SCDigest editorial staff

The News: Bookham an optical-component maker, saw it share price plummet last week after the San Jose warned that a shifting product mix and charges associated with the shutdown of its British manufacturing operations in favor of a new Chinese factory would push third-quarter results below the company's expectations.

The Impact: The story shows both the risks associated with any major supply chain move, even one with high longer term benefits, and the potentially huge impact of supply chain problems on share price.

The Story: Bookham had been a stock market star for the past year, with share prices up over 400% in that time, but saw it move the other way last week, as issues with a transition from a factory in the U.K. to one in Shanghai proved difficult to manage.

Over the past few years, the company has announced plans to close U.S. and European factories and move much of the work to China. However, the timing of shutting down one U.K. plant and moving its production to a new factory in Shenzen ate into the company’s profit and contributed to the share price dropping 30% after news about the higher than expected costs were released.

Bookham stated its gross margin and profit for the third quarter would be well below expectations. This was “due in part to unanticipated costs for inventory obsolescence and production scrap associated with the transition of manufacturing from the Company’s Paignton, UK facility, where production is being discontinued, to its low cost Shenzhen, China facility,” a company statement said.

Bookham’s problems highlight the myriad issues involved in offshoring production that may not be fully analyzed or planned for by company’s looking only at the allure of lower unit costs. This is especially true in industries with highly variable demand and rapid product lifecycles, where the timing of the move and how the move is managed can have a substantial impact in the short term.

Said SCDigest editor Dan Gilmore, “These transitional issues are always difficult. As Bookham's experience illustrates,  it is critical to model various scenarios to see their potential risk from things not going exactly as planned. This should be a lesson for supply chain executives and CEOs on the need to really think through offshoring transition schedules and costs.”

Can making the transition from a domestic to offshore location drive huge cost spikes if not done effectively? What are the risks companies need to consider, and how do you best mitigate them? Let us know your thoughts.