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Fletcher-Terry had a problem; a number of patents were running out on some key products. The Farmington, Connecticut, original equipment manufacturer (OEM) of hand tools and cutting equipment in the picture-framing and glass-cutting industry was feeling pressure from lower-cost competitors just as its manufacturing costs were going up in Connecticut. "Overhead (salaries, high property taxes, etc.) was killing us," says Blair Tomalonis, director of strategic procurement.

The 75 employee firm has strong research and development engineering skills in house. "We have the idea guys," says Tomalonis. It was manufacturing that had become the problem.

Tomalonis says through the years the company tried other alternatives internally, "but they weren't successful. We knew we had to do something to lower our costs."

So Fletcher-Terry looked to outsourcing, working with iSUN International Group LLC since 2004. According to Tomalonis, iSUN offered a high-quality product at a reasonable price that's significantly cheaper than the manufacturer could produce in the United States.

A unique solution: combining product lines to achieve volumes

Fletcher-Terry had one challenge: its manufacturing volumes were low. "We might need only 1,000 machines per year in one product line. You couldn't get a company in China to look at doing that," says Tomalonis.

So the company struck a unique deal with iSUN. "What we had to do was aggregate the dollars," says Tomalonis. The manufacturer consolidated several lines of similar business generating the volumes its outsourcer requires to preserve margins and keep costs down.

Tomalonis explains, "iSUN had the engineering and manufacturing resources and was willing to take a number of products and use the aggregate dollars to get to the volumes we needed." Fletcher-Terry bundled six machine product lines, which gave Tomalonis "some leverage in striking a deal."

Other advantages of the relationship

The arrangement had other advantages as well. "We're constantly developing new machinery," says Tomalonis. "We can bring those new products to market quicker and obviously at lower cost by using iSUN's engineering and manufacturing skills." The Chinese operation also executes designs because the engineers there are well versed in CAD and 3-D modeling. So they can assume more of the design role from the idea engineers in the United States. Depending on the complexity of the machine manufactured, iSUN can achieve turnaround times as quickly as two months.

Another big benefit is that it's ideal for labor-intensive products. Tomalonis says if an American factory is highly automated, the automation took out most of the cost. But Fletcher-Terry's machines require a lot of manual labor. So labor arbitrage constitutes a large portion of Fletcher-Terry's savings.

According to Tomalonis, what initially attracted him to iSUN was its factory in China, although the Chinese supplier also has engineers in America. iSUN's U.S. offices are located 45 minutes away in Boylston, Massachusetts. "We constantly interface with their engineers," says the procurement director. "They typically meet face-to-face once a week and are on the phone five times a day."

Lower tooling costs equal better ROI

Return on investment was impressive. Tomalonis says the payback on tooling for most products is less than a year.

This and other advantages Fletcher-Terry has experienced add up to serious savings for the company. All in all, says Tomalonis, he's seeing average savings of 30 percent for a product that, in all ways, is comparable to one produced in the United States.

Lessons from the Outsourcing Journal:

• By combining several product lines to meet volume requirements of an offshore supplier, a buyer can increase revenue for the supplier while retaining leverage in striking the outsourcing deal.
• If the customer needs to turn out new products, rapid offshore outsourcing manufacturing can help bring those products to market faster.
• Engineering products that require a lot of manual labor in the manufacturing and assembly process are best outsourced offshore to take advantage of labor arbitrage.

Publish Date: April 2009

Copyright © 2009 - Everest Partners, L.P.

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