10 Tips For Successful Outsourcing
Mark Miller C.P.M., C.I.R.M
Mark Miller C.P.M., C.I.R.M, Material Control Manager, Case Corp. Racine, WI 53404, 414/636-6565
Steve Fogle C.P.M.
Steve Fogle C.P.M., Team Purchasing Manager Case Corp. Racine, WI 53404, 414/636-7696
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Many major U.S. corporations have recently been restructured and downsized to remain competitive in the industry. The emphasis on reducing the size of the manufacturing plants and the work force, and the new philosophy of retaining only core competencies in-house has led to a tremendous amount of outsourcing activity over the past five years. Case, for example, has been involved in outsourcing manufacturing components ranging from welded assemblies to hydraulic cylinders; logistics functions including warehousing and packaging; and some expediting functions. We have also made progress in the area of indirect services such as security, mail room, janitorial, and lawn care services. We have not, as yet, explored outsourcing the purchasing, inventory control, or production control functions of the company. Outsourcing the non-core activities offers a tremendous strategic advantage to the company by reducing operating costs and improving its ability to react to the cycles of the business. There are, on the other hand, a variety of new challenges that outsourcing creates for the Purchasing Department; especially when it occurs in a compressed time frame created by a company downsizing. Whether your company is outsourcing to reduce costs, to gain technical expertise, or due to capacity problems, we have found ten key tips to be invaluable to making the outsource a success.
The first two tips are concerned with the importance of the make vs. buy decision. Whether your company has a formal policy on make vs. buy analysis or the procedure is informal, it is critical that your actions support the overall mission of the company.
TIP #1 Consider the Customer: The timetable for outsourcing is often rushed and it is easy to forget to consider the impact of the make vs. buy decision on the customer. Two of our major suppliers recently demonstrated why this is a key factor. Both of these suppliers made a decision to close plants to reduce costs, but the closings were poorly planned and little provision was made to protect the interest of the customers by maintaining adequate supply of product. As a result the entire industry has been living with shortages and unhappy customers. I'm sure the cost of the dissatisfied customers and the lost sales were not calculated into the decision to close the plants.
TIP #2 Include All Costs in the Make vs. Buy Analysis: In our experience there are often costs that are only discovered after the outsourcing decision has been made. Make sure the make vs. buy analysis takes into account the costs to buy new tooling or revise existing tooling; the additional inventory costs needed to protect the customer; and the engineering and quality costs associated with approving the new supplier's product and process. When manufacturing indicates that tooling is available to send with the outsource, it is a good idea to verify with the plant that the tooling is in good repair and not still required on other production parts that are not being outsourced.
One of the purchasing department's primary functions is to evaluate and select the correct supplier for each product. The next four tips will help in this selection process.
TIP #3 Select a Preferred Supplier: In an outsourcing situation there is almost always time pressure, so the last thing you want is surprises. We have found that the process works best when you select a supplier who you have an established relationship with: a preferred supplier. The supplier should have a good record of on-time delivery and quality. They should also have the technical expertise required to assist in the smooth transition of the product to the outside. Recently we outsourced a non-current engine component, a deep-draw oil pan, to a supplier that we later found had limited experience with the deep-draw process. After six months of trial and eventual failure we decided by mutual agreement that the supplier was not capable of making the oil pans. Our initial source selection mistake led to customer dissatisfaction and unnecessary costs.
TIP #4 Quote Only a Sample: Outsourcing projects, especially during down-sizing, often involve a large volume of part numbers. In some cases the company may be interested in moving an entire department to the outside. If a large number of parts need to be moved, we have found it efficient to have the supplier quote only a sampling of the parts at first to determine his competitiveness. If the make vs. buy analysis of the sampling looks good then the balance of the parts can be quoted after the source selection or the entire project can be quoted using target prices based on the sampling. If the sample parts averaged 10% less than the in-house costs, for example, then that would be the target for the rest of the parts. It is important in this type of an agreement with a supplier to have the flexibility to review and requote individual prices as needed when target prices and production costs are not in agreement.
TIP #5 Select a Supplier who can Complete the Project: Outsourcing is a hard process with lots of variables associated with transferring technology outside the company. It is important that you select a supplier who has the initiative and the resources to take the responsibility for driving the outsourcing to a successful conclusion. You need a supplier who is willing to spend time inside your plant pulling blueprints, learning about the manufacturing processes, transferring records, transferring tooling, and working with the engineering and quality people to ensure that the product meets specifications. We have found that when the supplier can identify a single focus person to handle the project you get the individual commitment and follow through needed to make the transfer a success. Without this supplier commitment the purchasing group becomes the middle man for every detail of every transfer and the process slows down.
TIP #6 Make the Supplier Selection Early: Outsourcing takes planning not just from the purchasing group but from the manufacturing group as well. The earlier the supplier is involved with the process the better. If the transfer is made after the plant has stopped production there is a good chance that much of the expertise will be lost. Machinists or engineers familiar with the process may have left, tooling and routing records may have been purged from the computer, and the new supplier will be at a tremendous disadvantage. If the technology has to be redeveloped it will cost money and time to do it.
Since the outsourcing process really involves the transfer of knowledge from the manufacturing plant to the supplier, it's important that the transfer happens quickly and completely. This transfer usually is the responsibility of the purchasing department. Coordinating between the supplier who needs the information and the employees at the plant who must provide it can be ticklish, especially if it is an "unfriendly" environment. The next three tips offer suggestions on this transfer of knowledge.
TIP #7 If Possible, Bring the Supplier to the Plant: We have found that having the supplier visit the plant to observe the manufacturing process while it is in production is invaluable. This gives the supplier a chance to examine the tooling and the machinery that may be supplied with the transfer. It allows him to review the process and any potential problem areas with the operator. It also allows the supplier to understand the process and use the information to establish correct cost calculations to be used in the quotation.
TIP #8 Send Last pieces as Samples: Although the supplier, in most cases, is obligated to manufacture parts to print, it is very useful to send the last production pieces along with the resource so that the supplier can check the prints against the last production parts. We have found that in many cases the production parts are not to print and that making them to print would actually hinder the functionality of the part. Part of the supplier's procedure should be to check the sample to the print. If the sample parts are identified as being different from the print, the supplier can review the discrepancies with engineering to determine how the parts should be made. The prints can then be updated or a deviation written to correct the discrepancies.
TIP #9 Send Resources to the Supplier's Plant: There is a tremendous amount of technology that needs to be transferred with some outsourcing projects and it's as important to send representatives to the supplier's plant as it is for him to visit your plant. Stationing company personnel familiar with the product at the supplier's plant can help minimize problems and speed the cycle time for start up and the initial run. On a recent, large-scale outsourcing project of welded assemblies to Mexico, we assigned two engineers to assist in certifying welders at the supplier's location. When we outsourced several of our regional parts depots, we stationed key employees with experience in warehouse management at each of the new depots during start up. This procedure can help maintain consistency and continuity of the operation during the transition process.
The final tip we would offer is to work with the supplier to establish a realistic approximation of the learning curve he will go through before he will be fully capable of manufacturing the product. This information is essential in setting up the timing of the transfer.
TIP #10 Build an Adequate Bridge Stock Before the Move: In our experience, we have seen again and again situations where the amount of time needed to produce the outsourced product is underestimated. There will often be considerable pressure from the manufacturing group to outsource a project as quickly as possible; it is up to purchasing to make sure that, before production is discontinued, the proper bridge buy has been run. Consider the engineering time required; consider the unknowns that need to be answered; consider the sample approval process that needs to precede production; and consider any lead-times associated with purchased components that will need to be ordered by the supplier.
A recent example that points out some of these potential problems is a water pump supplier who sold out to another company with a plant twenty miles down the road. The new supplier wanted to close the old water pump plant and consolidate the production at its other plant. The move would require that many of the experienced workers and the machinery be moved to the new plant. We suggested that the supplier build a bridge stock of water pumps at the old plant prior to the move, but they refused. The supplier's estimate was that the move would take a week and that no production time would be lost; they badly underestimated their learning curve at the new plant. Six months after the move they are still struggling with machines that don't work properly, lost tooling, and production yields that are much slower than expected.
Whether your customer is the end user or your own assembly line, one of the worst feelings in the world is having to explain why you, Mr. Buyer, are in a backorder situation. For this reason we have found that building an adequate bridge stock of inventory prior to outsourcing a part is critical. Our rule of thumb is that if the move is estimated to take one month, then have at least three months of bridge inventory built to protect the customer.
Conclusion: Purchasing plays a key role in outsourcing projects. The process is time-consuming, often confusing, and almost always subject to time pressures. To maintain control of the process and contribute to the success of your organization, remember the following ten tips:
Consider the Customer
Include All Costs in the Make vs. Buy Analysis
Select a Preferred Supplier
Quote only a Sample
Select a Supplier Who Can Complete the Project
Make the Supplier Selection Early
Bring the Supplier to the Plant
Send the Last Pieces as Samples
Send Resources to the Supplier's Plant
Build a Bridge Stock