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Firms get savvy about outsourcing

By Nick Easen for CNN

Quality used to be the main problem with outsourcing, in the last decade this has improved dramtically in Asia.
Quality used to be the main problem with outsourcing, in the last decade this has improved dramtically in Asia.

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(CNN) -- "To build or to buy?" is a dilemma many manufacturers in the developed world face every day.

In a global economy where inefficiency is mercilessly penalized, many large firms have already decided to stop building in their home country and buy overseas.

And outsourcing production to countries like China is nothing new, but the idea is only now filtering down to smaller companies.

Some are beginning to tap into cheaper manufacture overseas, in order to grow their business and expand their brand.

This message struck a chord with one company in Northern Ireland -- Avalon.

For 14 years this manufacturer of high-end guitars, made famous by the likes of Eric Clapton and Van Morrison, was selling only 1,500 guitars a year.

These mahogany and rosewood, handcrafted instruments priced at $4,000 were so expensive that the company director could not even afford one.

"My niece told me she wanted a guitar. I had to do the unthinkable and buy her a competitor's product because the guitars we produce are far to expensive," Steve McIlwrath, CEO of Avalon guitars told CNN.

Avalon with a turnover of just $2 million was not making music for the bank manager either and faced a problem common in many cottage industries.

"The business model was chronically unprofitable. To try and project a global brand and all the costs that this entails, on the basis of such a small level of output, was never going to work."

Time to outsource

Experts say that consumers care less about where goods are manufactured these days.
Experts say that consumers care less about where goods are manufactured these days.

When the global market for guitars is worth $6 billion, Avalon knew that with limited potential for quick growth in Ireland, sourcing overseas was essential.

The company decided to turn to South Korea and Cort Musical Instruments Co. -- one of the world's biggest guitar makers, which churn out 600,000 instruments a year.

"It is a good marriage because they have a good design and a reputation for quality. We have good facilities and quality at affordable price," says Young Park, CEO of Cort.

With partially automated manufacture, the Korean plant produced a guitar targeted at the mid-market. It was much cheaper than the Belfast-made models at $800.

Last year 8,000 guitars were sold, boosting Avalon's turnover to $5 million. This exceeded forecasts by 300 percent. The Korean-made model has already won two acoustic guitar awards from Total Guitar, a UK music magazine.

"Outsourcing has enabled us to break out of the cottage industry mentality and treat our business in much the same way as the major competitors have been treating it all along," says McIlwrath.

According to a Stanford Business School study, outsourcing to contract manufacturers can sometimes harm some companies, by reducing incentives to innovate.

However, Avalon is trying to overcome this by running Korean and Irish manufacture in parallel. Innovation developed in the handcrafted models in Ireland can then be fed into the outsourced lines, which subsequently fuel the business.

"We are a global acoustic guitar brand with a manufacturing heart, which is at our base in Northern Ireland and it is from this that the design ideas really flow."

"By retaining that manufacturing heart and developing new ideas and maintaining quality level we can now be a serious player in the global marketplace."

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