Outsourced manufacturing: an OEM's guide
By Stacie Kilgore -- Manufacturing Business Technology, 9/1/2002 12:00:00 AM
In interviews with high-tech OEMs, Forrester found that OEMs currently offload 78 percent of their subassemblies to providers like Solectron and Flextronics, and expect to get rid of 86 percent of this production in 2004. Their goals in outsourcing: lower capital outlays, boost flexibility, and increase focus on core competencies like product development.
While these OEMs actively shed their manufacturing assets, they're not willing to let quality slip in the process. And today, while these OEMs give outsourcers mostly passing grades, OEM executives weren't satisfied with a critical aspect of the relationship: product costs. They complain that their contract manufacturers don't try hard enough to identify potential cost reductions or pass along savings they find.
So while these OEMs continue to offload production, their struggles to capture cost savings and manage outsourcers aren't going away. Why? Because the objectives of OEMs and contract manufacturers clash. To succeed, they must: 1) decouple supply chains from manufacturing; 2) treat the relationship as a merger, not as a customer-vendor arrangement; and 3) cultivate a virtual manufacturing skill set. Let's examine these in more detail:
1. Decoupling supply chains from manufacturing. While contract manufacturers efficiently operate production assets, their manufacturing prowess doesn't always correlate to supply chain brilliance. But OEMs still offload materials management to these partners. To capture the most benefit from outsourcers, companies must evaluate when—and if—to turn over supply chain activities to these partners. OEMs should look at each component group and examine its technical interdependence and pricing leverage. Smart OEMs will control strategic components, offload commodities, and co-manage the rest.
Outsourcing doesn't reduce the importance of critical parts, so OEMs must continue to control materials that impact their cost or technical differentiation significantly. OEMs should let their outsourcers take control of production materials that offer little cost or technical differentiation, deferring to the contract manufacturers' approved vendor list (AVL). As part of this offloading, companies must insist that contract manufacturers own any excess raw inventory—and sign up for target pricing levels. The result: no finger pointing for over- or under-ordered commodity materials. And finally, components that aren't either strategic or commodities can't be managed fully by either company. To share these supply chain responsibilities with the outsourcer, OEMs should establish joint targets for pricing levels and common AVLs, splitting the savings on inventory reductions and price drops.
2. Treating the relationship as a merger. Outsourcing manufacturing isn't the same as jettisoning payroll; processes like scheduling and new product introductions need tight links with external providers. OEMs must treat outsourcers as an extension of their own operations by shedding duplicate organizations, monitoring joint scorecards, and institutionalizing problem resolution.
Companies must identify a small virtual manufacturing team—and aggressively shed the rest of engineering, operations, and supply management to avoid incurring unnecessary costs. Cisco Systems uses Manugistics' iHub to monitor contract manufacturers on measures including cost, quality, flexibility, and cycle times. Smart enterprises share this kind of data with outsourcers, collaboratively evaluating critical metrics. To avoid resolving quality problems with a frantic call to the plant manager for a replacement order, partners must formalize roles and responsibilities for unplanned events.
3. Cultivate a virtual manufacturing skill set. Companies must ask themselves if they're primed to get the most from outsourcers. In many cases, OEMs' internal processes will throttle the pace of an outsourcer that can move from design to production in a matter of weeks. To best use outsourcers, companies must sense and respond to changes, increase capacity "options," and intertwine engineering efforts.
Many factors can thwart a manufacturing plan. Rather than just reacting to every change by rerunning plans and pushing new requirements at outsourcers, manufacturers should proactively monitor these events by pulling data from suppliers' systems. Since they can't perfectly predict customers' buying decisions, companies must model the probability and magnitude of unforecasted demand spikes and use this information to structure call options for excess capacity from outsourcers. Finally, to avoid delays and OEM-engineer isolation, companies should synchronize their product data from as-designed to as-built, using vendors like Agile, PTC, or MatrixOne.
