Strategic Frameworks for Outsourcing Decisions Part One
Vivek Sood explains in three parts how to strategically outsource, click here for part one
Besides closing plants, perhaps no other strategic move arouses as much passion and heated debate inside organizations as outsourcing. There was a time, not too long ago, when outsourcing discussions would not even make it to the board rooms since they were considered too low level for that august setting. Top-tier business journals would not print articles on the topic for the same reason.
Today, outsourcing and supply chain management occupies the core space within strategic decision making. Yet, CEOs on the verge of making decisions to outsource face biases, distorted data and opinion based advice more often than not. Debating the benefits and risks of outsourcing are commonplace at such times in the boardroom. However, no strategic framework exists that can help make decisions in a systematic manner. The most pressing issues in this regard include:
Are there times where a company must not outsource?
Equally important, are there times when a company must outsource?
How to discern when you must, or must not outsource – and what to do when outsourcing?
Outsourcing Continuum: From Simplicity To Sophistication
Ask 100 people what image comes to mind when they think of outsourcing, and 99 people will describe a sweatshop in China or Bangladesh, or a call center in India or Philippines. No doubt these are somewhat stereotypical images of outsourcing conveyed by the media, but let me describe the other end of the continuum.
To understand its full potential, as well as the barrage of debate surrounding outsourcing in the modern business networks, let us look at Boeing as a brief case study. Its 787 Dreamliner has been one of the most innovative and costliest projects on Earth today. From the beginning it was apparent that to keep up with Airbus and to create the next generation of airplanes, Boeing would need extensive cooperation of the best in the world.
The most noteworthy feature of the 787 Dreamliner production is perhaps the fact that out of the entire airplane, only one part – the tailfin – is manufactured by Boeing itself. The rest of the plane – the fuselage, the engines, the avionics, the landing gear, even the wings are all manufactured by the outsourced service providers all over the world.
Secondly, since sections of the fuselage are baked hard in autoclave ovens, purpose built large autoclave ovens are installed in various locations of Boeing’s outsourced service providers. Some of the biggest autoclaves in the world were built for the 787 project. The one in Wichita, Kansas is 30 feet in diameter and 70 feet long.
For the first time ever, the wings of the Boeing Airplane are made overseas by Fuji in Japan. A purpose built plant with cutting edge technology and capability to use carbon fibre helps Fuji meet Boeing’s rigorous standards. Fuji not only builds the wings and parts of the fuselage that hold the wings but also works with Boeing to fine-tune the design specifications to meet the stringent strength and stability requirements.
Sub-assemblies are brought to the final assembly plant in Everett, Washington in a special plane called the Dreamlifter. It has a swing tail that opens out and a large cargo loader unloads the pieces coming from Italy, Japan, South Carolina and Kansas.
Moreover, the wings come from Japan, the horizontal stabilizers come from Italy, the engines from Rolls Royce in England, landing gear from Messie-Dowty in France, and the largest section that comes in a single piece is the 85 feet long mid-section of the fuselage, built by Global Aeronautica in Charleston, South Carolina.
The story of production of Boeing’s 787 Dreamliner is a poetry in motion and a true global supply chain in action.
At the time it was envisaged, this business network attracted a lot of positive and negative publicity. However, it is clear by now that the new product development time was shrunk, the capital cost of development as well as risk was reduced significantly as a result of extensive outsourcing.
Defining the issues
Ask any executive, when to outsource, and when not to outsource – you will get a quick answer. If it is a core competence, do not outsource. If it is not a core competence then consider outsourcing.
Let me first describe a real life situation where the company was convinced that it must NOT outsource. In a project of ours, one of the company directors, a very vocal gentleman, was dogmatically against outsourcing of any kind. In his executive career, prior to becoming a non-executive director, he had faced several outsourcing situations where the outsourcing service providers did not deliver the promise. In addition, he had seen an erosion of capability within his own company to an extent where it led to dependence on the outsourced service provider, even for minor tasks. At times, he had felt that the service providers charged inordinately high prices for these minor services, especially if they had not been covered by the initial contract. Such negative experience in the past created a bias which may have negative implications for the present.
Looking at the problem in a fact-based logical manner, we asked three key questions:
1. What exactly does the organization lose by outsourcing this particular service in this manner?
a.What specific capabilities will be lost, and in what time-frame?
b.What specific relationships will be lost, and to what extent?
c.What infrastructure – property, plant and equipment – will be lost or disposed of?
d.What specific knowledge base, technology or know-how will be lost – to what extent, and in what time-frame?
2. How long will it take to recoup these losses if the company had to do so, and at what additional costs?
3. How long can the company survive after the losses analyzed in Question 1?
A systematic and objective approach will yield meaningful answers, which in turn help break the impasse in the board room as it did in our case. In fact a lot of companies miss out on opportunities to outsource due to the fear of the unknown, lack of knowledge, lack of trust or overconfidence in their own ability to do things themselves.
What about situations where a company MUST outsource?
Our client – a pioneer in the sustainable energy field – was looking to boost production capability in a region where demand was projected to be especially strong. To capture the first mover advantage the company was marketing aggressively with the expectation that their production capacity could be rapidly ramped up when needed. When we looked at the end-to-end supply chain plan, matching projected supply to demand, it was very clear that the only way to meet projected demand was by outsourcing some of the activity.
The key questions to ask in this case are only slightly different (yet this difference is critical):
1. What exactly does the organization gain by outsourcing this particular service in this manner?
a. What specific capabilities will be gained, and in what time-frame?
b. What specific relationships will be built, and to what extent?
c. What infrastructure – property, plant and equipment – will be put at our disposal as a result?
d. What specific knowledge base, technology or know-how will be gained – to what extent, and in what time-frame?
2. How long will it take to make these gains on our own if the company had to do so, and at what additional costs?
3. Are there potential gains from outsourcing analyzed in Question 1 that the company cannot do without?
Stay tuned for part 2...