six are both letters of credit (L/C) and telegraphic transfer. For new suppliers and large contracts, L/C is used and with the terms subject to product-quality inspection. The company used to pay deposits when signing contracts, but no longer does this.

Achievements

After seven years of outsourcing practice, Company Six has achieved average cost savings of more than 60 per cent compared to producing the same in Australia. Other than production costs, logistic costs have also been reduced by more than 60 per cent due to shipping final products from China directly to customers overseas. The company has achieved more cost savings than its initial plans.

Current and potential business problems and related solutions

While achieving good results from outsourcing to China, Company Six faces four main outsourcing problems as follows:

(1) Cultural differences and communication problems

The problem: The main problem Company Six faces is the cultural differences. For example, the Chinese staff of suppliers are unwilling to acknowledge business problems to Company Six. Although they are polite to foreigners, they are afraid to talk about anything that may indicate a failure or cause them to lose ‘face’. They continue operating the outsourcing business despite the problems or without solving them right away. However, Australians prefer to use straightforward communication, and solve problems right away, having little concept of the need to avoid direct criticism as in the Chinese culture.

The solution: In order to improve communication and successfully reduce problems of misunderstanding with their suppliers, Company Six sends managers

travelling to China, builds its own office and hires local bilingual staff in China to visit suppliers frequently. The staff explain all the needs for the production, find out any business problems and translate operation manuals and technical requirements into Chinese. These manuals illustrate some of the technical requirements with drawings and pictures for ease of understanding. In this way, the company very carefully manages cultural issues, especially in relation to problems relating to ‘face’.

(2) Progress in business is difficult due to bureaucracy and unclear government policies

The problem: In China, business operations need business licences, and some water treatment solution projects require government approval. Company Six used to try to apply for business licences and permits itself in some cities, but found it was often difficult and time-consuming to achieve. One of the reasons was that the policies of local governments were different to those of Beijing’s central government.

The solution: Compared to foreign companies, local people have the advantage of better communication with their local governments. For issues relating to governments in China, Company Six relies on local suppliers to acquire the licences, permits and undertakes other paperwork from governments. For example, the company’s current suppliers in Ningbo City have good relationships with the local government so that they can more easily obtain all the licences and permits needed for the business.

(3) Flexibility of changing suppliers is low due to high lock-in costs, and costs for cancellation of current contracts and re-establishment of facilities

The problem: Company Six has to invest much time and money finding suitable suppliers. Sometimes the company also has to invest in tooling and other equipment to manufacture components. In the production of water treatment equipment, significant amounts of special tooling and facilities are required so that set up and re-establishment costs are very high. At times, a particular supplier had not done what was agreed to, was not reliable, and the production quality was not satisfactory by Company Six’s requirements. After spending some effort working and

negotiating with this supplier, Company Six had to cancel the outsourcing contract, change to another supplier, and re-establish new production facilities. The overall cost to Company Six for this was A$200,000.

The solution: Learning from this experience, Company Six is now more careful when choosing new suppliers, verifying as much as possible during the selection process, as well as working hard to maintain good relationships. As a result, it has now been able to establish stable and reliable relationships that are more suited to long-term outsourcing production with its suppliers in China.

(4) Potential loss of intellectual property, other confidentiality issues and the sales market

The problem: Water treatment is a big business due to heavy pollution and the huge population in China: therefore, many companies in China desire to make their own products to gain the markets. Thus there is a risk that suppliers use the same designs and technologies to produce their own identical products and sell them to China’s market.

The solution: Although Company Six desires to increase its communication levels by sharing data information and have, as far as possible, transparency on policies and operations on both sides, it has strong concerns that outsourcing can result in losses of its core competency, main tacit knowledge, crucial technologies and markets. In evolving measures to prevent this happening, Company Six retains some core-part technologies that it cannot afford to lose, and only outsources non- core components. Its company in Australia produces most core-part components. Some other high technology components are outsourced to Canada and Germany. These components are then together shipped to Company Six’s office in Ningbo City, China. Then the key staff in the office re-pack and re-label the components in order to keep their sources confidential, and then forward them to their suppliers in China for final assembly. The suppliers, therefore, do not know who makes the components and how to make them. In this way, the company’s thirty patents remain well protected. Other than protecting its own tacit knowledge and technologies, the company also protects its sales markets. Company Six’s office staff organise shipments of its final products to its end customers overseas and in

China without disclosing shipping information. This process protects the names and addresses of customers that are confidential and thus protects its sales market.

Business success factors and future plans

Company Six believes that there are several important business success factors and plans including strong management control in the selection of suppliers, quality and intellectual property. The company believes that both sides should increase the levels of trust by, for example, developing good relationships with suppliers and sharing as many as possible of the non-core designs and technologies. Company Six concludes that the most important way to achieve all outsourcing goals is to have a correct strategic balance between trust and management control with suppliers.

Analysis and summary

Company Six is a state-owned manufacturer located in Victoria providing water treatment equipment and services to many countries. The company has outsourced its low-end components, assembly, and logistics to China for the past seven years, and has an office in China. It has strong management control by monitoring production and quality inspection by its staff in China and also using an inspection agent. As a result, it has achieved average cost savings of more than 60 per cent in production and logistics costs, which are better than its initial plans. However, the tooling facilities for producing water treatment products are specialised so that the lock-in cost is high. The company faces the threat that the same products are made by its suppliers or others to win the market.

For the problems of culture differences and lack of communication, Company Six sends managers and hires local bilingual staff in China to frequently visit suppliers and do translations. For bureaucracy and unclear government policies, the company relies on local suppliers to deal with the local governments in China. For low flexibility and high lock-in costs, it has a careful plan when choosing new suppliers and works hard to maintain good relationships. For the potential loss of intellectual property, confidential issues and the sales market, it produces most core-part components, with some outsourcing to other Western countries and conducts shipping itself.

Company Six recognises some business success factors of strong management control in the selection of suppliers, and the protection of quality and intellectual property, increasing the levels of trust and increasing their communication levels by having as much transparency on policies and operations as possible. Having a correct strategic balance between trust and management control with suppliers is its important goal.