September 30, 2004
By Jim Limperis

Jim Limperis takes a business approach to the emotional subject of outsourcing in manufacturing

With manufacturing deeply rooted in the United States for generations, the subject of outsourcing can provoke an emotional response, especially when it involves production moving offshore to low cost economies. The business approach, however, requires the pros and cons to be carefully measured, and there is much more to it than cost. As no two products and no two markets are exactly the same, the question of outsourcing is very much a case of horses for courses.

Â"You must understand your market and your reasons for outsourcing,Â" notes Dan Miklovic, vice president of manufacturing research for the Gartner Group. Â"If your product life cycle has a six month shelf life and time to market is key, then you may be wasting quite a bit of a short product window with a less-than-ship load, 40-day ocean liner lead time from an offshore provider.Â"

There are many reasons why companies outsource, from cost to global presence. It is crucial that each individual company understands the total cost of outsourcing vs. manufacturing in-house. For example, if much of the test expertise in final inspection and test resides in-house and this is outsourced to an electronic manufacturing service provider to reduce cost, what are the implications for the OEM of losing its skills? If the OEM retains the in-house test engineers, can it still be competitive in the marketplace?

Outsourcing is less controversial when it does not entail offshoring, and when itÂ's simply a case of using an outside provider for a support function, like maintenance, it can be easily justified. Â"Our goal is to help US manufacturers run a more effective operation through our production equipment maintenance services,Â" says Jeff Owens, president of Advanced Technology Services in Peoria, IL, an industry leader in managed services for production equipment maintenance. Improvements to the effectiveness of a factory, even by a few percentage points, translate to extra hours of production over the year and the postponement of expensive outlays for new equipment.

Â"We use total preventive maintenance skills and lean manufacturing techniques to assess a clientÂ's current percentage level of effectiveness and determine what percentage we believe that they can achieve by following our maintenance program,Â" adds Don Johnson, Director of Marketing for ATS. Â"As we meet or exceed these goals, the incremental profits are realized by the client or split between ATS and the client depending on the proposal.Â"

Dr. Valerie Kijewski is a professor of management for University of Massachusetts-Lowell. Her graduate class studies the discipline of market leaders through the value strategies they develop. Â"I see three distinct value strategies that firms can pursue in todayÂ's global marketplace,Â" says Kijewski. Â"The first is operating efficiency, which involves a seamless integration between your operations and your outsourced operation. The second strategy is product leadership. In this value strategy, the firm is constantly changing outsourced partners and perhaps has more than one partner simultaneously. The focus is on repeatability and process management to gain a narrow edge on the competition, based on the value-add of your outsourced partner. The last value strategy is customer intimacy. In this scenario, the firm partners with a key provider who becomes a final integrator for the firm and completes the unique product offering, shipping directly to the final customer.Â" Within this broad theoretical framework, companies considering the prospects of outsourcing can evaluate three value strategies and choose one or two or a hybrid solution that meets their market needs.

Custom plastics manufacturer, Nypro Inc., based in Clinton, MA, initially embarked on the second strategy, forming many joint partnerships in its drive to be a global player. With 11,000 employees in 40 manufacturing facilities in 17 countries, it certainly fits the mold of a global manufacturer. Â"Much of our competition in the plastics field is regional but we believe it is key to have a global presence,Â" says Jim Buonomo, corporate vice president of Nypro. Â"We donÂ't want to let the rest of the international marketplace crowd us out. Our main reason for outsourcing globally was simply to maintain the business. By following our customers around the world, we have successfully retained their business and not willingly given up these accounts to potential foreign competitors waiting in the wings.Â"

Nypro believes it is crucial to understand local business practices to maintain effectiveness. Â"The management of these global organizations cannot be done effectively from a distance,Â" says Al Cotton, director of public relations for Nypro. Nearly all global operations are at least 50 percent owned by Nypro. Â"We truly believe in the global marketplace. With two of the biggest markets just beginning, China and India, consumerism in these countries will fuel more growth in the future which will lead to more opportunities for US service providers like Nypro who believe in a global presence. They say a rising tide floats all the boats and we want to be positioned properly when that occurs.Â"

While the prevailing current is from the Far East, however, there are issues about intellectual property which need careful assessment. Â"China and India do not have stellar laws protecting intellectual property,Â" adds Miklovic of Gartner Group. Â"There have been numerous instances of overnight competition in these countries due to pirated technology. If your companyÂ's niche is its strong intellectual property, then you best have ironclad protection of your intellectual property before pursuing any international outsourcing.Â"

While cheap labor may look attractive, the total cost of outsourcing and the unique requirements of each respective market need to be understood. Â"It is important that you make the right choice for the right reasons,Â" says Miklovic. Â"Indiana may be better than India.Â"

30 Sep 2004