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Apple's Troubled Outsourced Manufacturing Plants

Apple (AAPL) released its annual supplier responsibility report in which it had to acknowledge not only that one of its outsourced factories employed 42 minors, but also suicides at a Foxconn plant and serious toxins exposures at a Wintek touchscreen facility.

Although Apple is known for tightly supervising contractors, things keep going wrong, raising a question: If Apple can't obtain the manufacturing standards and conditions it needs from suppliers and outsourced manufacturers, what company can?

Substitute quality control, protection of intellectual property, accurate forecasting, or any of a number of business concerns for labor relations and public image, and the implications become clearer. At what point do any or all of these vital factors trump perceived low-cost manufacturing? Throw in the potential for a long-term jump in oil prices and, as a consequence, the cost of transporting products from Asia to other parts of the world, and you have to wonder whether we are now seeing new downsides in outsourced manufacturing. Maybe it's time for companies to own their own factories and to bring manufacturing closer to customers -- and corporate supervision.

It's not as though this last year has been an anomaly for Apple's China-based manufacturing. Last year's report found frequent violations of the more basic tenets of its supplier code. To the company's credit -- a continued surprise, given its legendary secrecy -- this year, again, Apple aired suppliers' dirty laundry. No names, but reports of serious incidents and the arm twisting it has done to correct perceived problems. (The image below links to a video report on the worker exposures to hazardous materials.)

And yet, when you look at the report and its sections on the the Foxconn factory issues that gained significant criticism, even within China, it might make you wonder. Apple brings in third party auditors to check what its suppliers do, is not afraid to cut a company loose, and still has to continuously follow up to get the manufacturing improvements that it wants.

If manufacturers regularly flout prohibitions on hiring under age workers, cheating employees out of earning wages, and falsifying business records, including financial information, what other directives do they ignore? Look at some of the problems that Apple has faced with its products in the last few years:

Such issues speak to problems in manufacturing. Perhaps closer management, more rigorous testing, and better integration between engineering and production could have helped. But that is tough to achieve when factories are thousands of miles away and owned by someone else. If Apple has these troubles, so does every other company with outsourced manufacturing.

Most likely other companies have an even more difficult time because they don't put in the necessary effort. According to Apple, 40 percent of the vendors and subcontractors it inspected said that it was the first time any client company had done so. Executives literally don't want to know what happens unless there is a mistake. That is phoned-in management. Experts say companies shouldn't outsource simply to save money. There is significant cost in adequate supervision and management.

So far, the "avert your eyes and replace the problem units" strategy has worked for corporations. Nevertheless, that won't last forever. What happens if oil prices skyrocket again because concern over protests in the Middle East? What if they double, as my BNET colleague Kirsten Korosec, discusses? Long term outsourced manufacturing may become problematic just because of the transportation costs. In which case, some leaders will wish that they had domestic capacity, just in case.


Image: morgueFile user wallyir.