Outsourcing

1
© 2004 Superfactory™. All Rights Reserved.
Outsourcing Strategies
Superfactory Excellence Program™
www.superfactory.com

2
Disclaimer and Approved use
 Disclaimer
 The files in the Superfactory Excellence Program by Superfactory Ventures LLC
(“Superfactory”) are intended for use in training individuals within an organization. The
handouts, tools, and presentations may be customized for each application.
 THE FILES AND PRESENTATIONS ARE DISTRIBUTED ON AN "AS IS" BASIS WITHOUT
WARRANTIES OF ANY KIND, EITHER EXPRESSED OR IMPLIED.
 Copyright
 All files in the Superfactory Excellence Program have been created by Superfactory and there
are no known copyright issues. Please contact Superfactory immediately if copyright issues
become apparent.
 Approved Use
 Each copy of the Superfactory Excellence Program can be used throughout a single Customer
location, such as a manufacturing plant. Multiple copies may reside on computers within
that location, or on the intranet for that location. Contact Superfactory for authorization to
use the Superfactory Excellence Program at multiple locations.
 The presentations and files may be customized to satisfy the customer’s application.
 The presentations and files, or portions or modifications thereof, may not be re-sold or re-
distributed without express written permission from Superfactory.
 Current contact information can be found at: www.superfactory.com

3
Outline
 Where in the world should productive activities be located?
 What should be the long term strategic role of foreign production
sites?
 Should the firm own foreign production sites or outsource those
activities to independent vendors?
 How should a globally diverse supply chain be managed and what is
the role of the Internet in managing global logistics?
 Should the firm manage global logistics itself or outsource the
management to enterprises that specialize in this activity?

4
Strategy, Manufacturing, and Logistics
Focus
Production
Logistics
Performed
internationally
To lower costs of value creation
Add value by better serving customer needs

5
Materials Management
 Materials Management: the activity that controls the
transmission of physical materials through the value chain, from
procurement through production and into distribution.
 Logistics: the procurement and and physical transmission of
material through the supply chain, from suppliers to customers.

6
Strategic Objectives
 Lower costs.
 Increase product quality.
 Total Quality Management.
 Increases productivity.
 Lowers rework and scrap costs.
 Lowers warranty costs.
 Accommodate demands for local responsiveness.
 Respond quickly to shifts in customer demand.

7
Total Quality Management
(TQM)
 The leaders: W. Edwards Deming, Joseph Juran, and A.V.
Feigenbaum
“We have learned to live in a world of mistakes and
defective products as if they were necessary to life.
It is time to adopt a new philosophy in America.”
W. Edwards Deming

8
The Relationship Between Quality
and Costs
Figure 16.1
Lowers
Rework and
Scrap Costs
Increases
Productivity
Lowers
Warranty and
Rework Costs
Improves
Performance
Reliability
Lowers
Service Costs
Lowers
Manufacturing
Costs
Increases
Profits

9
Where to Manufacture
Country
Factors
Technological
Factors
Product
Factors
Locating
Manufacturing
Facilities

10
Country Factors
 Political economy.
 Culture.
 Relative factor costs.
 Global concentrations of activity.
 Skilled labor pools.
 Supporting industries.
 Formal and informal trade barriers.
 Transportation costs.
 Rules regarding FDI.
 Exchange rate movements.

11
Technological Factors
 Fixed costs.
 Minimum efficient scale.
 Flexible manufacturing
 Lean Production.
 Reduce setup times.
 Increase machine utilization.
 Improve quality control.
 Flexible machine cells.
Product
customization
Mass Customization
Low cost

12
A Typical Unit Cost Curve
Figure 16.2
Volume
Minimum
Efficient Scale

13
Product Factors and Location Strategies
 Two product features affect location decisions:
 Value to weight ratio.
 Product serves universal needs.
 Two strategies for locating manufacturing facilities:
 Concentration.
 Decentralization.

14
Product Factors
 Value-to-weight ratio.
 Influences transportation costs.
 High value-to-weight.
 Electronic components.
 Low value-to-weight.
 Bulk chemicals.
 Does the product serve universal needs?
 Industrial products.
 Modern consumer products.
 Handheld calculators.
 Personal computers.

15
Manufacturing Location
 Factor costs have substantial impact.
 Low trade barriers.
 Externalities favor certain locations.
 Stable exchange rates.
 Minimum efficient scale is high and flexible manufacturing
technologies available.
 Product’s value-to-weight ratio is high.
 Product serves universal needs.

16
Manufacturing Location
 Factor costs do not have substantial impact.
 High trade barriers.
 Location externalities unimportant.
 Exchange rate volatility.
 Production technology has low fixed costs, low minimum efficient
scale, flexible manufacturing technology unavailable.
 Product has low value-to-weight ratio.
 Product does not serve universal needs.

17
Location Strategy and Manufacturing
Technological Factors
Flexible manufacturing technology Available Not Available
Minimum efficient scale High Low
Fixed costs High Low
Product Factors
Serves universal needs Yes No
Value-to-weight ratio High Low
Country Factors
Differences in factor costs Substantial Few
Substantial Few
Trade barriers Few Many
Differences in political economy
Differences in culture Substantial Few
Concentrated Decentralized
Favored Manufactured Strategy
Table 16.1

18
Strategic Role of Foreign Factories
 Initially, established where labor costs low.
 Later, important centers for design and final assembly.
 Upward migration caused by:
 Pressure to improve cost structure.
 Pressure to customize product to meet customer demand.
 Increasing abundance of advanced factors of production.

19
Make or Buy
Make
Lower costs
Proprietary
Product
Technology
Protection
Facilitating
specialized
investments
Improved
scheduling
Buy
Strategic
flexibility
Lower
costs
Offsets
Trade-offs

20
Strategic Alliances with Suppliers
Attempting to
reap benefits
of vertical
integration
Building
long-term
relationships
Mutually
beneficial
Pressure from
JIT
CAD
CAM
Trust
May limit strategic flexibility
Risks giving away key technology know-how

21
Coordinating a Global Manufacturing System
 Materials management (includes logistics):
 Activities necessary to get materials from suppliers to
manufacturer, to distribution system, to end user.
 Achieve lowest possible cost that meets customer’s needs.
 Power of ‘Just-in-Time’:
 Economize on inventory holding costs.
 Drawback: no buffer inventory.

22
The Role of the Organization
 Organizational linkages are more numerous and complex.
 More difficult to control costs.
 Functionally separate materials management:
 Equal weight with other departments.
 Purchasing, production and distribution are one basic task:
 controlling material flow from purchase to customer.

23
Potential Materials Management Linkages
Plant 1
Market A
Source A Source B
Plant 2
Market B
Source C
Plant 3
Market C Markets
Manufacturing
Locations
Source
Locations
Far East
Europe
North America
Figure 16.3

24
Traditional Organizational Structure
CEO
Distribution
Production
Planning
and Control
Purchasing Manufacturing Marketing Finance
Figure 16.4A

25
Organization Structure with Materials Management
as Separate Function
Strategic
manager/CEO
Production
planning
and control
Purchasing
Materials
management
Manufacturing Marketing Finance
Distribution
Figure 16.4B

26
Role of Information Technology and the
Internet
 Track component parts to assembly plant.
 Optimize production scheduling.
 Ability to accelerate (or slow) production.
 Electronic data interchange coordinates flow through
into/through manufacturing to customers.
 Suppliers, shippers, and purchasing firms can
communicate with each other without delay.
 Flexibility and responsiveness.
 Paperwork is decreased.

27
Issues
How do you manage an outsourced
manufacturing relationship for
success? What are the best practices for getting off to a
good start and building a solid relationship?
What are the dopey things that happen?
• What you do to us
• What we do to you
What practices and processes are essential for
overcoming these challenges and keeping the
relationship strong?

28
Managing a Successful Outsourced
Manufacturing Relationship
 Building the foundation
 Framing the relationship and start-up plan
 Managing for long-term success

29
Building the Foundation
 Your objectives and needs
 CM feedback—the budgetary quotation
 Discussion and negotiation
 “Agreement in principle”

30
Understanding your objectives and strategic intent
CM’s accomplish this through an in-depth Q&A process.
Where are you now?
 What products do you design, manufacture, source—or want to?
 Where do you plan to sell them: Now? In the future?
 Who are your target customers?
– Price metrics
– Manufacturing locations and other factors
 How established is your current supply chain?
– Fully established?
– “Back of a napkin”
 Future supply chain plans?
…Where do you need to be in 3 years? 5 years?

31
Possibilities
• Components
• Modules
• Products
• Electrical
• Mechanical
• Industrial
• DFX (test,
manufacturing,
supply chain,
etc.)
• Systems
• New product
introduction
• Prototyping
• Subsystems
manufacturing (e.g.,
PCB assembly)
• System assembly
• Logistics and
fulfillment
• Repair
• End-of-life
product
management
TECHNOLOGY DESIGN MANUFACTURING SERVICE

32
Address any part of the end-end supply chain
The Challenge
 Cut cost
 Extend product life without major
redesign that would necessitate FDA
review…
 …Despite extensive use of obsolete pin
through hole (PTH) technology
Customer Outcome
• Product life successfully
extended
• Cost reduced significantly
• Increased product reliability and
quality
Example: PCB Redesign for Aging Medical Diagnostic Equipment
The Solution
 Revamp design
– PTH  SMT
– Cut part count 30% (e.g., multiple
DRAMs  one)
 Improve manufacturing yields and
quality using this new design

33
Budgetary Quotation
Core Quotation
 Scope of work—our understanding of your needs
 Recommended supply chain activities…
TECHNOLOGY DESIGN MANUFACTURING SERVICE
 …And supply chain design recommendations—for example
manufacturing sites—consistent with your time-to-market and
cost requirements

34
Budgetary Quotation
Pricing
 Materials (selection and pricing)
– Your AVL?
– CM AVL?
– “Supplier profiles”
– VMI opportunities
– Comprehensive BOM analysis and
recommendations
 Manufacturing (assuming your standard times)
 “Turns”
 Orders/forecast liability
 Feature sets
 Nonrecurring engineering (NREs)
Tip: Only a sophisticated
partner can make a turnkey
price quote.
• Capital to finance the
inventory
• Skill/capability to select it
properly
• Supply base expertise and
investment (AVL)
• Spend leverage
• Risk

35
Budgetary Quotation includes an in-depth discussion of
the processes
 Set the stage for future
successful relationship
 Help flag issues that need
to be discussed together
 Initiate key proven
processes
 Define handoffs & cross-
functional relationships
Materials Management
and Procurement
ECO Management
Quality and Engineering
Organization: Customer
Focus Team
Communications and
Reporting
• Quarterly business reviews
• Reporting and meeting
requirements
• Customer Complaint
Resolution Process (CCRP)

36
Discussion and Negotiation
 “Your price is too high…”
 “Where?”…the price discussion
– Materials (80% to 90% of total cost)
– Labor
– NRE
– Freight
– Other
 Time—When can it be in production?
 Gates/constraints
 Scope of services
 …Sign the Memorandum of Understanding
 Begin formal contract negotiations
• Your material
assumptions
• CM AVL and our
assumptions
• Sources of
variance
BOM Review
• AVL
• Prices and
margins (V)
Reconciliation

37
Framing the Relationship
 Contract development
 Operational requirements
 New Product Start-Up Checklist

38
Contract Development
Business Discussion
 Synthesize the Manufacturing Services Agreement
 Incorporate “all requirements” from both parties (Legal,
Operational, Account Management)
 Solidify the quotation
 Ongoing price reductions

39
Contract Development
Operational
Discussion
• Volumes
• Final AVL
• Schedule and timeline
• Forecasts
• Cycle times
• Lead times, especially
long lead time parts
• Seasonality
• Quality expectations &
other metrics
• Change orders
• Kanbans
• Semi-finished goods
• Stocking
• What if there are
failures?

40
CUSTOMER
Manufacturing
and Test
Engineering
Quality
Program
Manager
Account
Manager
Service
and Repair
Production
Control
Materials
Exchange Contacts
 Account manager
 Program manager
 Engineering (operations)
 Manufacturing
 Test
 Materials (CSCM, SBM)
 IT
 …Equivalent functions on
your team
New Product Start-Up Checklist

41
New Product Start-Up Checklist
Set key parameters
 Start date
 Factory qualification (e.g., QS9000)
 Ramp
 Volumes
 Communication channels/escalation paths
 Materials—BOM, AVL, drawings, etc.—current pipeline & EDI
links
 Transfer of fixtures

42
Managing for Long-Term Success
 The project plan
 Communications and organization
 Managing the key processes

43
Project Plan
 Timeline
 Milestones and owners
 Overall ramp plan
 Subsidiary plans, e.g.,
 Site readiness plans
 Equipment plans
 2 to 6+ months
 Materials-driven

44
Communication
Weekly customer meetings
 CM/Customer equivalent functions
– Program Manager
– Quality Engineer
– Supply Base Manager
– Manufacturing Manager
“As needed” customer discussion of issues, changes, problems ~daily
 Flag topics for weekly meeting
 Program Manager tracks issues/owners/due dates
– New
– Current
– Closed
Daily CM meetings
 Issues as they arise, e.g., SMT or QE issues
 Flag topics for weekly customer meeting
Quarterly business reviews
 90 day look back/ahead

45
Scalable and Dedicated Teams
Account Management Team
A scalable Account Management Team is
created to meet the needs of the account and
to manage all customer projects globally
Customer Focus Team (CFT)
Provide cross-discipline linkage to all
facets of project execution
CUSTOMER
Manufacturing
and Test
Engineering
Quality
Program
Manager
Account
Manager
Service
and Repair
Production
Control
Materials
Account Executive
NPI
Program
Manager
Customer
Supply Chain
Manager
Site 1
Program Manager
and CFT
Account
Manager
Site 2
Program Manager
and CFT
Global
Program
Manager

46
Managing the Key Processes
 Planning and forecasting
 ECOs and change management
 Quality
 Ongoing price reduction
 Supply chain optimization and site transfers
 Repair and post-manufacturing services

47
Planning and Forecasting
The Process…
 Customer issues “non-binding” forecast
 Jointly reviewed and updated monthly, or when changes occur
 Forecast drives:
– Materials purchasing
– Capacity planning
 Forecast is reviewed under Solectron Forecast Acceptance
Process
 By mutual agreement:
– Assignment of liabilities
– Customer issues POs
– CM “loads” the “accepted” forecast
 MRP
 Order parts

48
Planning and Forecasting
…When Changes Occur
 Examples
 Major rapid demand fluctuations
 Materials shortages
 CM proposes solutions for customer consideration
 Switch from Supplier A to Supplier B
 Substitute component
 Escalation if necessary

49
Engineering Change Orders (ECOs) and
Change Management
Initiating An ECO
 Change requests can be originated by the customer or CM,
typically at the weekly meeting
 Typical issues include:
– Product revision
– Component feed format change [e.g., tape & reel  tray]
– Supplier change
– Replacement of part X due to low ICT yield
The CM Response
 CM reviews now-obsolete material on hand or on order
 We develop a response proposal according to the urgency of
Customer need

50
ECOs and Change Management
Putting the ECO in Place
 The Customer formally authorizes the ECO
 CM proposes an implementation plan, including
– New BOM and AVL
– Plan for meeting the current production schedule
 Effective date of the ECO
 Materials liability
 Mitigation of inventory [supplier take back, other customers]
– Alternative implementation plans
 Upon mutually agreed-on terms (slip date, cost liabilities), the
ECO agreement is put in place and implemented

51
Quality starts long before manufacturing begins
 Both the Customer & CM propose quality standards and
metrics very early in the relationship—before the MSA
 We negotiate these metrics & formalize them in the MSA
(these vary by product, customer)
 Report, chart and analyze quality data daily

52
Customer Satisfaction Index
Customer Satisfaction Index (CSI)
Date: 02/12/03
Customer Name: XXXX
Person Surveyed: Operations Team
Week Ending: January 31, 2003
Your Email Address:
Your Fax Number:
Account Manager: 02/12/03
Location: Malaysia Plant
Program Manager:
Week Ending: January 31, 2003
Frequency: Weekly Bi-Weekly Monthly
x
Score
Percentage
A A– B+ B B– C D: Unacceptable
100 95 85 80 75 0 -100
1. Quality
2. Delivery/Responsiveness
Category 3. Communication
4. Service/Flexibility
5. Technical Support
X
X
X
X
X

53
Fluctuations result in “corrective actions”
Fluctuations result in “corrective actions” using CM’s
Customer Corrective Action Resolution Process
(CCRP)
1. Isolate the cause; root cause analysis
2. Recommend a fix; review with the Customer (e.g., drop a
vendor from the AVL; train or replace an operation creating
errors)
3. Issue mutually agreed on CCRP resolution
4. Implement

54
Ongoing Price Reductions
 Frequently the MSA specifies ongoing price reductions (e.g., 8%
Y/Y).
 What’s possible depends on:
– Who “owns” the BOM: for the most part, we can attack what we
control
– Manufacturing cost saving/efficiencies
– Openness to site transfers (more about this later)
 Usually “win-win” incentives are put in place to reward cost
reduction.

55
Ongoing Price Reductions
 Each quarter, the CM organization seeks materials cost
reduction opportunities, such as:
– Alternative components (lower cost, shorter lead times,
more flexibility, better payment terms)
 Prioritize the top CR opportunities, especially “low hanging
fruit”—and recommend changes
BOM Today
Recommended
BOM
 After negotiation and agreement…
– ECO terms
– Cost liabilities
– Terms (e.g., inventory disposition, buy-downs)
 …Implementation

56
Cost reduction via system redesign
The Challenge
 Create a sample unit that dramatically reduces the cost and revamps the
design of a high-end enterprise server…
– Enclosure
– Backplane
– Fan tray, cables, and power supplies
 …despite incomplete CAD files, rapid turnaround
The Solution
 Cost reduction via DFM, component elimination
 New CAD files generated through reverse engineering and 3D simulation
 New supply chain proposed to cut lead time by manufacturing subassemblies
in Singapore and Shanghai, with final integration and test in the US
Example: Enterprise Server Level 3 System Integration Sample

57
Outcome
 Sample successfully developed with projected 25% cost reduction
 Recreated 30 missing 3D CAD files for the customer
 Completed and delivered the level 3 system sample and DFM proposal in
record time
 Customer commented: “This is the first time an enclosure supplier has
built a design of this complexity right the first time”
Cost reduction via system redesign
Example: Enterprise Server Level 3 System Integration Sample

58
Supply chain optimization and site selection

59
Site transfers represent one tool for supply chain
optimization
Deciding On A Site Transfer
 The CM account management team continuously explores
global supply chain optimization opportunities
– Proactively
– In response to customer request
 Site transfers represent one tool of optimization
– Cost reduction (both labor & materials)
– Supply chain improvements, e.g.:
 Proximity to component supply or end markets
 Unique capabilities
 Supply changes, such as shift to a BTO/CTO model
 Tariffs or tax incentives

60
Site transfers represent one tool for supply chain
optimization
Implementation
 Use a systematic process:
1. Review the supply chain and ID improvement opportunities
(lowest landed cost model)
2. Propose changes to the customer
3. Negotiate and reach formal agreement
– Cost/benefit
– Supply chain impact
– All the specifics: materials, labor, freight, cost of money, time-to-delivery, etc.
4. Implement

61
Repair and post-manufacturing services
Repair & Refurbishment Services
 Factory warranty
 OEM warranty
 Out of warranty
Customer Care Services
 Sales (pre-sales, cross-sell, up-sell)
 CRM (leads, warranty processing & management, retention/win-back,
surveys)
 Technical support
Other
 Asset recovery & environmental disposal
 Inventory management
 Transportation management & warehousing

62
Effective and integrated repair can be a powerful lever for
quality improvement and cost reduction
The Challenge
Improve quality and cut costs, while improving the end-customer experience
The Solution
Repair service information management system and data warehouse
Example: Repair For Global Cellular Handset OEM
• Repair process know-how and
capabilities
• Key people
• Facilities worldwide
• “Recipe” for handset repair
• Risk mitigation via transparency
& continuous improvement
• “Script” for repair technician
• Solectron Active Business
Partner™-based
architecture
• Data warehouse
• Business Objects reporting
system

63
Effective and integrated repair can be a powerful lever for
quality improvement and cost reduction
• Component
improvement
• Improved
design
• Improved
manufacturing
quality; cost
• Refined
manufacturing
process
• Reduced
repair cost
• Reduced need
for repair
• Reduced part
consumption
TECHNOLOGY DESIGN MANUFACTURING REPAIR
• Improved user
experience
• Industry-beating
carrier reporting
END-USER
Customer Outcome
Major benefits in both cost and quality

64
Managing a successful outsourced manufacturing
relationship starts before the contract is signed
Building the foundation
Framing the relationship and start-up plan
Managing for long-term success

Outsourcing

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (7)

Similar to Outsourcing

Similar to Outsourcing (20)

Recently uploaded

Recently uploaded (20)

Outsourcing