By Julie Bort

04/23/01

Mexico, Scotland and Taiwan have become popular sites for U.S. network vendor factories, while India, Ireland, Israel, Pakistan and Russia have become hot spots for software development.

Manufacturing offshore saves the vendor money, which is good for its financials, its share price and, if you're a tough enough negotiator, your costs. But global manufacturing is infinitely more difficult than local manufacturing. The vendor that flubs it could face quality and intellectual property problems.

"Tariff policies early on encouraged offshore factories, and now complete manufacturing is often done overseas for many products. Of course, there are quality problems, especially in the sites where labor costs are quite low. That is why the labor is so cheap in the first place," says Bruce Kogut, professor of management at the University of Pennsylvania's Wharton School of Business in Philadelphia and co-director of the university's IT globalization research center.

But quality needn't be an issue if the vendor assumes adequate responsibility. "New and better practices diffuse quickly. I have been involved in cases where offshore plants in Asia have had lower costs and higher quality than American factories," Kogut says.

The issues differ between hardware and software facilities. With hardware, a manufacturer will often outsource subassembly work but handle final assembly and system testing. Its mission is to ensure quality across suppliers. Major manufacturers, such as Cisco, Compaq and Sun, outfit offshore factories and subcontractors with homegrown quality-control tools. Compaq suppliers must run products through the vendor's five-step, audit-control process, a company spokesman says.

Cisco uses inventory control software that lets it calculate hourly wage costs among suppliers and shift production accordingly, says Randy Pond, senior vice president of operations for the vendor. Such a system keeps Pond from getting blindsided by production costs. However, because Cisco outsources only its lowest-end products to offshore suppliers, this cost-control system isn't a foolproof way to manage overall production - as witnessed by Cisco's problems in January meeting orders of its high-end Catalyst 6000 switches, which it manufactures itself.

For software, controlling intellectual property is the tough part. In many regions, particularly the Middle East, people can legally take another's code, repackage it and sell it as their own. Kogut has seen that happen in India: "The American company did not properly protect its property, and it did not respect these contractors enough."

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