Wednesday, June 8, 2011

WHAT SHOULD BE OUTSOURCED?

I came across this article while I was looking for materials for an assignment. This article is from the book "Build-to-Order & Mass Customization; the Ultimate Supply Chain Management and Lean Manufacturing Strategy for Low-Cost On-Demand Production without Forecasts or Inventory," by Dr. David M. Anderson. There was a chapter he discussed about what not to outsource and what should be outsourced.


According to Dr. Anderson, most companies outsource the wrong products. Many companies outsource their newest product that generates unusually high profit margins while holding on to older products, spare parts, and oddballs which used too many resources and make the smallest amount of profit.


Companies tend outsource their “cash cows” while retaining the oddballs because they see everyone else is doing it. Their perspective has become blurred by the ‘outsourcing trend’ that had a thriving result on the other organizations. One must remember that a successful business strategy depends on the company’s business model. The business model should decide which products should be outsourced, not the trend.


From the article, Dr. Anderson discussed that companies that manage to develop products with half the cost have selected and identified several characteristics before deciding on which products or services to outsource.


The criteria for what to outsource are as follows:


1) Standard parts. It may be profitable to outsource the manufacturing of standard parts that have common use, no variations, and are not likely to go obsolete in a long time. If these conditions are met, these parts can benefit from mass production economies-of-scale, especially if the parts have been standardized around high-volume industry-standard parts.


2) Modularity. Only products parts and modules with consistent, clearly-defined interfaces that are easy to integrate are allowed to be outsourced because product like this can reduce or even eliminate any interface complications.


3) Skill, talent, and costly equipment. If the assembler requires special skill, talent, and costly equipment, it may be a good move to take advantage of a supplier’s capabilities to perform the task and outsourced it. If there is a need to personalize the manufactured goods, be sure to work closely together to make sure the customization can be accomplished without difficulties.


4) Company-specific lines.An innovative outsourcing arrangement would be for specialized outsourcing companies to set up company-specific parts production lines in or nearby assembly plants. These lines would build on-demand any part needed, be it mass-customized or standard products. The greater the range of parts, the more would be the need for the outsourcer to use Build-to-Order principles. The assembly plant would get near-instantaneous delivery in a seamless integration with their operations. Of course, for this to work, the demands of product assembly would have to be satisfied by the flexible capabilities of the parts lines, which would be structured to accommodate all the products in that facility. This may require that products be designed around these part lines or that product family and flexible part lines be concurrently developed”.


5) Cooperation. For outsourcing to be successful, good cooperation is crucial in the form of supplier partnerships, where all the suppliers work directly with the assembler to optimize cost, delivery, and all aspects of quality and reliability.


Source:

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