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The option of manufacturing overseas is done mostly to reduce component costs whilst maintaining research and development and design in New Zealand. The idea behind manufacturing overseas is to either contract the job or create a partnership with an overseas manufacturer while still having control over the product. The company can even move to another option which is ownership of the factory as it grows. For this report, the raw material that was chosen was wool. The process of shearing the wool, importation and processing in Mauritius and exported back to New Zealand have been described with the help of a flowchart. The ten major risks together with their justifications were identified. The treatment options to reduce these risks were also considered.
The wool is normally shorn off sheep once or twice annually. This amounts to around 220,000 tonnes of wool per year. The wool is then classified in terms of their properties such as fibre diameter, length, tensile strength, colour, bulk, fibre medullation (whether hollow or centred) and presence of vegetable matter. This will determine whether the wool is suitable for making soft fabrics, carpets, blankets, upholstery or curtains. The best quality of wool comes from the shoulders and sides of the sheep whereas the lower quality comes from the legs (How Products are made, n.d). The wool then has to be washed to remove all sand, dirt, vegetable matter, manure, grease and dry sweat during a process called scouring. The wool should also be tested for any insecticide which might still be present due to the spraying of the sheep. These should meet the international acceptable minimum levels (Te Ara, n.d).
About 70% of the wool is then packed and transported to the relevant port to be shipped overseas through containers. Some documents relevant during exportation to Mauritius are the invoice to show proof of transaction between the importer and exporter, packing list to declare the inventory, bill of entry which is a formal declaration of the goods entering the country and a certificate of origin attesting the origin of the goods (Mauritius Chamber of Commerce and Industry, 2018). If these are found to be satisfactory, then only the goods can be cleared and transported to the factory (Mauritius Trade Easy, n.d)
At the factory, the wool will be processed by going through combing to separate the strands. This process also helps to remove small particles of vegetable matter, seed and leaf. It then undergoes spinning whereby the strand of wool is taken, twisted and drafted into a thinner entity then wound onto a package at high speed to form yarn which is collected on wooden bobbins. Weaving is used when making apparels, carpets or upholstery while knitting is used to make garments (Wood, n.d). After these processes, the fabric will need to be immersed in water to ensure that the interlocking of the fabrics followed by crabbing to set the interlock and then processed to prevent shrinking and finally dyeing (Blackberry Ridge, n.d). Quality control is then carried out by sight, feel and measurement. Any loose threads are removed and knots are pushed back into the cloth. All minor flaws are taken care of before undergoing the finishing procedures (How Products are made, n.d). All the clothes should have care labels according to the standard AS/NZS 1957:1998 Textiles – Care labelling regardless whether the product was made in New Zealand or overseas. It should state the caring instructions, country of origin, fibre content and children nightwear should have a fire hazard label (Commerce Commision New Zealand, 2018).
The clothing items are then packed and sealed individually and transported to the port where it will be sent to New Zealand in containers by ship. After analysing the processes and their description, a few major risks were identified and have been provided in the table below. The risks were identified from the point of view of Manufacturer (based in Mauritius) and the Distributor (Brand owner based in New Zealand) and some risks were found to be relevant to both the Manufacturer and the Distributor. The impacts of these risks have also been described. These risks were found to be Major due to their consequence and likelihood scores in Section 4 – Evaluation of risksLoss of control concerning the manufacturing of the products The control over the production processes is not at the same level as when dealing with domestic facilities.
Quality control of the final products – Fabrics and clothes Consistency of product quality can be difficult to achieve specially if the products are being made somewhere where the labour force are untrained or migratory workforce (Coakley, 2013). Intellectual property theft or misuse Since the wool will be processed into fabrics and apparels overseas, there is the risk of the designs being stolen if it is disclosed without permission (New Zealand Trade & Enterprise, n.d).
The company might get a negative public image for sending the raw materials to be processed in a foreign country instead of giving a job to domestic workers. This can lead to negative public image (Hamel, n.d). Noncompliance with environmental regulations It is mainly the brand owner’s responsibility to make sure that all environmental regulations are being respected. Failure to do so reflects poorly on the company for failing to conduct its due diligence on supply chain partners. This can result in loss of business opportunities (Arena, 2008). Exchange rate fluctuations Changes in conversion can affect the gains or losses.
Being in an offshore partnerships means navigating the cultural gaps. To be able to transact business, there is the need to understand the preferences of both countries (Coakley, 2013). Language can be problem specially if technical issues need to be discussed. There can be confusions about the quantities and deadlines. This can affect negotiations and create communication delays. Relationship difficulties with business partner Disputes among supplier, manufacturer and distributor. Loss or damage of goods in transit Products can be at risk of theft at all stages of the export process, including during shipping and in-market transport (New Zealand Trade & Enterprise, n.d).
Longer order cycles Due to the fact that the manufacturer is far away, additional time is required for transportation. Lead times of several months are required (Coakley, 2013). In this case, Mauritius is a cyclone prone country which can also play a major role in delays if all ports are shut down. Loss of control concerning the manufacturing of the products Quality requirements, delivery expectations and governance should be agreed upon in a manufacturing agreement (business.govt.nz, 2018). Quality control of the final products – Fabrics and clothes Quality inspections can be outsourced or someone can be employed to oversee the quality on site. Quality control and production audits can be carried out by independent inspections (business.govt.nz, 2018).
A written comprehensive IP clause and confidentiality agreement before starting the business to make sure that all information are legally protected (New Zealand Trade & Enterprise, n.d). The Intellectual Property can also be protected by registering for patents and trademarks in New Zealand, and in the country where the products are being made (Rasmussen, 2017). Bad public relations The company will have to spend some more money for advertising and public relations to make up for the sales lost due to bad press (Hamel, n.d). Noncompliance with environmental regulations An environmental compliance strategy should be developed to ensure adequate documentation in case of audits. Each supply chain partner should know his role and responsibilities and certify all processes as compliant (Arena, 2008).
Exchange rate fluctuations Changes in exchange rates should be monitored
A fixed exchange rate can be locked for a fixed period of time. A hedge against this exposure via derivatives can be proposed. Set all contracts in only one core currency.
This can be overcome by having a representative or an employee from the Brand owner company who is either a native or is knowledgeable about the culture of the manufacturing country (Coakley, 2013). Relationship difficulties with business partner Provisions for governance, dispute resolution and exit strategy should be included in the manufacturing agreement (business.govt.nz, 2018). The manufacturing company hired should have experience in structuring contracts and be familiar with the legal aspects. Loss or damage of goods in transit Insurance is required to protect the business against any loss caused by crime and fraud, including theft during transit. Well-known shipping or courier companies which allows tracking of shipments from their origin to the final destination should be used (New Zealand Trade & Enterprise, n.d).
There is the need to be aware of lead times to know if the stocks are being replenished on time. Monitoring of the usual time required for shipping and delivery will be necessary. Checking weather forecasts will also be helpful to know if there will be any kind of delays in the deliveries.
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