Outsourcing. How To Make Money With Outsourcing? Learn How To Organized Outsourcing.
Every thing about outsourcing, its types ............. a wonderful presentation by Prateek Shrivastav
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Table of content ACKNOWLEDGEMENT:
INTRODUCTION 1.1.Definition of Outsourcing 1.2.A Brief History Of Outsourcing: 1.3.The Trends Shaping Outsourcing Manufacturing 1.4.Initial stages of evolution 1.5.Outsourcing Today 1.6.Key decision of outsourcing 1.7.Why do companies outsource 1.8.Observations from the survey results 1.9.Outsourcing or Insourcing 2. WHAT SHOULD BE OUTSOURCED? 3. 7 BUSINESS FUNCTIONS THAT CAN BE OUTSOURCE 4. OUTSOURCING MANUFACTURING 4.1.Things To Consider Before Outsourcing Manufacturing 4.2.How To Outsource Your Manufacturing And Cut Costs 4.3.Manufacturing Your Own Products Or Using Third Party
6 6 6 6 7 7 8
9 10 11 12 13 15 17 18 19
4.3.2.Full cost analysis
4.4.Choosing A Contract Manufacturer
4.5.Important Things To Know About Manufacturing Suppliers
4.6.Working With Overcies Manufacturing 4.7.Outsourcing Your Manufacturing Pros And Cons 4.8.How To Ensure Quality Control
22 24 25
4.9.How To Outsource Your Manufacturing Process
4.9.Measure And Evaluate Manufacturing Outsourcing 4.10.Manufacturing Outsourcing: 6 Common Pitfalls To Avoid
5. OUTSOURCING MANUFACTURING PROCESS FRAMEWORK 5.1.Zeng Framework
32 34 1
5.2.Momme And Hvolby Framework 6. WHAT TO CONTROL IN MANUFACTURING OUTSOURCING 7. RESEARCH PAPER ON MANUFACTURING
35 36 38
8. KNOW HOW TO IMPROVE THE ORGANIZATION’S MANUFACTURING OUTSOURCING SUCCESS
9. SIX SITUATIONS: WHERE MANUFACTURING IS BEST LEFT IN-HOUSE 42 10. OUTSOURCE THE MANUFACTURING EXAMPLES
11. PAKISTAN RANKS AMONG TOP OUTSOURCING DESTINATIONS
ACKNOWLEDGMENT First of all we would like to thank to All MIGHTY ALLAH who has given us the consistency and erudition to make our endeavor credible. This work has been dependent on the support and contributions from several people. These people have through their commitment, encouragement and support helped me through the journey to write this Research work. I would like to thank first and foremost, to our teacher, SIR ZULKARNAIN, for giving us this opportunity to work on this project, for providing us guidelines throughout the project as how to collect the data and how to work on our project. It is due to his continuous efforts and support that we are able to complete this project in a very comprehensive manner. Afterwards, we would also thanks here to all those people who directly or indirectly help us in achieving our objectives regarding this project.
I dedicate my work to Al Mighty Allah who gave me the courage to complete this project and to Hazrat Muhammad (Peace Be upon Him) Who irradiated the darker paths of humanity With blaze of knowledge and guidance. To my Loving parents whose prayers make us able to complete this project. And to Sir Zulkarnain who provide me related information’s and guide lines to complete this task effectively.
ABSTRACT This project assesses the outsourcing of manufacturing activities by firms. Is Outsourcing manufacturing as the strategic solution to strengthen future competitiveness or just a modern trend? The analysis begins with first generating an awareness of the nowadays manufacturing outsourcing business and variances and the steadily surrounding decision making process. The advantages and disadvantages of manufacturing outsourcing and the different impacts of outsourcing on business. And in what condition and when to outsource the manufacturing and how to measure its performance. The insourcing/outsourcing decision requires a careful understanding of internal core competencies, both currently and in the future. The decision involves considering total cost, as well as quality, technology, and customer requirements. Insourcing/outsourcing decisions must be aligned with other functional strategies. Traditionally, in most industries strategic aspects of manufacturing outsourcing have been subordinate to tactical considerations. However, in the past decade, the need for considering the long-term and strategic goals of conducting business in a global multiple-partner environment has been magnified. Consequently, the complexity of making outsourcing decisions has increased. The currently available decision models do not take into consideration the most important and comprehensive strategic and tactical aspects of outsourcing. Therefore, we also see researchers propose a framework for making strategic manufacturing outsourcing decisions through developing a meaningful multi-factor decision model.
INTRODUCTION Despite receiving a lot of attention in the last decade, outsourcing is still a term many people do not understand fully. Let us, in this section, try to examine some of the basic factors that are common to all types of outsourcing and thus derive a definition and after this go towards manufacturing outsourcing. Definition of Outsourcing : Outsourcing is any task, operation, job or process that could be performed by employees within an organization, but is instead contracted to a third party for a significant period of time. In addition, the functions that are performed by the third party can be performed on-site or off-site. Hiring a temporary employee while your secretary is on maternity leave is not outsourcing. Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant. A Brief History Of Outsourcing Since the Industrial Revolution, companies have grappled with how they can exploit their competitive advantage to increase their markets and their profits. The model for most of the 20th century was a large integrated company that can ―own, manage, and directly control‖ its assets. In the 1950s and 1960s, the rallying cry was diversification to broaden corporate bases and take advantage of economies of scale. By diversifying, companies expected to protect profits, even though expansion required multiple layers of management. Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures. To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding which could be outsourced.
The Trends Shaping Outsourcing Manufacturing: As the certain market, Industrial and business trends are going direction towards the world outsourcing manufacturing for decreases its cost and to focus most on its core aspects‘ of business which will leads them more easily towards success. These trends are driven by business top management by seriously all aspects of business. They Industrial Revolution, companies have gaining competitive advantage by outsourcing manufacturing portion to increase their markets and their profits. These trends also support the notion that during times of economy duress, investment is placed into safe, predictable markets like the United States and countries that are intimately connected to them, like Mexico. The countries such as Mexico, France, Germany, United States, United Kingdom and Japan, which are perceived to be more stable for investment. 6
Initial stages of evolution Outsourcing was not formally identified as a business strategy until 1989 (Mullin, 1996). However, most organizations were not totally self-sufficient; they outsourced those functions for which they had no competency internally. Publishers, for example, have often purchased composition, printing, and fulfillment services. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. Outsourcing support services is the next stage. In the 1990s, as organizations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not related specifically to the core business. Managers contracted with emerging service companies to deliver accounting, human resources, data processing, internal mail distribution, security, plant maintenance, and the like as a matter of ―good housekeeping‖. Outsourcing components to affect cost savings in key functions is yet another stage as managers seek to improve their finances. Outsourcing Today Now, the outsourcing of many business functions is quite common. Call center companies are kept busy from a steady stream of clients looking to outsource these duties. When a customer calls an insurance company's 800 number with a question or a concern, he or she will likely be speaking with someone who is working for a separate company, even though that person has been trained to handle customer service duties. Not all outsourcing involves foreign workers. Many people work as independent contractors providing services to businesses of all sizes. Outsourcing is a growing trend that is not likely to slow down in the future. The days when someone worked for one employer for all of their working life is becoming a thing of the past, and more more employees may be finding that they are being replaced by outsourced workers. Some individuals may find that they are laid off from the company they work for, and are then hired back to that some company as a contractor. Why do companies outsource Here are some common reasons:
Reduce and control operating costs
Improve host company focus
Gain access to world-class capabilities
Free internal resources for other purposes
A function is time-consuming to manage or is out of control
Insufficient resources are available internally
Share risks with a partner company
In earlier periods, cost or headcount reduction were the most common reasons to outsource. In today‘s world the drivers are often more strategic, and focus on carrying out core value-adding activities in-house where an organization can best utilize its own core competencies. KEY DECISION OF OUTSOURCING Purchasing an item, process, or service externally when the organization has the capability to produce it internally is equivalent to "selling jobs" Overriding factor in considering internal versus external products/processes / services is TOTAL COST
(Montresor, s. (2007) Outsourcing and transaction costs in “real” time and space)
Main factors influencing successful outsourcing The critical areas for a successful outsourcing program as identified are:
Understanding company goals and objectives
A strategic vision and plan
Selecting the right vendor
Ongoing management of the relationships
A properly structured contract
Open communication with affected individual/groups
Senior executive support and involvement
Careful attention to personnel issues
Short-term financial justification
OBSERVATIONS FROM THE SURVEY RESULTS Each heading in this section reflects a section of the survey. The subheadings (underlined text) were risk considerations that survey respondents scored according to how effectively each one was managed in their respective companies. Drivers of Outsourcing Review The top three drivers that most often cause an outsourcing review are 1) the need to reduce cost or internal headcount, 2) internal capacity constrained by increasing market demand, and 3) internal manufacturing or service performance is insufficient or does not meet requirements.
Driver Need to reduce cost or internal headcount Internal capacity constrained by increasing market demand Internal manufacturing is insufficient or does not meet requirements Strategic sourcing process Regulatory, legal or environmental Internal capacity is underutilized
Percentage 29 22 20 19 06 04
(Protiviti’s Reduce Outsourcing Risk and Procurement Capability Assessments)
REASONS OF OUTSOURCING
What is Insourcing Insourcing is a recent concept that has been advocated as an alternative to outsourcing. Supporters believe that it will lead to better management control and job creation at the local level. Insourcing is also seen as a solution to the problems of control and hidden costs with outsourcing. Insourcing seems to be more prevalent with manufacturing companies that hire labor and services from an external organization in order to cut costs and decrease their tax burden. Insourcing can also mean an organization building a new business center or facility which would specialize in a particular service or product. Insourcing also seems to be popular among those companies who have been dissatisfied or even unsuccessful with outsourcing. It is also employed when temporary workers fill positions within an organization for a short duration. Outsourcing or Insourcing
Before deciding whether insourcing or outsourcing is the best option, it is important to first define business goals. A poorly defined objective may result in neither insourcing nor outsourcing being beneficial. Though insourcing may look like a straightforward option, businesses need to look closely to see how difficult it is to implement. Insourcing makes sense when the business requirement is only temporary or where no significant investment is involved. Insourcing is also an option for those who want to outsource but are wary to do so. Insourcing may give you a preview into how outsourcing can work. Done well, insourcing may help you build a team of skilled people, though it might take more time than outsourcing. Insourcing can also help smaller businesses and startups that have little or no experience with outsourcing. Outsourcing is a clear winner when businesses need to cut costs while still requiring expert personnel. It was once considered a luxury only larger companies could afford. Today, companies of all sizes use outsourcing to let go of managing non-core functions while saving a lot of money in the process. Outsourcing also gives you access to specialized skill sets of resources and processes that insourcing simply cannot match—not without significant costs. This is perhaps one of the most important factors for businesses choosing to outsource. Though there are many outsourcing vendors, it is important to assess potential vendors before shaking hands on a partnership. Doing
a little homework before choosing your outsourcing partner can lead to long term gains and help you build a long-term competitive advantage for your business. How to decide whether to outsource There are no simple criteria to conduct an outsourcing versus in-house analysis. The benefits associated with outsourcing are numerous, and one should consider each project on its individual merits. Ongoing operational costs that may be avoided by outsourcing are also a consideration. In a nut shell, outsourcing allows organizations to be more efficient, flexible, and effective, while often reducing costs. The key factors which have led to a growing trend of outsourcing are
Lack of expert-labor in some portions of the business process Availability of cheaper labor, whilst not comprising on the quality of output Ability and feasibility to concentrate on the other crucial business process
WHAT SHOULD BE OUTSOURCED? Harmon‘s Process Strategy Matrix provides very useful guidance about which processes can be safely outsourced and which should be kept in-house, but subject to automation or other improvement. It uses two axes: 1. Complexity/dynamism of the process. Dynamism is a measure of how much the process changes. 2. Strategic importance of the process
Ken Garrett is a freelance lecturer and writer 12
Notice that in the right-hand pair of quadrants, where strategic importance of the process is high, outsourcing is not recommended. If a process is strategically important it is likely to be a source of competitive advantage. If that were to be outsourced, then the company would be telling the supplier about its most valuable secrets and competences. What would then be left for the outsourcer to do? If a process is relatively stable and non-complex, then automation would be feasible and worthwhile. If, however, the process were very complex and subject to many changes, then automation will be difficult to achieve and even more difficult to keep up to date.
7 BUSINESS FUNCTIONS THAT CAN BE OUTSOURCED Outsourcing can be a great way to get quality results, without paying high prices. You can achieve quality results by outsourcing firms who are experts in certain areas of your business. This allows you to easily capitalize on their expertise and abundant knowledge. Furthermore, it allows you the flexibility to focus more on your core business operations, while cutting down on administrative cost. There are several basic business functions that can easily save you time and money by outsourcing. They are: 1. Manufacturing Manufacturing is the business of producing industrial goods, and can encompass anything from embroidered hats to drill parts to car stereos. Manufacturing is capital intensive, meaning that it involves a lot of money and specialized equipment. Manufacturing requires large factories with dozens of pieces of specialized machinery and operators who know how to work them, and modern manufacturing often involves frequent changes to machinery and production. 2. Human Resources Keeping up with benefit packages, employee law standards, and wage issues are functions that should not be taken lightly. The Human Resource department needs continuous training and education as laws, benefits, and protocols change frequently. Therefore if you are concerned about the high cost that accompanies hiring employees and providing consistent training, then you probably can achieve the same goal by hiring a great reputable human resources firm to perform these functions for you. 3. Legal Services This is a controversial issues, but it demands some discussion. Many companies are outsourcing their basic legal needs to companies that are located in places such as India. Some American companies are requiring that their basic legal task to be performed by legal firms who are said to be quite efficient and fast. Such legal duties consist of processing legal documents, researching legal codes, or drafting contracts. If that is not enough to convince you, companies such as DuPont, Morgan Stanley, and Cisco Systems were said to have successfully outsourced their
legal departments to an outsourcing firm permanently. Not to mention, these firms are all located in India. 4. Accounting or Bookkeeping Services There are many accounting firms that offer outsourcing capabilities that are both convenient and economical. These firms can do everything from pay vendors, invoice clients, pay employees, prepare quarterly payroll/sales tax reports, and provide online access to all of your information. You are also assigned a representative to your account, in which you can contact if you have any questions. 5. IT Outsourcing you IT needs is a great way to save on cost and office space. Instead of hiring an IT department, you can hire an IT firm who would be able to perform the same services as your employees would. Now, with the advancement of technology it makes it even easier to perform and manage IT issues remotely. Most outsourcing firms provide both onsite and remote monitoring, desktop support services, hardware/software updates, training, and technical support. 6. Website Services This is another great way to effectively outsource a much needed function. Website design and development is not a job that needs to be conducted at your office. Outsourcing allows you the option of selecting from a local firm, or one that is miles away from your business. Most firms can assist you with many internet related activities such as website design/development, email marketing, search engine optimizing, and ecommerce. Therefore, by creating an informative and quality driven website, you can rest assured that your web presence will give you a "leg up" on the competition, without the added cost. 7. Knowledge Process Outsourcing Companies can decide to outsource some of the high value and high skill requiring jobs to places where they can have access to some of the best talent in that particular field.People working in a KPO are highly skilled and qualified individuals such as lawyers, doctors, engineers, MBA's, Chartered Accountants, Company Secretaries etc. Experts in market research, investment banking and research, medical research, patent management and research, legal research, engineering and construction specialists etc. The list of functions that can be outsourced can be endless. What should of course be kept in mind is the nature of your business and the demands of your customer. Outsourcing can help increase your profit margins however what needs to be determined is how you can make it work for you, to your advantage.
WHAT IS MOST OUTCOURCED
OUTSOURCING MANUFACTURING Many manufacturing firms have started outsourcing manufacturing because the costs to produce the products are too expensive or the cost to hire employees is too expensive. When you are focusing on cutting costs, outsourcing manufacturing is one of the best ways to do it. An increasing number of companies spend an increasing amount of money to outsource their manufacturing. According to companies Accenture and The Outsourcing Center, companies opt for outsourcing as a way to increase flexibility and decrease the money and manpower involved in building and maintaining their own factories. Furthermore, for many small companies, outsourced manufacturing makes much more financial sense than building a factory that will be underutilized. Surprisingly it can be much cheaper to relocate your manufacturing plant to China and ship the products back to the United States. Part of working with china manufacturing plants also means you need to be able to hire an auditor that will help you assess the suppliers and to make sure both companies are maintaining quality standards and ethical standards as well. Since different
countries have different operating procedures, it can be hard to standardize procedures overseas and through different cultural barriers. Some of the challenges you will face as your outsource manufacturing include the following: 1. Quality of materials and effectiveness of the materials 2. Internal and external audits 3. Review of management procedures 4. Continuous process improvement 5. Documental control and organization 6. Identification of waste, control, and disposal 7. Recruitment of staff and training of staff To help with quality control and t make sure you meet quality standards, you will want to focus on additional things like lean manufacturing or Six Sigma. A popular method for quality control is Lean Six Sigma. This allows you to not only focus on reducing your defect ratio so your customers have quality products, you will also focus on improving the rate in which the products are produced along with the employee morale. Overseas manufacturing can save your company money, but is the hassle of cultural barriers worth it? You also need to consider how expensive your raw goods are and where they are coming from. A big problem lately has been dealing with the lead paint issues. In the United States, it is recognized that lead paint is dangerous to children and adults and when toys are manufactured using lead paints, you will have a product recall. Will the manufacturing plant pay for the product recall and handle the publicity to fix your tarnished reputation or will this fall directly to your company? This is a big issue to talk over before you start outsourcing manufacturing. Surprise your manufacturing plants by sending in quality control checks and audits. This will help to keep the manufacturing plant on their toes and to make sure they are listening and honoring the needs of your company. You must be able to have good communication with these facilities in order to ensure that everything is working correctly and that they understand your needs and that they are actually following them. Hiring a quality control specialist is a must with outsourcing manufacturing. It is the only way to make sure corrective issues are implemented when you are trying to address problems within the company's manufacturing and assembly lines. Some of the things to discuss with the quality control specialist include the following:
Health and safety Employee morale and pay Manpower needs Resources Management structure 16
Commercial conditions Business licensing Legal procedures Company history Location Local infrastructure The quality control specialist will be able to make sure your company is able to run correctly even though they are in other countries. This will help to protect the reputation of your company and it will ensure that your company will remain successful for many years. Random checks are the best way to make sure you are running a successful plant and that you have gathered all the right information to make sure you are maintaining a high reputation. THINGS TO CONSIDER BEFORE OUTSOURCING MANUFACTURING Because of the difficulties within the economy many manufacturing businesses are looking for ways to cut costs. One of the most widely considered ways to cut costs is outsourcing some of the production of their product. This can mean significant cost savings and higher profitability if it is handled correctly. For many manufacturing businesses this cost savings can often mean the difference between staying in business and shutting their doors. Because of the high cost of producing an entire product in one location outsourcing can often be a cost effective solution. However, there are certain things that you should consider before you decide to outsource. Here are some things to consider before outsourcing manufacturing• Decide if outsourcing will be profitable for your business-The bottom line in outsourcing is whether or not you will make money by utilizing it. You will need to do a cost analysis of your product to determine if outsourcing will be right for you. It is important to understand that outsourcing does not save money for all businesses. There are a number of reasons why this can be so from transportation to lack of skilled employees, so it is important to determine if it can work for you. Keep in mind that there may just be a better way to save money. • Decide what potential products (or parts of products), will be outsourced-As part of the process of determining whether or not you should use outsourcing you will need to look closely at all products and determine if the entire product or parts of it should be outsourced. Remember, that you are only looking at them in terms of whether or not you can save money by having them made somewhere else. Once you have decided what products or parts of products will be outsourced then you will need to look closely at the entire manufacturing process. • Decide what manufacturing process will be used-There are different ways to outsource your manufacturing. You will need to become familiar with them in order to find the one that works best for your needs. You will need to know what is involved in the process and what will be required of your company. It is important to understand that if you are going to be outsourcing part of a product rather then the entire thing, the process may be somewhat different.. • Decide which company you will outsource to-At this point in the process you will begin contacting companies that may be able to do the outsourced manufacturing for you. If you are unable to contact individual companies there are businesses that specialize in finding the right outsourcing manufacturer. These are the people who will be able to find the company that will best meet your needs. However, you should keep in mind that they will charge a fee for this 17
service so you may want to consider doing this yourself. If you decide to contact outsourcing manufacturing companies yourself it is crucial to get all of the details in writing concerning what they can offer you and how much it will cost. Keep in mind that price should not be the determining factor as you want to choose a manufacturing company that will make the product to the highest quality of standards .
HOW TO OUTSOURCE YOUR MANUFACTURING AND CUT COSTS In today's economy, most businesses are looking for different ways to cut down on their overall costs; this is especially true for manufacturers. Cutting down on overall costs simply means you are saving money, and increasing profitability. The bottom line is that saving money in a bad economy can sometimes mean the difference between staying in business, and having your business fail. With manufacturing businesses, one of their biggest costs is the manufacturing all of their products in one location. Many manufacturers find that they can save considerable cash by outsourcing a portion of their products. Today, many manufacturers are choosing to outsource their manufacturing overseas. Here is what you need to know about how to outsource your manufacturing and cut costs. Determine if outsourcing will be good for your company. You will need to look closely at your manufacturing process to see if outsourcing some of your products, is going to be profitable. It is important to keep in mind that not all businesses, can save money by outsourcing their manufacturing. There are many reasons for this such as it can be too hard to get the materials needed in another location, or because there are better methods, you can enact to save money. You will also need to determine how much it is going to cost to manufacture the product some where else, and then have it shipped to your location, to figure out if you will be benefiting from it or not. Determine exactly what products you will want to outsource. You will need to go through the various products that your business manufactures, to see exactly which ones would save you the most money by, having them outsourced. Many manufacturers choose to the beginning to have one product outsourced and then see if it will work for their business. Remember that in order to determine if outsourcing a product is going to be beneficial, you will need to examine your manufacturing processes. Determine which process will be used-You will to need to research the process that is involved in outsourcing your manufacturing. You will have to understand exactly what is specifically involved in the process and what is going to be required of your business, in order to outsource a specific product, or just a part of a product. Keep in mind that if you are only going to be outsourcing a portion of a product, the rules are going to be a bit different, than if you outsourced the entire product. At this point you will also need to find out the best place to outsource your product to, such as if it is cheaper to go overseas or to stay local.
Determine which outsourcing manufacturers are viable candidates. You will then contact the businesses that specialize in outsourcing manufacturing because they will be able to help you know where to go, or who to contact, to outsource your manufacturing. They should also be able to give you advice on which companies will work best for you, and which ones you should stay away from. Keep in mind that you will need to pay them a fee for their services, so you should consider looking into doing this yourself. After narrowing down the field you will then contact the companies, that you are considering using, and ask them for some basic information. You will want to find out how much each of them will charge for manufacturing your products. You will want to choose the company that can help you cut down on your costs the most, as well as the one that will provide you with the most benefits and the highest quality product. Once you make the final selection make sure that you sign a written agreement that you both agree with, so that you can know what to expect in the future.
MANUFACTURING YOUR OWN PRODUCTS OR USING THIRD PARTY Cutting costs and providing customers with the best products possible is always a concern for manufacturing plants. If you are trying to reduce the amount of money you spend on manufacturing processes, you may need to consider third-party manufacturing. Establishing a contract will be one of the hardest parts as you need to try and limit your liability when it comes to the product. Since another manufacturer is in charge of producing them, they should also be liable for product defects and the costs to send new products to the customers. You are in charge of the product design but the actual engineering and manufacturing of the product is left up to the manufacturing company. Third-party manufacturing has its benefits, but it also comes with its fair share of problems as well. The industry you work in will provide you with the benefits or challenges. If your customers are seeking quality customer service and they call your hotline only to have a frustrating experience due to language barriers, you will suffer from customer fallout. Just because third-party services can provide you with something for cheaper doesn't mean they are necessarily better. If your customers are taking the brunt of your money-saving strategy, they are not going to be satisfied which will in turn leave you unsatisfied and potentially out of business. Third party manufacturing is a great way to cut costs and to reduce the burden on your company. The other nice thing about third-party is the networking possibilities. When you are working with multiple companies to produce your products, you will gain exposure to a new audience and potential customer base in the manufacturing industry. Word of mouth marketing is a great way to let people know about your business and you can use your new contacts in the manufacturing industry to meet new customers and generate more clients. Whenever you are thinking about expanding or you are dealing with an influx of orders, thirdparty manufacturing is definitely the way to go. The providers will eliminate the stress you may 19
be feeling and they will make it easier for your company to produce the products it needs in a timely and efficient manner. Not only can you find third-party companies to produce and ship out products for you, they are also available in the form of third-party resellers. These companies can also reduce the burden you may feel to boost your sales numbers as they will order a set number of products and focus on selling them. Your commission rate will not be as high as they could if you were to sell them on your own but you will still earn a nice consistent contract for your business. The nice thing about resellers is how much control you have with them. Unlike the third-party manufacturing plants, you can actually provide specific rules for how they can go about selling the products. This allows each customer to have the same interaction with your company even if these individuals are not actually hired by the company. If you want to save money and boost production, third-party manufacturing is the way to go.
MAKE/BUY STUDIES Finding True In-house Costs is not Easy!
Costs of Overhead Costs of Quality Operational Costs Capital Costs
CHOOSING A CONTRACT MANUFACTURER A firm that specializes in manufacturing components or products for another "hiring" firm is known as a contract manufacturer. While this type of manufacturing was once only the domain of technology companies it has spread into many other areas including pharmaceutical and cosmetic companies. There are many industries that utilize this process, especially the aerospace, defense, computer, semiconductor, energy, medical, personal care, and automotive fields. This type of manufacturing can include many different types of production including but not limited to: CNC machining, chemical development, complex assembly, aluminum die casting, grinding, broaching, gears, and forging. In a contract manufacturing business agreement, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the cost of manufacturing the parts based on processes, labor, tooling, and material costs. Typically a hiring firm request quotes from multiple contract manufacturers. When the bidding process is complete, the hiring firm will select a contract manufacturer who then will begin the actual manufacturing of the components or product. The contract manufacturer literally acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm. It falls to the contract manufacturer to oversee production and bring the product to market for the contract price. Some of the largest and most profitable companies use contract manufacturing as an alternative to operating and maintaining their own factories. Contract manufacturing can be used for anything from single components to a complete product. There are many different and varied components and complete products that are made using contract manufacturers. Some of these products are: printers, computers, cellular phones and personal care products (cosmetics, hair care and personal hygiene). Many companies today are finding that in order to stay profitable and move a product quickly they must choose a contract manufacturer. This is done to help the parent company minimize their capital spending and often results in being able to shorten the time it takes to fully a develop a product on their own. These companies are finding that choosing a strictly manufacturing company to develop their products helps considerably with their profit margin. Contract manufacturers are set up to produce large numbers of products in the most cost and time efficient way possible. This especially give the hiring company (owning the product) more flexibility in meeting shifting consumer demands. But for these benefits to be realized it is essential for a firm that is outsourcing to choose a contract manufacturer that is best suited to its needs. Contract manufacturing also has extended internationally. Companies are finding that using contract manufacturing in an international context, thereby establishing a foreign subsidiary as a contract manufacturer can have favorable tax benefits for the hiring/ parent company, allowing them to reduce overall tax liabilities and increase profits. The amount of profitability depending upon the activities of the contract manufacturer.
IMPORTANT THINGS TO KNOW ABOUT MANUFACTURING SUPPLIERS There are plenty of important things to know about manufacturing suppliers. Your manufacturing supplier can be someone that you outsource too in order to help you make a finished product or your manufacturing supplier can also be someone who supplies you with materials to build your product. No matter what type of supplier you have you want to have a good working relationship with them. Here are some important things to know about manufacturing suppliers to gain a good working relationship with them. One of the many important things to know about manufacturing suppliers is when to expect the product you are outsourcing to them. Before entering into any working relationship with a manufacturing supplier you need to get to know more about them to make sure they will be able to supply what you want and when you want it. This can be done in interviews with other personnel from the manufacturing supplier. You should know what their turn around times are or how long it will take you to get the supplies from the manufacturing supplier to your company. Knowing the turn around time will help you with making your product and marketing it. Along with doing research into the manufacturing supplier you are looking at you should also look at the products they make and the reputation that those products have. Not all manufacturing suppliers will have the same quality of product. If you are putting the manufacturing suppliers' parts into your products you will want supplies that can stand up to scrutiny and help your product to shine. It is important to know how well the manufacturing suppliers parts or supplies can handle what you need those parts or supplies for. Important things to know about manufacturing suppliers can have more to do with the supplier then with your company. You need to know as much as you can about the manufacturing supplier and their products in order for you to make an informed decision about who to outsource to or to buy any supplies from. You will be working with your manufacturing supplier for years to come so the more you know ahead of time the better.
WORKING WITH OVERSEAS MANUFACTURERS Outsourcing your manufacturing can cut costs, but it can be a danger to your company as well. Overseas outsourcing can cause a lot of frustration to your customers as many of the call centers overseas have very thick accents, making it hard for your customers to get the support and help they need. However the cost of having toys and other things manufactured overseas may be significantly less due to salaries of the workers. In overseas countries the value of the dollar may be much higher, causing you to pay less per unit that you will in the States. Most companies outsource at least one thing whether that is the actual production of your products or payroll services; you are most likely going to outsource at least one thing. One
common rule people follow is leasing what depreciates, which is why so many companies outsource a lot of things. One of the biggest reasons to use outsourcing is because of the ability to avoid the cost of purchasing manufacturing equipment along with the raw goods you need to create the products. When you do so, you are able save yourself money on these costs and also on the maintenance of these machines. This is a great way to strengthen your cash reserves and to put the responsibility of your manufacturing processes on another company that will need to deal with the liability issues. Staffing is another cost you can avoid when you are dealing with overseas manufacturers. Since it takes a lot of people to run a manufacturing plant, you don't have to worry about finding these employees to run the machines and to run the company. This cost savings is huge for your business as you also reduce your liability issues that are common for manufacturing plants and employee injuries. Product defects and recalls must be paid out of the pocket from your manufacturing plant. This is another big cost savings to your company bit you still risk dealing with the customer fall out that may come as a result of your inability to provide your customers with solid products that are free of defects and other problems. It can be stressful and frustrating for businesses to deal with the employees that work at the manufacturing plant, especially if they are interacting with your customers. If you are outsourcing your call center, you need to be extremely picky and consider the needs of your customers. A lot of companies have switched to automated call service centers. These automated services allow many of your customers to have their simple needs met but you will be responsible for providing some customer service agents that can handle additional needs that cannot be handled with the automated system. Overseas manufacturers are not right for everyone. Always consider the type of industry you are in and the customers you are working with. Having a complex industry may lead you to seriously consider using overseas manufacturers that are industry specific. Outsourcing to companies that are not industry specific can cause problems for you and your customers. Many times the people manufacturing your products or talking to your customers will have no knowledge about your company and your industry whatsoever, leaving both them and the employee frustrated. Many companies consider using overseas manufacturers and outsourcing when they are expecting an influx of orders. If you are in a growth spurt, you need to consider outsourcing your production even if it is only for a few weeks or months. This way you can manage the changes in a timely manner and you will be able to manner your business while you are adjusting to the changes of growth.
OUTSOURCING YOUR MANUFACTURING PROS AND CONS If you are in the manufacturing business, then the word "outsourcing" is extremely familiar to you, as it becomes part of the industry. For others it may be a some what foreign term so let's begin by explain what it means to "outsource" in manufacturing. Outsourcing is contracting with another company or person to do a particular job or function for you. It is not unusual for companies to outsource regularly. Generally speaking, the outsource "service" that is provided to the company is usually done by a third party provider; A person, or a group that is not associated with the business in any way. Outsourcing can help companies be more efficient and cost effective. Outsourcing usually encompasses four stages: 1. 2. 3. 4.
Strategic thinking Evaluation and selection Contract development Outsourcing management Outsourcing also depends on three main factors to be successful. Executive Level support in client organization, Communication efforts from management to employees, and the client's ability to manage its providers. It becomes even trickier when the companies take their outsourcing to other foreign countries because of language barriers, and cultural and time zone differences. With all that in mind and a little more knowledge in outsourcing, let's take a look at the pros and cons to outsourcing your manufacturing plant. Pros to outsourcing in manufacturing
Specializing in what they do best is a great benefit of outsourcing. Any smart business will hire independent consultants or outsource critical functions within their business. Business owners cannot do everything all at once and becomes very ineffective, which is why outsourcing can be a huge advantage to them. Outsourcing can allow business owners the freedom to focus on what they need to in order to keep their business running smoothly. This is extremely important in large manufacturing plants who want to increase the quality of their products. Outsourcing allows you to hire the right person for the right job and may give you some new ideas into your business as it presents an unbiased perspective. Every manufacturing business is looking to decrease their costs which is exactly what outsourcing can do for you. When you hire only what you need, you pay for only what you need. Outsourcing can also give you a small advantage when trying to win customers, and other project bids. If you have "specialist" within your company that can increase quality and cost who wouldn't want to have you on their team?
Cons to outsourcing in manufacturing
Upsetting employees may be one of the major disadvantages to outsourcing. Sometimes employees feel less important and the quality of work can suffer. You could lose money on your outsourcing investment. Every business investment has some risk and there is no guarantee that outsourcing is going to produce the quality you want, and could end up costing more money because of labor. Business employees to some degree or another are fairly loyal to a company, but when you outsource you run the risk of having less control over what happens and less loyalty from those you have hired. The desire to "get the job done" may be lower than what you wish it to be, and the job might take a lot longer than planned, costing you more money. Although some may argue that outsourcing can give you an edge over other companies, others might argue that it takes away your competitive edge. Often times with outsourcing there are conflicts of interest and issues with confidentiality. It is always a good idea to have confidentiality agreements to steer clear of this problem. The decision is ultimately yours when it comes to outsourcing your manufacturing plant. Knowing all the information is the best way to begin the process.
HOW TO ENSURE QUALITY CONTROL When you are producing products or outsourcing your products to another company, you need to make sure there is a high level of quality control. Quality control simply means you will set a standard for where your products need to be at and then strive hard to meet those expectations. When quality control is not implemented within a plant, it can lead to manufacturing defects and other problems. Product recalls are incredibly expensive for your business and could damage your company's reputation for life. Quality control helps you avoid expensive lawsuits and other things by taking steps to prevent problems and eliminate them before they become a burden and a waste on your company. If you are choosing to work with a company that will manufacture your products, you need to also find out how they implement quality control. This is extremely important if you are working with manufacturing companies that are overseas. They have different safety standards in other countries so you will need to check up on the manufacturing plant before you hire them. Find out how much experience the company has with their overseas exporting. Check references to see if their previous clients have been happy with their services and delivery of the products. Exporting products is expensive, are they planning to work the shipping costs into the total production costs or are they going to send you a separate bill for the manufacturing and shipping costs.
When you are dealing with overseas plants, you need to make sure you keep the lines of communication open. It can be a bit of a challenge as the representatives with the company may not be fluent in English and they may not understand all of the demands you are asking for. Foreign language barriers can cause a number of issues for you with your product production. Have they implementing safety standards? What are they doing to make sure their employees are staying safe? A great method to implement is known as Behavioral based safety. Ask the manufacturing plant to consider implementing it so you can find out that the people that are producing your products are staying safe. Outsourcing to manufacturing plants can be hard since you lose some of the control. Obtain quotes from multiple companies and obtain quotes. You also need to meet with them to find out what type of control you will have and what your involvement will be with the company. Be careful of the price when you obtain the quote from the different manufacturing plants. Some of them may offer a low price but you will get what you pay for and they may not have a high standard for quality control. Quality control not only starts with the machinery and equipment you have and making sure everything woks correctly, it also comes down to your employees. You need to make sure your employees are properly trained on their job responsibilities. Improper training can lead to mistakes within the manufacturing process and this will cause you to have expensive product recalls. Have your manufacturing equipment tested often to make sure everything is running correctly and to prevent problems from happening. Always inspect the products carefully and test them for quality. This is the best way to make sure the manufacturing equipment isn't producing product defects. If you are outsourcing the manufacturing of your products, you always need to check the finished goods for quality. If you notice a problem, report it in a timely manner so you can return it and have it replaced. Most plants will build in an 3% error ratio and they will credit you or provide you with new products that meet this ratio. HOW TO OUTSOURCE YOUR MANUFACTURING PROCESS Because of the high cost of doing business in the United States many companies are outsourcing more and more of their business to other countries. The reason for this is that in other countries the cost of living is less which means that wages are less and many times the prices of materials are a lot less. All of the reduction in costs leads to a reduction in the price of the product. This is great for companies because the lower the cost of goods the more of a profit the company will make on their finished products. While the lower cost is a huge factor in outsourcing that is not the only reason that companies outsource. Companies also outsource parts of their business because they do not have the capabilities of doing that part of business themselves, such as payroll. But yet another reason that companies outsource is because they can not meet the demand for the product by themselves and in order to keep up with the demand they need to make more of the product.
For example Company A manufactures mother boards for computers and Company B manufacturers CD-Drives for computers. Both of those companies have a great manufacturing process for what they are making but don't have all of the parts to put the computer together, this is where Company C comes in. Company C, which manufactures computers, will contract with both Company A and Company B to buy there products so that they can manufacture a whole computer to sell to the consumers. In this case outsourcing works out for the best for all of the companies involved. Just because you are outsourcing doesn't mean that you have to go to another country. Here are some steps you should follow to outsource your manufacturing process: Step one: The first thing you need to do is determine if outsourcing your manufacturing process is going to be beneficial for your company. Will outsourcing help you cut costs and raise profits, or will outsourcing help you lower the total cost of your product so more people can buy it. Step two: Now that you have decided that outsourcing is right for your company you are going to need to decide what you are going to want to outsource. Do you want to outsource all of your manufacturing or just parts of it? Take a look at your manufacturing process to see which way will be the best for your company. Step three: Now you are going to have to do some research on outsourcing. Doing this research you are going to have to see what place is the best place to outsource to. Part of this will depend on what type of product you are manufacturing. Some jobs can be outsourced locally while other jobs are best outsourced overseas. Step four: Now you can contact some companies that specialize in outsourcing manufacturing to other companies or you can locate the companies yourself to see what they have to offer. In the agreement you are going to want to make the terms and conditions clear so that you both now what to expect. MEASURE AND EVALUATE MANUFACTURING OUTSOURCING The following provide some simple ideas on how manufacturing outsourcing arrangements might be assessed: Metrics relating to costs, quality, and timeliness may be used to monitor outsourcing performance. According to the Aberdeen Group, ―best in class‖ manufacturing organizations monitor the following five key areas:
scrap or yield supply chain inventory 27
factory throughput manufacturing cycle time, and overall time to market.
The following are potential operational measures: 1. Quality Measures
Customer feedback, i.e. the percentage of quality feedback reports from customers that indicate errors on shipment, or the number of customer complaints, or customer perception index. Average number of faults, i.e. percentage of faults found at final test. Supplier quality performance, i.e. numbers in parts per million of rejected incoming parts. Quality control, i.e. number of life test failures, or pounds of scrap at a given location.
2. Service Measures 1. 2. 3. 4.
On-time delivery, i.e. percentage of deliveries received on time. Incoming orders, i.e. incoming orders per period. Urgent orders, i.e. rush orders per period. Overdue products, i.e. overdue items in work in progress, or overdue items in shipping, or overdue incoming trucks. 5. Lead time, i.e. average lead-time by product family. 6. Overruns, i.e. overrun units to non-valued inventory. 7. Reorders, i.e. the number of reorders to make up incomplete orders. 3. Financial Measures
Stock days, i.e. numbers of days‘ worth of stock held. Debtor days, i.e. numbers of debtor days recorded.
4. Productivity Measures
Throughput versus cost, i.e. throughput divided by total production and materials costs. Throughput costs, i.e. throughput costs per hour of manufacturing time. Unit throughput, i.e. units produced per working day, or units produced per shift, or units produced per hour. Production, i.e. jobs completed per period, or average run size, or earned hours per 1000 units, or paid labor hours per 1000 units, or machine hours of downtime.
5. Supplier Risk Management
Percentage of supplier business, i.e. revenue spent as a percentage of total supplier revenue. This is a measure of the level of a supplier‘s revenues that are derived from the client organization. This measure seeks to establish how dependant a supplier might be upon the client‘s business, and provides an indication of the risks involved. 28
Percentage of supplier choice, i.e. chosen supplier/available suppliers. This measures the spread of suppliers available to provide a given product of material. It indicates risk, availability, and levels of competition. Outsourcing penetration, i.e. number of tasks or processes outsourced as a percentage of total tasks or processes. This is a measure that provides an indication of the degree of reliance on sub-contract agencies.
MANUFACTURING OUTSOURCING: 6 COMMON PITFALLS TO AVOID Outsourcing is a way of life for electronic manufacturers and many would not survive the marketplace without this option. Original equipment manufacturers (OEMs) can not only offload manufacturing but tasks like materials management, design and testing, order fulfillment and logistics can also be handed over to a contract manufacturer (CM). Despite the significant benefits that come with outsourcing, there are also risks and challenges for OEMs to consider. Outsourcing, by definition, leads to loss of control. Placing manufacturing activities in the hands of a manufacturing partner makes it increasingly important to manage tasks through documented business processes, contractual agreements, and software tools. Without building new processes and infrastructure to support this supply chain approach the benefits of outsourcing will be offset by newly introduced costs and risks. Through our years of experience in working with electronics OEMs and CMs, we have observed seven common pitfalls that impact manufacturing outsourcing success. In each case, the impact on revenue, cost of goods sold (COGS), quality, inventory levels, and time-to-market can be easily measured. In this whitepaper, we will offer more insight on these seven most common outsourcing mistakes and steps that can be taken to address them. 1. Selecting the Wrong Contract Manufacturer (CM) Working with the wrong CM is at the root of many problems that we observe in outsourcing. An OEM selects a handful of contract manufacturers — or worse yet, a single CM — and starts discussing business without having a clear understanding of the appropriate selection criteria. Before making any decisions, spend time to develop a clear set of selection criteria, understand your short-term and long-term requirements, and cast a wide net to evaluate multiple options. Develop a clear plan and follow a methodical process until you have narrowed down your choices to at least two finalists. Refrain from awarding business until you have, at a minimum, finalized your key contract terms and agreed to how your products will be priced — now and in the future. Even if you are not planning on embarking on any new relationships, validate your existing solution from time to time to ensure ongoing alignment with the direction of your business or product roadmap. This will reduce the likelihood of a hasty selection process when the need arises.
2. Using a Quote-and-Go Approach The first formal exchange between an OEM and CM is typically the submission of a request for quotation (RFQ). Product specifications are provided via electronic or paper means, CMs go through their quotation process, and the output is a product price that is sent back to the OEM in order to make a decision. In our opinion, there are four potential problems with this ―quote-andgo‖ approach: Component pricing ambiguities. The OEM and sometimes even the CM do not clearly understand what assumptions are built into the pricing quotes. For example, what role has volume played in the pricing received from the component suppliers? How will purchase price variances be managed? Which component suppliers have been contacted to obtain pricing? What minimum order quantities apply to each component? Have any approved vendor list (AVL) or approved manufacturer list (AML) substitutions been made? Does the component pricing used in the CM quotation assume any onetime purchases from brokers? The best way to catch misquotes and inadvertent errors is to get the detail and look for discrepancies. Lack of visibility to product pricing structure. Some CMs are hesitant to provide an accurate breakdown of cost to a detailed level that specifies material cost, cost of acquisition (or material mark-up), labor, test, manufacturing overhead, and profit or gross margin. But without clear visibility to the cost breakdown, how can you know what assumptions were used in quoting your product, or what cost improvement opportunities there may be in the future? Unknown details regarding the supply chain model. Unless you have had the early discussions upfront on what your supply chain model will look like, your CM quote can increase or decrease substantially. As an example, what ―inventory turns‖ were assumed during the quoting process? How is the CM using vendor managed inventory? How do they handle Kanban, including bin sizing, engineering change order (ECO) management, and buffers? How is the purchasing order policy being managed: through the traditional ABC categories, or by a more modern approach? At what point in the supply chain does the ownership of the finished goods inventory transfer? Are all transportation costs such as freight, taxes, and duties included, or will they be invoiced separately? All of these can have a noticeable impact on your product price. No attention to non-price issues. Added to the acquisition price are a host of factors that can drive your cost up or down depending on how well you structure your agreement with your CMs. What is the scope of your CM‘s warranty, and for what period of time are your products covered? What is the cost structure for repairing products that are outside of warranty? Is the inventory for warranty repairs at a different location and under a different cost structure? How do quality-related metrics such 30
as yield and part-per-million failure rates play into your total cost of ownership? Transportation, duties, tariffs, prototyping costs, engineering services, and RMA (return material authorization) services are among critical cost factors that are often overlooked. 3. Negotiating a Weak Contract or No Contract At All Although contracts are tedious to negotiate, there are three key reasons why they are now more critical than ever before. First, corporate governance requirements such as Sarbanes-Oxley necessitate that companies apply much more rigor than before in reporting their financial numbers. The large dollar purchases associated with manufacturing outsourcing put your CM relationships on the radar screen for any financial auditor. Second, a well-structured contract forces discussion on important business terms that would otherwise be overlooked. In the absence of a contract, rarely do companies get into a detailed discussion of ―what if‖ scenarios until crises occur. Finally, a contract negotiation and signature process itself serves as a vehicle to pull in senior level managers from both sides to build relationships. You will need these relationships from time to time as you navigate through the impact of fluctuating business conditions. 4. Inadequate Change Management Processes and Infrastructure Managing change within a company is a complex challenge that requires careful coordination. This complexity increases drastically in an outsourcing model, as the OEM and CM are following different but interlocked business processes and making use of different information systems. The challenge with communicating product changes to a CM during NPI is not so much the volume of data, but rather the frequency and complexity of change. Continuous design revisions, new manufacturing process instructions, and updated AVL/AML information all require the CM to react and often deviate from previously made implementation plans. It requires people to pay attention, assess the scope of the change, and determine when and how the change impacts their specific tasks. 5. Broken Environmental Compliance Management Although OEMs are required to take ownership for their products‘ environmental compliance and drive it throughout the supply chain, they often don‘t take the time to do so in enough depth. A cavalier approach to these regulations and the assumption that the CM ―has it covered‖ puts you on the path to failure and your company at risk of non- compliance. As the owner of the design, you must assess, document, and manage the compliance of your product, or pay your CM or other outside resources to do this for you. Once your internal data management structure has been established, perform a risk assessment on all outsourced activities to identify failure modes, implement the necessary controls, and include the documentation to generate an audit trail. Take the time to ensure that there is one complete and revision-controlled BOM that is shared in real-time with the CM. Set up a formal process to control the CM‘s use of substitutes on the BOM. Typically this includes an 31
engineering change request process, and an ECO process to approve, document, and phase in the change. Include material substance testing, such as XRF testing equipment, at incoming inspection for high-risk parts. Implement controls around the repair of product that was built after July 2006, paying special attention to swap-pools, repair inventory, and repair tools, including solder paste. 6. Ignoring the Hidden Costs of Going Offshore Transferring production offshore is not for everyone. There is no doubt that the lower cost of labor and overhead in Asian countries such as China, Malaysia, and Taiwan makes offshore manufacturing attractive, especially for OEMs that have a low mix of products with very high volumes, and that sell — or expect to sell — their products in the region in which they are manufactured. As the numbers flow in, develop a cost model that focuses on the total cost of offshore sourcing rather than the purchase price alone. In other words, your cost model should encapsulate not only the price you pay for the product, but also:
The transportation strategy (air versus ocean) that you will employ based on your product lead time and demand profile; In the case of ocean freight, the cost of carrying inventory due to an extended lead time; The cost of supply buffers that you will need to put in place at various points in the supply chain in order to respond to demand upsides; and The overhead required to manage an offshore manufacturing partner.
As you build your offshore partnership, keep in mind the time zone and communication challenges that are inherent in this new relationship. You may not have the option to pick up the phone to explain a product change or to drive across town to pick up the initial prototypes. It is essential to put in place the appropriate tools to collaborate effectively across time and language barriers, and the disciplined processes to ensure that hand-offs and changes are clearly communicated. This will become essential in the NPI phase of new products, and, once a product is in production, for managing the myriad of changes that are inevitable in fast-moving product development environments.
OUTSOURCING MANUFACTURING PROCESS FRAMEWORK In this section we describe the outsourcing process framework and enlist the key activities and issues embedded in each of the phases of the process. Outsourcing is the process of establishing and managing a contractual relationship with an external supplier for the provision of capacity that has previously been provided in-house (Momme, 2001). In spite of an impressive research intensity of the outsourcing process, there are only few frameworks depicting the actual stages and the layout of the overall process of outsourcing. Figure 2 presents an overview of some of the frameworks. After carefully examining the content 32
of the stages of each of the proposed outsourcing process frameworks we have aligned the frameworks and grouped the stages into the following sequence: preparation, vendor(s) selection, transition, managing relationship and reconsideration (See Figure 2).
Figure 2 – Framework for the process of outsourcing (Source: Perunovic et al., 2006) Each of the stages has to provide an answer on various questions, thus emphasizing the complexity of the outsourcing process and arguing for a need that it has to be managed carefully throughout all of its life cycle (See Figure 2). Cyclic and holistic characteristic of the outsourcing process management is stemmed in the evolutionary economics (Nelson and Winter, 1982). The evolutionary economic theory is in the core of process theories. It has received significant application in exploring firm‘s learning characteristics for improving performance (Simonin, 1997), creating value (Anand and Khanna, 2000), and capabilities (Kale et al., 2002). Outsourcing Manufacturing Frameworks Before physical transfer, the focus of the outsourcing process is on decision making. Decision making is about weighing all possible pros and cons and displaying scenarios of what effects a certain decision alternative will bring. The purpose of using an outsourcing process is to make the most advantageous decision for the company as a whole. A process also provides a structure for the decision making and the carrying out of the decision. By having a structured approach the decision makers get helped by the activities included in the process to take a cross-functional view on the outsourcing decision (Moses, 2009). Through the cross-functional view the decision makers can evaluate the effects of a decision alternative for different parts of the company. A decision process can be defined as a flow of actions to transform input into a decision (Moses, 2009). However, the existing literature about outsourcing decision making has not only focused on decision processes; in some cases other forms of structures for decision making have been developed. Therefore, the term ―outsourcing framework‖ used in this thesis denotes any kind of structure that supports outsourcing decisions and outsourcing projects and the term ―outsourcing process‖ is used to denote an outsourcing framework consisting of specific phases 33
and specific activities in order to make outsourcing decisions. This section introduces a variety of outsourcing frameworks and processes to show their differences, similarities and content. It can be distinguished between frameworks, focusing on developing strategies prescribing a comprehensive top-down analysis of production activities or products in order to identify those most suitable for outsourcing, and frameworks with an operational approach where a suitable production activity or product has already been identified (De Boer et al., 2006; Wasner, 1999). In the frameworks presented below it is seen that the first phases of the existing frameworks aim to prepare the decision making by analysing the present situation based on the company‘s overall or production strategies. Thereafter, in most cases, cost calculations follow where some frameworks end their processes (e.g. Platts et al., 2000; Probert, 1996; McIvor, 2000). Other frameworks go further and include supplier evaluations to identify suitable suppliers, contract negotiations, physical transfer and relationship management after physical transfer (e.g. Momme and Hvolby, 2002; Zeng, 2003; Franceschini et al., 2003). The frameworks that end before physical transfer are not suitable from a perspective of how to ensure materials supply as these do not include the physical transfer and steady state where actual materials supply takes place. ZENG FRAMEWORK The Zeng (2003) framework aims to combine global sourcing processes with logistics and is based on literature studies and a case study. The Zeng (2003) framework includes the whole outsourcing process from identification of core activities to after transfer. It has five steps: 1. Investigation and tendering a. Core activities b. Analysis of company, customer and competitors c. Sourcing strategy 2. Evaluation a. Selection criteria b. Pre-screening c. Estimate of economic and operating benefits 3. Supplier selection and development a. Negotiation b. Technical assessment c. Savings identification 34
d. Implementation schedule 4. Implementation a. Team, strategy and schedule b. Agreement on supply and logistics terms c. Measurement of actual performance d. Progress report 5. Performance measurement and continuous improvements a. Monitoring of suppliers‘ performance b. Relationship analysis c. Continuous improvement opportunities d. Maintaining a dynamic and flexible procurement process. Franceschini et al. (2003) present a framework that aims at developing a generic outsourcing framework in accordance with total quality management principles; it is based on literature studies and a case study. The framework consists of four steps. The first step, internal benchmarking, helps the outsourcing company evaluate its processes, analyse their efficiency and evaluate what to outsource. A company-specific core competence definition is made, possible relationships with suppliers are identified, and finally, a stratification of activities is created. Steps two through four consist of an external benchmarking with the aim of supplier selection, followed by contract negotiations and finally managing the outsourcing process. MOMME AND HVOLBY FRAMEWORK The framework by Momme and Hvolby (2002) aims at linking operational and tactical considerations to strategic planning by combining core competence thinking with an outsourcing process. The framework was developed from a case study of a strategic outsourcing programme used by Aalborg Industries. Momme and Hvolby (2002) introduce an outsourcing decision process in six phases and include activities to be executed during the phases: 1. Competence analysis a. Strategic analysis b. SWOT analysis c. Core/non-core competence mapping 35
2. Assessment and approval a. Defining critical assessment criteria b. Supplier assessment 3. Contract negotiation 4. Project execution and transfer a. Establishing basis for supplier integration b. Defining workflow interfaces c. Adapting organisation to supplier performance 5. Managing relationship a. Establishing communication, information and monitoring systems 6. Contract termination
WHAT TO CONTROL IN MANUFACTURING OUTSOURCING By Bijan Dastmalchi In outsourcing the manufacture of your products, you gain efficiencies that you may not achieve by manufacturing in house. But it is also important to realize that in this process, you can lose control over factors that are critical to your success. Many companies erroneously view the outsourced manufacturing relationship as a traditional buy-sell relationship rather than an extension of their own business. This simplistic view has a direct impact on your operational – and financial – performance as a company. In our practice, we have identified a handful of key areas in which OEMs need to play an active role and retain control of fundamental attributes that can differentiate between success and failure. They are:
Key component supplier relationships Keep your strategic, high value component relationships close to your chest. This requires that you have the appropriate resources and expertise to engage in technology roadmap exchanges, forecast sharing, supply buffer programs, and price negotiations. Your CM should be considered 36
only as a point of sale, with little to no impact on affecting these strategic relationships. This should also impact how much mark-up you pay on these components vs. other off-the-shelf components that are completely managed by your CM.
In-process quality management Quality problems that are not caught on the manufacturing line show up in the field or in your factory, resulting in dissatisfied customers, a tarnished reputation, and higher recovery costs. You should have clear visibility to what is happening on the production line and what corrective actions are being implemented when problems occur.
Product lifecycle management With product life cycles shrinking and abrupt changes in product introduction and obsolescence activity, you need to have a solid foundation in place for managing change. Also, changes to your bill of materials require robust business processes and tools to minimize supply chain risk during these transitions.
Inventory exposure Inventory within your four walls is only a small subset of the inventory that you need to worry about. You may be exposed to a significant amount of inventory from your contract manufacturer and further upstream in your supply chain, requiring you to have a program to measure and mitigate this risk.
Supply buffer programs The biggest problem with supply buffer (or flexibility) programs is that they become stale over time. You should make sure that there is a solid rationale behind your buffers, as well as a process for re-setting the buffers as business conditions change.
Early warning metrics While it is nice to have post-performance metrics like inventory turns, shortage reports, and quality-as-shipped, it is even more critical for you to have metrics that help you discover risks in your supply chain long before they create problems. More progressive metrics like Inventory Exposure, Supply Mis-Alignments, and In-Process Yields can give you information to proactively address risks.
Environmental compliance While your contract manufacturer will play a key role in your environmental compliance (e.g. RoHS), the ownership falls on your shoulders. In fact, it is important for you to fully validate the robustness of your CM‘s manufacturing process because in the final analysis, it is your brand name on the line. 37
Testing CMs build products for a variety of OEM companies and it is unreasonable to expect that they will have an intimate knowledge of your customers, the operating environment for your products, and the relative weight you put on product reliability. So, you have to take the lead on product quality and reliability testing. The CM will execute to it, but you have to set the stage with a strong test plan and by having the product engineering resources to follow-up on trends and issues. In addition to the normal product testing (ICT, functional testing, etc.), the plan might include occasional product stress testing or out-of-box audit. Your product engineering team should review test results on a regular basis to look for issues that may need attention. There are many benefits that come from manufacturing outsourcing. But an OEM to CM relationship should not be treated with a typical buy-sell mentality. There is too much at stake and you will benefit by maintaining control over certain aspects of the business. The list above is not exhaustive, but these are the areas where we have seen the greatest opportunity and/or risk for the OEM. RESEARCH PAPER ON MANUFACTURING OUTSOURCING AND ITS EFFECTS ON BUSINESS (Overby, Kallender, Canadian Heritage, 2004) Manufacturing outsourcing has been occurring for decades and has using affected the other business sectors in the past. Since cheap manual labour was available overseas, corporations became profitable by outsourcing tasks to foreign markets. In the early years in North American History, America outsourced tasks of building covered wagon covers and clipper ships' sails to workers in Scotland, with raw material were imported from India. England's textile industry became so efficient in the 1830s that eventually Indian manufacturers couldn't compete, and that work was outsourced to England (Kelly, 2004). In today's world, most successful companies also beginning not only to outsource unskilled manual labor tasks but also white-collar tasks. Companies like Dell Computers and Cisco Systems rely on their suppliers to do their development work. Dell Computers focuses on the few aspects it performs well and outsources the rest of its responsibilities (Woody, 2004). Also corporations are beginning to outsource more highly skilled positions such as financial services, human resource services and information technology services. There are many reasons that a firm might outsource some or all of its information system services. Companies today want to make use of the outsourcing advantage in order to progress and stay abreast of the competition. This is the reason why more and more companies irrespective of certain failures are entering the race of outsourcing. Here are some of the main advantages: Lower costs and quality concerns: It is possible to achieve high-quality systems at a lower price through economics of scale, better management of hardware, lower labor costs and better software licenses. Since the wages and 38
rent of the workforce in outsourcing destinations like India and China are low, outsourcing makes it possible to attain high quality information systems at very low rates. This in turn reduces costs and improves productivity which allows companies to save on operational costs. In fact most companies can cut their operating costs to half by outsourcing. This allows a company to stay ahead of its competition by providing better service and better customer satisfaction. Since all corporations are pursuing low cost and high return on investment, it makes economic sense to produce products or provide services where the labor cost is lower. In addition to its low cost of living and wage standards, outsourcing destinations such as India, has a huge highly educated workforce that speaks English fluently. These jobs, which require English speakers, are often liable to flow to India, including call centers and software programming (Canadian Heritage, 2004). Simplifying and downsizing: Organizations under competitive pressure attempt to focus on their core competencies by cutting huge costs through outsourcing while their non-core operations are looked over by a specialized foreign firm. Outsourcing frees up human resources and allows the company to be more flexible for future changes and avoids potential internal problems as they become the responsibility of the outside firm. Outsourcing leads to tighter relations between strategy and IT. Knowledge which usually flows slowly can flow freely, and a company has more access to outside technology. Outsourcing can also unlock organizational structures which provide better mechanism for costing user requests, prioritizing technology initiatives and controlling expenditures (Canadian Heritage, 2004). The availability of a highly motivated workforce: Business process outsourcing is also not just about cutting costs. The willingness to work in certain areas, such as centers and back-office functions are much higher in outsourcing destinations like India than in North America since call center turnover is generally pretty high and motivation is very low. Also employees are more willing to work overtime or finish work at home in places like China where as its lower in North America. For every advantage there is always a related disadvantage, and one must not overlook the disadvantages of outsourcing. These disadvantages are the reasons why companies should thoroughly do their research and think twice before outsourcing. Outsourcing contract failure costs can be considerable and can be very complicated to turn around. Here are some of the main disadvantages: Loss of jobs and its effects: Outsourcing results in loss of jobs in first world nations that cause employees to respond negatively from the fear of losing their job and thus affecting their quality of work. The current employees in the company that outsourcers may feel threatened due to outsourcing and may not work as useful as before. The attitude of people in the developed countries against companies that outsource is not that great and the domestic IT intellectual property resources have been decreasing because of the fear of outsourcing. "The number of students in engineering and IT is going down. ... Staying ahead means setting a very high bar," Gates said (Kallender, 2005). Loss of generated talent within an organization is another problem which is a result of job loss.
Outsourcing hinders the growth of an employee by relieving him from the experience which he could have gained by handling various issues himself then by passing it over an external party. Hidden costs: When outsourcing, companies tend to miscalculate the potential hidden costs of outsourcing which includes legal costs of putting together a contract between companies and time spent on coordinating the contracts. The total cost of outsourcing includes regular costs such as wage, rent and additional costs like training fees and transportation (MacMillan, 2004). Overall costs become underestimated since hidden and missed out costs of outsourcing are usually hard to predict. In order to be successful, a business model to needs to be developed to determine the true cost of doing business. Security and confidentiality: Another disadvantage is that outsourcing can also prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing important business processes such as payroll, confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not. Customers in developed nations can get annoyed if they find out their personal details (bank, credit-cards etc) are in foreigner hands instead of domestic hands (Canadian Heritage, 2004).. Competitors can also be using the same Foreign Service provider which could potentially cause leakage of valuable information. Cultural conflicts: The firm and its supplier may develop problems with communications because of language and culture barriers. What is accepted in one culture maybe different in another, causing worker and management related problems. Since is no proper alternative for a face-to-face meeting, lack of communication between the company and their supplier may possibly lead to major losses. The company will eventually reach a point where a decision between inexpensive labor and loss of communication needs to be made (Yee, 2005). Loss of control: Outsourcing also results in the loss of control of business operations to the Foreign Service provider. Many businesses are suspicious of outsourcing because they're concerned about handing over key business functions to an outside business over which they have no control over. This happens since it is harder to manage the outsourcing service provider when compared one's own employees. Many organizations that have benefiting immensely because of outsourcing and the success stories keep increasing. Cinergy and JM Family achieved success by outsourcing processes that had clear business rules. The tasks were easily defined, and both CIO's wanted to outsource in order to gain access to technology expertise, "to deal with variable demand for certain IT EssayEmpire offers you the best custom essay writing services, along with term paper, thesis paper, and research paper writing help. Our company employs professional essay writers who are fully qualified in a variety of academic fields. If you require a high quality writing service that is 40
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KNOW HOW TO IMPROVE OUTSOURCING SUCESS
Outsourcing relationships work best when all parties have a common perspective on partnering and are committed to making the contract work. However, intent alone will not ensure success. In addition, the life sciences manufacturer and its service provider must align their goals and communicate them clearly (internally and externally), establish definitive processes for working together and create performance metrics that are evaluated over time. This takes much work, so before deciding to outsource, be sure to evaluate preparedness for taking on this responsibility. Life sciences manufacturers with outsourcing experience will want to take a long, hard look at the effectiveness of the relationships they have in place. Most will find that they can take some simple steps to make the relationships more rewarding for themselves and their contract manufacturing outsourcing partners. Based on Gartner inquiry, most life sciences manufacturers have multiple outsourcing agreements in place with a variety of contract manufacturing service providers. Outsourcing contracts are developed based on division, geography, expertise area or project basis, depending on the company structure. However, many companies suffer from a lack of project management discipline, performance oversight and consistent standards for dealing with service providers. The result is that they waste time and money, because contracts often need to be renegotiated for each project. They also miss out the potential to leverage the size of the company and the number of projects they manage by spreading their business across too many service providers. Each part of the organisation may have multiple independent and possibly redundant outsourcing relationships, as well as too many people involved in outsourcing management. Putting an outsourcing office in place for co-ordinated process management and oversight will improve service provider performance. It will enable the use of standardised processes for production activities and business functions such as contract negotiation. Companies that improve their internal structure for dealing with outsourcing service providers see a significant reduction in the time it takes to get a process up and running because they are able to reduce the number of handoffs, non-valueadded steps and process latency (see Figure 1).
Figure 1: Current State versus Preferred State A report by C a r o l R o z w e l l Vice President & Distinguished Analyst, Life Sciences Division,Gartner Manufacturing Industry Advisory Services Life sciences manufacturers that consider themselves outsourcing experts may want to move their relationships to the next level and collaborate with their outsourcing partner to dramatically improve established processes. These companies will want to ensure they have the role of relationship manager well defined and that the people selected to perform this role are practised in leading virtual teams populated with remote workers. SIX SITUATIONS: WHERE MANUFACTURING IS BEST LEFT IN-HOUSE. (Apr. 10, 2012 Jeff Wallingford, vice president, Supply Chain Strategy, Riverwood) The trend to outsource manufacturing has been going strong for two decades. Recently, it has been popular to speculate on whether this trend has gone too far. In the developed Western economies, much is being written about bringing manufacturing back in-house. This discussion often seems to focus on inflation in China, or a political desire to protect manufacturing jobs at home. But reasoning based on parochialism and wishful thinking will not change the economic motivation of an individual firm. The world will not soon become less global, and significant wage and operating cost differentials between developed and developing economies will continue to exist for a very long time. Nevertheless, there are still many cases where a company 42
may benefit by choosing in-house manufacturing over outsourcing -- but only when these cases truly apply: A company's manufacturing process is the source of its competitive advantage. One example of this case is microprocessors, where the ability to manufacture smaller and smaller geometries directly affects product performance. If you believe your company's manufacturing process provides a true competitive advantage, there is a critical strategic implication: You must continue to advance the art and lead the technology curve for that manufacturing process. If you stand still while others move forward, you will lose your competitive advantage. At the point that process innovation is more likely to come from outside your company than inside, you have to reconsider your strategy. A firm does something in a unique way and does not want competitors to know how to do it. It is not hard to mix sugar and flavors into soda syrup, but Coca-Cola is not likely to outsource it. Trade secrets -- if they are really a source of sustainable competitive advantage -- should not be outsourced. Keep in mind that just because we do it our own way does not mean it is the same thing as a trade secret that provides competitive advantage. A competitive market for the specific manufacturing service does not exist. Even if the firm chooses to use just a single outsourced manufacturing supplier, they need access to other providers in the market to quote competitively or they risk operating in an inefficient manner or even being held captive. There is no opportunity for the service provider to leverage their fixed capital, common overhead, specific purchasing power, or expertise. Always remember the original economic proposition that enabled manufacturing outsourcing to become widespread in the first place. By aggregating the demand, an outsourced supplier can improve utilization, increase buying power, and leverage their overhead and experience across many customers. If the work you want to outsource doesn't have processes or materials in common with what the outsourced provider is doing today, then outsourcing is unlikely to provide the value you expect. To capture a limited and critical resource or channel. Supply chain bottlenecks can be an opportunity to create strategic advantage by taking those sources away from potential competitors. I once worked for a company that made inductive heaters. The heater wire had unique braided insulation. While it was otherwise an easy part to outsource, we bought all the equipment from our supplier and made our own wire in order to prevent competitors from selling replacement heaters using the same wire.
It is too costly to outsource the manufacturing process because of the additional costs driven by outsourcing. Everything that gets sourced outside the firm drives transaction costs -- the expenses and risks associated with such things as finding suppliers, quoting, negotiating, verifying performance and managing the suppliers on an ongoing basis. Sometimes, outsourcing a manufacturing process would otherwise make sense when considering manufacturing strategy and direct purchase price, but the transaction cost is greater than any potential savings or benefit. Manufacturing outsourcing is not going away, but the choice to outsource should be both a thoughtful economic decision and most importantly a strategic decision.
OUTSOURCE THE MANUFACTURING EXAMPLES
Why Toyota Outsource Japanese companies such as Toyota, unlike American companies, outsource over 70% of their vehicle content. Toyota though understands that customers are expecting reliable quality regardless of who makes the engine, radio, seat, etc of their cars. Nevertheless, outsourcing does not absolve Toyota or responsibility. Toyota is known to have outsourced engines as well as software and hardware. The primary reason why Toyota outsources is that Toyota is a master of cost reduction internally and expects its suppliers to master this discipline as well. Toyota makes use of functional outsourcing which is thrusting of certain services towards partners or providers. The advantages of functional outsourcing for Toyota are superior leveraging of market, redundancycapable and maintenance of outsourcer‘s control over processes though this process can result to a non-existence of end-to-end management. The second reason why Toyota outsources is to further improve quality management. A viable option to eliminate poor management in exchange of quality management is through outsourcing of functional areas into suppliers. Through this process, a relative degree of pressure will also be alleviated. The result would be sufficient control over the operation. The third reason is to focus on strategy and core functions while also avoiding heavy investments. The tactical part of function-distribution would enable the management to focus on strategy-related issues like market positioning and product development in return. Moreover, acquiring increased market share requires a support mechanism for function overloads. Converting fixed costs into variable costs as well as driving the performance ratios improved the profitability per person and the business as a whole. 44
Hyundai Motor to outsource auto semiconductor production Hyundai Motor Group has taken the initiative in making semiconductors (integrated circuits) for vehicles in Korea to replace imports by deciding to outsource chip production to Samsung Electronics and Hynix Semiconductor. Hyundai`s automotive semiconductors used to be developed by Hyundai Autron, a new vehicle semiconductor maker, but the latter will now focus on ―customized design‖ while increasing efficiency by outsourcing production Hyundai Motor Group will design automotive semiconductors by itself but has decided to outsource their production. The conglomerate can focus on R&D without making a huge capex investment for semiconductors. This is what Apple does. Apple designed the iPhone but outsourced production to Taiwan‘s Foxconn. ―In Korea, Samsung Electronics and Hynix are highly interested in automotive semiconductors,‖ Yang said, adding, ―Foreign companies such as Infineon and Freescale are competitive in production and they can be our options, too.‖ The group has imported semiconductors from foreign companies including Infineon. The industry estimates that Hyundai Motor Group has a budget of 2 trillion won (1.75 billion U.S. dollars) per year for the purchase of automotive semiconductors. Korean automakers import 98.4 percent of such chips from outside the country. ―If we assemble existing products (designed by chipmakers), efficiency will go down and it could impact the credibility of our products,‖ Yang said, adding, ―Our ultimate goal is to have all electronic technologies related to automobiles.‖ ―Hyundai Motor Company has accumulated years of technological know-how in the automotive semiconductor sector through its partnership with Infineon. We successfully used them for headlight control systems, and are in process of developing dozens of semiconductors.‖
PAKISTAN RANKS AMONG TOP OUTSOURCING DESTINATIONS
Menlo Park, California based Desk has ranked the Philippines and Pakistan as the top two outsourcing manufacturing destinations in terms of growth, value for money and customer feedback. Desk helps its clients with tools, technologies and services to hire and manage remote work teams. Other companies in its category, including Elance, Guru and RentACoder, create marketplaces in which employers and freelancers can contact one another. These sites often manage the payments, and make money by charging membership fees and/or take a cut of the payment. The cuts can range from 4 percent to 15 percent. 45
According to Desk, Pakistan experienced 328% growth in its outsourcing business in 2007-8, second only to the Philippines (789%) on a list of seven top locations that include US (260%), Canada (121%), India (113%), the Ukraine (77%) and Russia (43%). Pakistan ranks number one in value for money for developers and data entry and number two overall behind the Philippines where the cost of answering calls is about half of the cost in Pakistan. Pakistan is well ahead of India and just behind the number 1 ranked United States in customer satisfaction. The growths of outsourcing within the US and Canada as well as the high customer satisfaction data for North America are particularly noteworthy. It seems to indicate that more and more North American companies are showing preference for outsourcing close to home. In addition to Desk's view of Pakistan as a preferred outsourcing destination, Gartner, in its 2008 report ‗Analysis of Pakistan as an Offshore Service Location‘ said the major factor behind upgrading Pakistan to first tier status for outsourcing is the lower salaries and better infrastructure advantages than other offshore destinations. ―The salaries of IT professionals in Pakistan are approximately 30% lower than those in India, while telecommunication costs are also lower as compared to any other offshore locations, which make Pakistan an attractive outsourcing destination.‖
This exploratory empirical investigation into manufacturing outsourcing provides tentative avenues for increasing the probability of success of outsourcing projects and raises many issues for further study of the outsourcing phenomenon. This project is limited across a wide range of business sectors and organizations sizes. In addition, a many researchers survey methodology was also used, which is susceptible to both misinterpretation and common method variance. Despite these limitations the research contributes to developing an understanding of outsourcing in identifying areas that need further research. First, the study indicates that in many cases, one of the primary risks to firms is the effect of manufacturing outsourcing on employee morale and performance. However, more must be learned about the specific changes made to human resources, how these were successfully implemented, and how they contributed to the outsourcing effort. Second, the study found that organizations with different levels of success at manufacturing outsourcing identified different factors as problems in the outsourcing project. These factors need to be explored in more depth to identify those that must be managed to ensure the highest level of success of an outsourcing project.
RECOMMENDATIONS Carefully examine and explicitly articulate what you are seeking from the outsourcing provider Relationship. If manufacturing efficiency and cost savings are the goal, then an efficiency relationship is the one for you. If improving production processes and product quality are more important, then an Enhancement relationship is better suited to meeting this need. There are two common mistakes Gartner sees in the execution of manufacturing outsourcing contracts. The first is when the manufacturer outsources a process with the intention of having it performed more efficiently and cost-effectively, but then fails to relinquish control of the process, forcing the service provider to create custom procedures that end up raising its costs. The second is when the company requests more comprehensive production management support and hopes to benefit from the outsourcer‘s experience and process acumen, but then the contract is constructed on a transaction basis that is more appropriate for efficiency relationships. Life sciences manufacturers can help themselves to achieve more successful outsourcing arrangements by following several recommendations:
Consider strategic drivers and market types, now and in the future, when making outsourcing decisions. Strategic drivers, such as low-cost manufacturing, market growth or research and development, should be considered along with market types such as commodity/price-driven, value added/rapid response or technological/innovative markets. Having a clear understanding of the industry and its future direction will help you make the right outsourcing decisions. Analyse the total cost of outsourcing. Indirect costs (such as working with suppliers from a great distance or intellectual property and currency risks) and benefits should be factored into the outsourcing decision-making processes. Consider the product complexity and volumes required in relation to the intended outsourcing location. Limited numbers of locations are likely to be suited to highvolume/high-complexity production, whereas other combinations have a greater spread of possible locations. Consider establishing new marketing distribution channels when outsourcing in-house processes. Valuable sales and distribution capabilities may be lost when handing control over to a third party. Ensure that there is a ―good fit‖ in terms of culture and strategy alignment with the 3PL provider. Prior to outsourcing, conduct a risk appetite analysis, and use cross-functional teams to help understand each others‘ business. Create a dedicated outsourcing management function – the outsourcing office – to act as a focal point for learning, so that the company leverages lessons and feedback from established relationships. A unit that outsources transformation but owns inputs is a manufacturer and a unit that outsources transformation and does not own inputs is treated as being engaged in trade. The ownership of materials classification criterion to units that outsource transformation activities to either domestic or foreign manufacturing service providers.
CONCLUSION In most theories about outsourcing and specially manufacturing outsourcing processes the perspective has been focused on exploring certain issues emerging within the phases of the process. The problem occurring in such approach is to choose between many different possible outcomes. In principle it is possible to find an optimal solution of this rather stationary problem. However a more fruitful and practically useful approach could be taken if we ask questions about the dynamics in the manufacturing outsourcing processes. What is important in such cases can be caught up under the term learning. The idea is that the manufacturing outsourcing decision makers will take into account results of former decisions in similar cases. This creates a need to study the outsourcing process as an evolutionary process. Manufacturing Outsourcing is often an attractive option, since it offers the availability of needed resources without the need for new capital. Risks can also be shared with the outsourcer, and financial flexibility gained via reduced debt levels. However, certain intangible costs, associated with political and economic risks and supply chain management restrictions, should be seriously considered when entering into outsourcing partnerships. Outsourcing models are continuously changing along with developing markets, changing price structures, and the levels of expertise available worldwide. Outsourcing arrangements are highly collaborative in nature. It is therefore important that vendors and clients work well together, communicate effectively, and continuously monitor and improve their processes. And a broader view of the general scheme of things in nature we should realize that just as everything has its pros and cones, the manufacturing outsourcing too has its own. So we should see its all aspects before outsourcing manufacturing.
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