'You (could) end up with lead paint and batteries exploding' A while back, Terrapin Communications Inc., maker of a bracelet that sounds an alarm when a child falls into the water, decided to reduce its manufacturing costs by looking east. But Terrapin's president, Bob Lyons, said he was faced with the prospect of venturing on his own in a foreign land - a difficult challenge in the best of circumstances, but even more so when making a children's product. "This product only does one thing: save the kid's life," he told the OBJ. "If it fails to work, your child is going to drown. This product doesn't do anything else. "The implications are huge. The insurance, the liability issues are huge." In a pinch, Mr. Lyons turned to Terrapin's long-time local manufacturing partner, OCM Manufacturing. OCM then worked with its long-time overseas partner in Zhuhai, China, to assess the financial model for the bracelet's offshore production. But offshoring to China - whose government, especially since recent product recalls and political controversies, has become something of a pariah in the West - isn't for everyone, explained OCM president Michel Jullian. Indeed, Mr. Jullian said product volumes must hover at around 10,000 to 20,000 units per year to be effective. But if the situation works, the savings can be significant. By Mr. Jullian's calculations, infrastructure costs are one-third in China and labour is around one-tenth. But he said with those savings comes added responsibility. "We do the hand-holding for customers who don't have the reach to develop that relationship," said Mr. Jullian. "Too many people are prepared to buy anything from China over the Net and think that they are getting the goods from the supplier they are talking to, which isn't always the case." That's what Kurt Ritcey, a partner specializing in supply chain operations at Deloitte, researched during the creation of the firm's Innovation in Emerging Markets 2008 annual study. Mr. Ritcey said that before outsourcing to China, companies should ask themselves about risks, real costs, sourcing strategies and the execution of such a plan. "Many smaller companies thinking about sourcing to China have asked me, 'How much is it going to be to fly over to China?' If you're in a situation where you can't consider a flight to China, then you could be putting your business at risk," he said. "You need to take the time to see the people, spend the time building relationships." Face-to-face meetings are extremely important, agreed Mr. Jullian, who makes a point to visit his suppliers and subcontractors every six months. "People get sticker shock and say, 'Wow it's so cheap.' But if you're not going to go down to the factory and get down and dirty, you end up with lead paint and batteries exploding," Mr. Jullian said. By the time a defective shipment has arrived, the supplier could theoretically have shut down and reopened under a different name. "There is a lack of regulation in China, but that's why you go and check your suppliers. If you say 'I want the cheapest price possible,' they're going to give you the cheapest price. If you say, 'I want high quality, environmental standards and the employees to be treated fairly,' they will do that also," Mr. Jullian said. By Julie Fortier Special to the OBJ
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