Fundamentally, outsourcing changes the business model and
introduces many challenges.
If your own organization hasn’t jumped onto the bandwagon and outsourced most or all of its manufacturing to
specialty houses or to lower-cost countries,
then you have been reading a great many
articles and posts about the trend. There is
much debate over the effectiveness of the
strategy, the affect it has had on “American”
brand quality, and the affect it is having on
the U.S. economy and its ability to pull out
of the current recession.
In some cases, it has proven to be a good
move. In some cases it has proven disastrous.
Let’s set the scenario with a medium-to-large size business that is bought by a
large corporation or a holding company.
At the time of the takeover, the business
manufactures and assembles its custom and
unique parts and only sources materials and
standard parts, such as assembly hardware.
However, some time after takeover, the
greater corporate entity directs the business
to outsource its manufacture and to remain
solely an assembly house.
At the boardroom table, the decision
seems to make a great deal of sense. The
business can leverage the corporation’s
agreements with high-volume, quality-prov-en, manufacturing houses for better pricing.
The inexpensive cost of doing business with
lower-cost countries appears to offset the
shipping and inventory costs associated with
the global environment. It also enables certain components to be made from composites and plastics instead of choosing to make
them using the equipment and processes so
far used in-house, meaning that those component costs can be reduced as well. The
savings predicted over time are substantial.
There are three factors that lead to most
of the issues the business experiences as a
result of the decision to outsource.
1. Insufficient resources in the right
functions to outsource effectively
2. Loss of connection between the design
intent and the purchased components
3. Failure to effectively manage suppliers
In truth, all three of the above problem
sources are fed by one root cause: inexpe-
rience operating outsourced (instead of
in-house) manufacture. All of these prob-
lems are interrelated.
Let’s walk through the breakdown as it
manifests. First, the existing sourcing function suddenly becomes overwhelmed. It is
correctly resourced to purchase materials
goods, and standard components. It is not
correctly resourced to select and manage a
large suite of subcontracted manufacturers.
Immediately, the sourcing function must
increase its resources. However, there is a
lack of experience managing subcontracts
Subcontracted services require more
investigation and require more manufacturing process knowledge than the sourcing
personnel on staff possess.
Here we run into a repeat of the problem
in a different function: quality, specifically
the supplier quality function.
In order to determine if a subcontracted
manufacturer is really capable, we must send
our supplier quality function to that manufacturer and investigate. Unfortunately, our
pre-existing resources for that function are
not enough in number to meet with all of
the would-be subcontractors.
Meanwhile, the production floor is rearranged, equipment is sold off, personnel
are redistributed, and there’s no going back
to in-house production even if the business
changed its mind.
If the business plan reasonably predicted
the increase in overhead in sourcing and
quality functions and the lost revenues or
profits from the learning curve, it will be
OK. Chances are, those predictions weren’t
accurate or didn’t exist, and business savings
are already diminished or eliminated for
several years to come.
Now we start to observe problems asso-
ciated with the disconnection between
engineering design intent and the manufac-
turing process, which brings us to our final
failure mode as the business is, effectively,
unaware that it has introduced a quality
issue. How could
it be aware?
There is only one
the business isn’t
to do necessary
Checking the certificates on incoming
manufactured custom parts is much more
complex than checking certificates on
incoming material. To evaluate incoming
custom parts, the quality function must compare the parts, its manufacture, its critical
dimensions, its treatments, its performance
and its material authenticity against the specifications on the engineering drawing. This is
a greater skill set.
And that brings us to the nightmare. The
business has at least one quality/safety problem that it isn’t aware of and it doesn’t have
an inspection/qualification process robust
enough to discover it.
How many of these quality issues will be
discovered, painfully, before the business
realizes the full extent of the process gaps,
logistical errors, gaps in quality control,
risks to business and customers, and failure
to appropriately manage their total supply
system? It often takes years before the first
of the real dangers are realized. It can take
years more before a business fully grasps
the extent of the mistakes made and gaps
Fundamentally, outsourcing changes
the business model and introduces many
challenges. If a business doesn’t know and
understand this up-front, it goes through a
very painful and costly process of learning it
the hard way.
Stay wise, friends.
If you like what you just read, find more of
Alan’s thoughts at www.bizwizwithin.com