Global Outsourcing as a Strategic Initiative

Author(s):

Dawn Moore
Dawn Moore, Global Systems Manufacturing Outsourcing Manager, Intel Corporation, Hillsboro, OR 97124, 503/456-1121, Dawn.Moore@Intel.com

86th Annual International Conference Proceedings - 2001 

Abstract. Many companies from all industries are turning too global outsourcing as a strategic initiative. There are several environmental factors, both internal and external that give rise to such a dramatic shift in the way companies "add value". What products and services being outsourced or the term "add value" has tremendous implications stretching from pure assembly and manufacture to full on design, development, direct fulfillment and post sales support.

Adding to the complexity is the geographical locations; time to market and operating margins in sometimes highly diversified and dynamic market space. Due to the complexity and dynamics of the supply chain, it is very difficult to provide a "one size fits all" to multiple supply chain even within the same corporation. This drives a "recipe book" approach on global outsourcing strategies. This session will explore the key drivers that are influencing global outsourcing and review strategic initiative used to preposition a company to address those changes. Key focus on optimizing the supply-chain with an example of an eBusiness initiative.

We will start out by outlining the changing industry and other environmental factors (internal and external) that are driving companies to utilize global outsourcing as a competitive advantage. We will then review supplier management strategies and supply chain implications for a spectrum of different levels of outsourcing efforts. We will review the pros and con's of the different types of outsourcing models. We will be looking at the levels of operational support and resources required for each type of model as well as measure the level of flexibility provided to the organization. In addition, we will drill down into methods of improving the effectiveness of the supply chain via our eBusiness efforts for everything from communication of demand, receipt and quality/performance indicators.

Objective. Our objective is to present a clear understanding the key drivers for outsourcing, understand the pro's and con's of different outsourcing models and understand eBusiness efficiencies on outsourcing supply chain.

Why Do We Outsource/Internal Environment. There are multiple reasons why companies pursue outsourcing and many are very industry specific. Some examples are flexibility in terms of capital equipment and people. Depending on the stability of the industry and the barriers to entry in the market, this is a common rational for pursuing outsourcing. In addition, time to market (TTM), quick capacity growth and avoiding long term commitments on people and capital during product testing and new market introductions. With product life cycles shrinking, having the right manufacturing capability, capacity and cost structure is key for a "go/no go" new product introduction.

It should also be noted that capability and capacity is also directly related to geographical locations and the resource of people. For example, in our ever growing global economy, the traditional "end customer" looks very different based on geographical location and conditions for doing business in certain countries in relation to tax, license and customs must be considered. Further, with the very low unemployment rate many technical design and development resources are of limited supply in the market. Outsourcing can also provide this high level skills set as needed. Please note that many of the reasons above are very similar to acquisition strategies. Many companies today are taking on both an outsourcing and an acquisition strategy to position themselves for the future.

External Environment. The outsourcing market is growing at a phenomenal pace. The supply base is also changing rapidly with vertical and horizontal integration by the contract manufacturers (CM's), niche players in NPI and Design and many new players in the lower tiers (smaller firms). This market is still heavily dominated by the top 6 suppliers with a large % of the market. You will also see a shift from the pure CM's to more of Original Design Manufacturers (ODM) with full cradle to grave support models. This model is starting to push the envelope on what are the originating firms "true" core competencies. In the past, the only items that were outsourced were the very stable, proven products. Today, you will see a much heavy trend toward more technically advanced products going "outside".

Strategies in Outsourcing. As previously mentioned, there is an endless number of combinations of outsourcing strategies that can be pursued. We will take a look at very typical examples at each end of the "spectrum of control" and outline the many factors of gray that exist between the different types.

The first one is internal design/develop and protobuild. This strategy is typically used with very stable product with longer product life cycles. Most outsourcing value add in the manufacture of the actual product. The originating company designs and develops the product, typically "proofing" the product internally and sending out for high volume manufacturing. There is no need for heavy capital or people investment and is easily portable to any MNC worldwide. The CM's see this business as very stable, predictable and enjoy consistent margins (little risk) with this strategy.

The next strategy is conceptual design/development with NPI and manufacture outside. This strategy is typically used for more technically advanced products with volatile life cycles. The originating company keeps technical control/core competencies and may focus on enabling the market over operating margin. The CM's take greater control over final design and operational consideration such as approved materials list (AML), ECO's, etc. This strategy starts to shift the risk factor into the hands of the CM's and requires lower headcount by the originating company to support product launch over the previously discussed strategy.

As you can see from the above two example of outsourcing strategies, there are different levels of engagement along the supply chain, which involve different levels of risk. In the spirit of brevity, I will list many other factors that can shift from the originating company's control to the CM:

  • Concept design (high level only)
  • Detailed design including AML specified materials and components
    • 100% CM
    • 100% Originating company
    • Blended AML
  • New Product Introduction (NPI)
  • Volume production/Ramp
  • Low Cost Geography transfer
  • Product life cycles (second generation products and on....)
  • Product Roadmaps (complimentary product families)
  • Technology Roadmaps
  • Materials Management
  • Inventory Management — Raw, WIP and FG
  • Packaging/Branded
  • World wide support modeling
  • Tax, License and Customs (TLC)
  • "No touch" — direct fulfillment
  • Post Sales Support (PSS) and warranty
  • Market Analysis and Feedback

Span of control and value add shifts from originating company to outsourcing suppliers and with that the risk and reward also shifts. The idea is to move to the best "total cost" solution for each outsourcing effort. This should include not only the external cost but internal costs as well. Highly comprehensive "make verses buy" models help to determine the best outsourcing solution that may very well change over time as our environment and business conditions change.

The final and most "pure outsourcing" strategy is, 100% Outsourcing — off the shelf "branded items". This strategy is typically utilized when you need immediate entry into the market, you have strong brand name recognition and the product/market may not be your original core competency. This strategy is one of the quickest ways to enter new global markets and is heavily utilized in the consumer product space. Very minimal internal headcount needed to manage this strategy.

Operational considerations and eBusiness. With different levels of outsourcing there are different levels of operational and informational support required. Common issues that need to be address is demand loading (MRP & Master Schedule), smoothing of a forecast and inventory management for raw, WIP and finished goods (including scrap and rework). Change management is another key aspect with demand change and engineering change orders (ECO's), all of which directly impact the material supplyline in and out of the CM. Quality management and output indicators are also critical to ensure product going out the door has the appropriate level of quality.

In addition, based on certain technologies some materials may be purchased by the originating company and "consigned" to the CM verse full "turnkey" materials management. In addition, the end customer may want to validate your outsourcing process to ensure they are comfortable with the process and controls.

Taking all of the different stakeholders into account in this very complicated supply chain's, it is essential that everyone have the right information at the right time. Here is where many companies are shifting to eBusiness and other ERP systems to help drive a virtual supply chain. One example at Intel is our "no touch" system which will allow orders placed with Intel to download directly to the CM, which starts a serious of events from "build to order," "configure to order" or "ship standards direct". The idea is to shorten the virtual supply chain, increase the speed of the information transfer and thus optimize the supply chain (inventory, people, capacity, etc.).

Typical Pitfalls. Some typical items that can cause excursions in the start up, maintenance and ramp down of an outsourcing project are listed below. This is by no means an exhaustive list but merely typical examples.

  • Align products and expectations with product roadmap and supplier roadmap
  • Do you have the right suppliers?
    • Scope now and future (design, low cost geo, volume, PSS, etc....)
    • The right geography (low cost or cost to customer base)
    • Size of outsourcing suppliers (avoid detrimental reliance)
    • Mix of outsourcing suppliers (expertise, tech. capability, high speed lines)
  • Supplier selection and Site audit
  • Continuous improvement from cost, quality and beat rates perspectives.
  • Strong contractual agreement to determine the level of risk and liability
  • Protect you're intellectual property (IP)
  • Does the culture of the CM and the originating company match?
  • Opportunities for joint design/development
  • Cross license mfg. Technology
  • Strong "make verses buy" model
  • Closed loop information system (eBusiness or other)
  • Tax/License and Customs issues with raw material, finished goods and capital equipment
  • Labor relations and restrictions

Summary. As you can see, there are many factors that come into play as you pursue an outsourcing initiative from choosing the right strategy, selecting the right supplier and aligning with the appropriate operational and eBusinees support models. All items will shift risk and accountability to either the originating company or the outsourcing CM and should be managed carefully. Flawless execution can make global outsourcing a competitive advantage.


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