Outsourcing in the Chemical and Automotive Industries: Choice or Competitive Imperative?

The outsourcing of manufacturing is a strategic

option which in some cases represents a choice and

in others a competitive imperative. In this article,

the authors explore the approaches of sample firms

in the chemical and automotive industries to the

outsourcing of manufacturing.

Based on clinical research done

with companies participating in

IMD’s Manufacturing 2000 project, the authors con-

clude that the outsourcing of manufacturing is not

a panacea, but rather a strategic choice, which is

business dependent. In the cases where it is pursued,

the need for firms to focus on the managerial

challenges of selecting appropriate partners for the

long term and building and nurturing a mutually

rewarding relationship is stressed. Setting and

realizing an aggressive improvement agenda is

required by each partner to make the necessary

transformations to sustain the relationship in the

long term.

INTRODUCTIONThe outsourcing of manufacturing was an agenda

item for a Manufacturing 2000 board meeting held inOctober 1996. Started in 1990, Manufacturing 20001, an IMD research initiative in collaboration with industry,had been supported since its inception by 22 organiza-tions, mostly large multinational firms. Its mission wasto identify both the changing requirements for manu-facturing excellence and the appropriate organizationalresponses in manufacturing companies.

During the discussion with the senior executives present, it became apparent that some confusion andfrustration accompanied their experiences in the out-sourcing of manufacturing. Their concerns could besimply summarized in terms of what was and what wasnot working and why. Several board members volun-teered to give the authors access to their operations witha view to documenting the way in which outsourcingdecisions were made as well as how outsourcing strate-gies were formulated and implemented. This article synthesizes these observations as they apply to the out-sourcing of manufacturing in the chemical and automo-tive industries.

During the mid-1990s, the business press was repletewith articles extolling the virtues of the outsourcing of manufacturing. Indeed, Trent and Monczka (1998)reported that, based on survey data, firms would increas-ingly rely on external suppliers as a source of productand process technology. But be that as it may, theManufacturing 2000 board members were somewhatskeptical of this trend. Was the outsourcing of manufac-turing all that it was cracked up to be?

Additionally, concerns were being raised about theselection of appropriate suppliers. While supplier selec-tion has been extensively addressed in the literature [for example, Spekman (1988)] the executives were

4 The Journal of Supply Chain Management | Fall 1999

Outsourcing in the Chemical andAutomotive Industries: Choice orCompetitive Imperative?

Robert Collins

is Professor of Manufacturing Management and Strategies at IMD-

International Institute for Management Development in Switzerland.

He earned his D.B.A. degree from Indiana University. Dr. Collins’

research interests include outsourcing of manufacturing, benchmarking,

and pan-regional manufacturing.

Kimberly Bechler

is a Research Associate at IMD-International Institute for Management

Development in Switzerland. She earned her MBA degree from

Georgetown University. Ms. Bechler’s research interests include enter-

prise transformation, manufacturing strategy, and strategic information

management.

The Journal of Supply ChainManagement: A GlobalReview of Purchasing and Supply Copyright © November 1999, by theNational Association ofPurchasing Management, Inc.

AUTHORS

1Manufacturing 2000 research is based on a research partnershipbetween IMD, based in Lausanne, Switzerland, and the following companies: Andersen Consulting; Bell Packaging Corp.; BP Chemicals;DuPont de Nemours; Exxon Chemical International, Inc.; GKNAutomotive; Heineken; Nestlé SA; Nokia Mobile Phones; Omega SA;Philips International B.V.; Siemens AG; and Volkswagen Audi AG.

SUMMARY

5The Journal of Supply Chain Management | Fall 1999

Outsourcing in the Chemical and Automotive Industries: Choice or Competitive Imperative?

displaying some discomfort regarding the appropriate-ness of their current approaches to supplier selectionand evaluation. They seemed to be drawing a distinc-tion between suppliers on the one hand and potentialpartners on the other. Furthermore, while they recog-nized the need to manage such relationships in the longterm, the challenge was to actually apply existing guide-lines such as those proposed by Dwyer et al. (1987) andmore recently by Ellram (1991).

In conducting the research, the authors chose to focuson both the automotive and chemical industries inorder to compare and contrast the formulation andimplementation of outsourcing strategies for manufac-turing, and to build on their previous research in theautomotive industry. Collins et al. (1997) developed two models, the Supplier Profile Matrix and the Stairs of Transformation, to facilitate the understanding of themanagerial challenges related to partner selection andthe building and nurturing of the relationship whenmanufacturing is outsourced.

The outsourcing of manufacturing is a strategic option,which needs to be critically assessed not only in light ofthe structure and dynamics of the industry in which thefirm competes, but also its positioning, and whetheroutsourcing will lead to achieving a sustainable compet-itive advantage. The chemical industry is one exampleof where the outsourcing of manufacturing is a choice— it is appropriate in some instances but not in others. BP Chemicals, a bulk chemicals manufacturer, has rejectedthe outsourcing of manufacturing as an option as itcontinues to invest in a world-class asset base focusedon the global provision of specific hydrocarbon buildingblocks to its customers. On the other hand, DuPont deNemours, in its agricultural crop protection business,argues that the outsourcing of the synthesis of chemicalintermediates is critical in the development of the com-plex molecules, which find applications as pesticides,herbicides, and fungicides.

Alternatively, the automotive industry illustrates how outsourcing has become a competitive imperative.Historically, the automotive industry has made a prac-tice of outsourcing the manufacture of parts and com-ponents to a myriad of suppliers. Today, automotivemanufacturers have expanded the practice to includethe design, manufacture, and assembly of increasinglycomplex systems and modules thereby shrinking theimmediate supply base to a set of first-tier suppliers. In doing so, automotive manufacturers have movedbeyond vaunted JIT relationships with suppliers to integrated supply and modular consortia relationships.While many firms in various industries are still strug-gling to implement JIT concepts within their respectivesupply chains, these manufacturers are championingsupply base management innovations which transcendthe JIT approach and drive greater manufacturer-supplierinterdependence. These partners are introducing new

approaches to production as suppliers take on more of the value-added work. Skoda’s two facilities in theCzech Republic producing the Felicia and Octavia models; Volkswagen’s modular consortium in Resende,Brazil; and DaimlerChrysler’s new plant in Alabama,which produces the M-Class sport utility vehicle, as well as its Smart Car production facility in Hambach,France2, are representative of these evolving relation-ships. As first-tier suppliers in the automotive industryare moving to modular supply, contract manufacturersin the chemical industry are taking on responsibility forthe application of current good manufacturing practice(cGMP), regulatory compliance, and clinical testing asthey work toward building and nurturing long-termrelationships with their customers, the major chemicalfirms.

OUTSOURCING OF MANUFACTURING: A CHOICE

There are 89 elements in the Periodic Table whichoccur naturally. Thus, the atomic building blocks thatcan combine to form an infinite number of chemicalcompounds are few in number. However, the way inwhich they can combine ranges from the simple to thecomplex. For example, the oxygen molecule is made upof two atoms of oxygen, while a protein, or polymer, ismade up of hundreds of thousands of different atomsand radicals (specific groups of atoms). The chemicaland physical properties of these molecules give rise toapplications in, for example, gaseous welding and anes-thesia as well as flavors, fragrances, dyes and pigments,lubricants and additives, catalysts, and oil field andindustrial chemicals. In turn, these applications deter-mine the production volume necessary to satisfy globalmarket demand. These can range from hundreds ofthousands of tons in the case of some industrial chemi-cals to grams in the case of a particular “note” or fra-grance used in perfumery. The combination of a molecule,its application, and volume can be represented on thethree axes of a cube as shown in Figure 1.

Indeed each combination represents a business oppor-tunity within the industry. Firms will operate in differ-ent segments of the cube. The chemical firm’s decisionregarding the type of businesses within which it wishesto compete, namely the molecules it will produce andtheir application and volume, dictates the applicabilityof outsourcing as a strategic option.

BP Chemicals and DuPont Agricultural Crop ProtectionChemicals (DuPont AG CPC) help to illustrate the use ofmanufacturing outsourcing as a choice. Their respectivepositioning in the business system dictates competencies,which impact the outsourcing decision.

2The plant was commissioned by Micro Compact Car AG, the former Mercedes-Benz and SMH joint venture to manufacture theSmart “Swatch” car.



BP ChemicalsThe bulk chemical industry is process intensive with

process efficiency and process technology developmentproviding the bedrock upon which competitive advan-tage is founded. Bulk chemical manufacturers createvalue by developing and applying a particular processtechnology. Manufacturers are looking for new ways tomaximize both plant capacity and return — formingjoint ventures or swapping assets to achieve economiesof scale as well as searching for new process technologiesand applications.

BP Chemicals specializes in the production of petro-chemical derivatives containing 2-4 carbon atoms fromcrude oil and gas feedstocks. As a bulk chemicals manu-facturer operating globally, BP Chemical’s position inthe value chain, as shown in Figure 2, is in primary

conversion which requires competencies in processtechnology and manufacturing.

For this company, competitive advantage lies inincreased process efficiencies and process innovation,i.e., the enhancement of a process knowledge base. BPChemicals has chosen not to outsource manufacturingas it has a distinctive competence in the application ofstate of the art process technology at each of its manu-facturing sites; it is adding value to basic hydrocarbonmolecules, the building blocks for downstream processindustries, and to those derivatives where cost competi-tive and leading technologies can be applied. BP Chemicalsoperates from a portfolio of world-class assets and, as aresult, the outsourcing of manufacturing is irrelevant.

DuPont Agricultural Crop Protection ChemicalsWithin agrochemicals, the crop protection industry is

bioscience-based. Research and development intensity is high, and product development is a long, costly, andrisky process. With product development being the keyto competitiveness, profitability depends on launchingnew products in a timely fashion. Some crop protectionmanufacturers are looking for ways to maintain or increasedifferentiation by enhancing product innovation andaccelerating product development, thereby leveragingpatent protection, reducing the costs involved in newprocess development, and gaining access to new technologies.

In crop protection, DuPont is a leader in providing appli-cation technology, products, and services to agriculture.Relative to BP Chemicals, it is positioned further down-stream in the value chain, where secondary and tertiaryconversions require competencies in molecular research,new product development, and process development.

For DuPont’s agricultural crop protection business,competitive advantage lies in realizing timely and effi-cient product innovation in the marketplace. This is adaunting challenge. Research activities focus on thedesign of a molecule having the chemical and physicalproperties to match the intended application. Thisrequires the screening of thousands of variants. Thedevelopment phase involves specifying appropriate synthesis paths and choosing between them. In produc-tion, manufacturing needs to progress from laboratoryscale operations through to pilot plant and, eventually,volume production. A dedicated plant and equipmentmay require investments of up to $100 million. Manu-facturers also need to comply with a stringent regulatoryenvironment. Since the elapsed time between the initialscreening of the molecules to determine the activeingredient and product launch can be five to ten years,outsourcing or contract manufacturing is viewed as ameaningful option. DuPont is looking for partners thatwill allow it to compete more effectively on productinnovation, time to market and cost, while giving access to state of the art technology and avoiding capital investment.

Tons Simple

Complex

Kilos

Grams

Applications

MoleculesVolume

COMPETITION IN THE CHEMICAL INDUSTRY

Figure 1

Bulk ChemicalsBP Chemicals

• Geo-science engineering

• Process technology

• Manufacturing

• Molecular research

• New product development

• Process development

• Product application

• Packaging

• Branding

• Consumer logistics

Crop ProtectionDuPont AG CPC

RawMaterial

PrimaryConversion

Secondary/Tertiary

ConversionsFormulation Distribution

EndUser

CHEMICAL INDUSTRY VALUE CHAIN

Figure 2



OUTSOURCING OF MANUFACTURING: A COMPETITIVE IMPERATIVE

Competitive pressures and the ongoing search forincreased efficiencies and greater profits are drivingautomotive manufacturers and suppliers to reevaluatetheir respective supply chain activities and relationships.As they strive to improve overall performance, theymust reassess who does the value-added work as well aswhere and how it is carried out. Automotive manufac-turers are moving to fewer platforms, rationalizing thesupply base, defining a new set of supply requirements,and outsourcing activities that have historically beenconsidered the automotive manufacturer’s domain.Outsourcing has made the separate territories, formerlystaked out by suppliers and automotive manufacturers,less well defined. Suppliers are doing more design, partsmanufacturing, and assembly as they become indispens-able partners in the assembly of vehicles (Sleigh 1996).These trends are driving two fundamental changes in the automotive supply base: consolidation andrestructuring.

The further concentration of the world componentsindustry into a smaller number of global companies isin response to the need to master a greater breadth oftechnologies and capabilities, and to realize economiesof scale together with geographic coverage. As a result,the configuration of the automotive parts supply industryis moving from a flat structure, in which suppliers shippedproduct directly to the automotive manufacturer, into ahierarchical structure in which the first-tier supplierassembles the system or module and the second- andthird-tier suppliers provide the subcomponents. Manyfirst-tier European suppliers have either announced amerger or acquisition or are rumored to be looking forpartners. In October 1997, Mannesmann purchasedPhilips’ Car Systems business (Financial Times, February1998) and in July 1998, France’s Valeo purchased theelectrical systems business of ITT Industries. Valeo’s pur-chase made it one of the industry’s top 10 largest com-panies overnight (Miller 1998).

As automotive manufacturers outsource more of theirdesign, manufacturing, and assembly activities to sup-pliers, and suppliers in turn move toward modular supply, there is necessarily an impact on how produc-tion is organized. Supply relationships have movedbeyond JIT to integrated supply and modular consortia.Table I compares these three supply approaches alongfive operational dimensions: the number/nature of suppliers, supplier location relative to the automotivemanufacturer’s plant, nature of the manufacturer-supplierbusiness relationship, supplier role in logistics, andthe degree of flexibility in the manufacturer-supplierrelationship.

As dependency increases, partner selection, as well asthe building and nurturing of the relationship, becomesincreasingly important.

MANAGERIAL CHALLENGES: PARTNER SELECTION

If the outsourcing of manufacturing is to be pursued,manufacturers and suppliers must first recognize thenature of the relationship into which they are about toenter. For example, in the automotive industry, as man-ufacturers move beyond JIT to increasingly interdepen-dent relationships that stretch across geographies andrely predominantly on first-tier suppliers, they createsingle, and in some cases sole, supplier relationships forat least the life of a specific model. In the single supplierrelationship, where the manufacturer relies on a singlesupplier chosen from a pool of several qualified suppliers,choice can still be exercised. However, in the sole supplierrelationship, the manufacturer has just one qualifiedsupplier, at least in the short to medium term. Figure 3highlights the evolving manufacturer-supplier relation-ships at the two Skoda facilities assembling the Felicia

BASIC FEATURES OF EACH APPROACH

Table I

Integrated Modular JIT Supply Consortia

Suppliers Many First tier Co-investors

Location Proximate, but Onsite “hole- Online, with geographically in-the-wall,” no geographicseparated with no constraint

geographicconstraint

Relationship Independent Interdependent Dependent

Logistics Effect Increasing Increasing coordination efficiency efficiency

System Possible to Limited ability Limited ability Flexibility reconfigure to reconfigure to modify

partnership

Multiple Single Sole

Global

Regional

Local

SUPPLIER PROFILE MATRIX: THE AUTOMOTIVE INDUSTRY

Figure 3

Johnson Controls: Skoda Felicia

Modular Modular Consortia ConsortiaSuppliers: Suppliers:Skoda Octavia VW Resende

Number of Suppliers

Supplier’sGeographicFocus



and Octavia models and VW’s truck and bus plant inResende. In the matrix, the rows represent the geographicfocus of suppliers, and the columns the number of sup-pliers involved in the partnership.

At Skoda’s Felicia plant, the manufacturer effectivelymaintains a sole supplier relationship with JohnsonControls. Johnson Controls is a hole-in-the-wall sup-plier manufacturing seat sets to order, with a deliveryleadtime of 303 minutes. However, at its Octavia plant,Skoda has a single supplier relationship with the threesupplier joint ventures that assemble cockpit, front end,and door modules directly on the line. The three modulesuppliers have designated floor areas within the plantwhere the modules are assembled on feeder lines linkedto the main assembly line. At its Resende bus and truckplant, VW has a sole relationship with its seven first-tiersuppliers, which constitute the consortium. Again, themodule suppliers are located directly online.

Moving from multiple to single and sole relationshipsacross geographies implies a transformation in the natureof the supply relationship. The transformations are repre-sented by the boundaries of each cell and it is in effectingeach transformation that the managerial challenges lie.

As shown in Figure 4, the situation in the matrix isanalogous to that of a young couple as they move fromcourtship to marriage. These relationships are at differentstages of maturity and may reflect different levels ofcommitment.

In the Octavia plant, Skoda and the three modularsuppliers realize that while they can both benefit from a closer relationship, viable sourcing alternatives exist.This stage can be referred to as living together — the

first step in establishing the partnership. In the Resendeplant, VW and the modular consortium of seven sup-pliers are co-investors and the partners have alreadyinvested significant resources in acquiring and trainingpersonnel, commissioning the plant, workforce integra-tion, and infrastructure. At this stage it is in the interestof all partners to make the marriage work. A similar com-mitment exists between Skoda and Johnson Controls atthe Felicia plant.

As in any formal relationship, the greater the level ofcommitment, the more difficult and painful is the sepa-ration or the divorce. In the case of the Octavia plant, ifeither the manufacturer or the supplier is unhappy withperformance, ending the relationship is really just aformality. In this early stage of the relationship, Skodacould replace the supplier with other qualified suppliers.Indeed, Skoda could assume assembly responsibility itself.The investment made by both partners in the relation-ship, production systems, and infrastructure is notenough to prohibit them from seeking other partners.However, in the case of the Felicia and Resende opera-tions, the manufacturer does not have the option to gowith a replacement supplier in the short-to-mediumterm. Therefore, given the joint investment in infra-structure made by both automotive manufacturer andsuppliers, and their operational interdependence, severingthe relationship becomes a complex issue — the divorceis likely to be costly, painful, and drawn out.

DuPont AG CPC manages relationships at each stageof maturity depending on the nature of the product orservice supplied. Both single and sole source supplierrelationships are in evidence here. In the formulationstage, DuPont opts to single source regional relationships

Multiple Single Sole

Global

Regional

Local

MANAGING SINGLE VERSUS SOLE SUPPLIER RELATIONSHIPS

Figure 4

DuPont AG CPC“commited to making the marriage work” for the synthesis of chemical intermediates

DuPont AG CPC Johnson Controls:“living together” Skoda Feliciafor product “commited to making formulation the marriage work”

Modular Consortia Modular ConsortiaSuppliers: Suppliers: VW ResendeSkoda Octavia “commited to making“living together” the marriage work”

Number of Suppliers

Supplier’sGeographicFocus

(Commitment)(Commitmentnot clear)

Divorce remains aformality (reservethe option to switch)

Divorce is complicated,drawn-out, and painful



in which total costs are a critical determinant in supplierselection and retention. For the synthesis of chemicalintermediates, involving as many as 10 steps, it has cho-sen to maintain sole supplier relationships typically dic-tated by the level of capital investment required toeffect the synthesis and availability of the necessarytechnical capabilities. Of necessity DuPont is committedto making the marriage work since, as was the case atthe Felicia and Resende operations, it does not have the option to go with a replacement supplier in theshort-to-medium term.

It is evident that, as manufacturers move from multipleto single or sole supplier relationships, the choice ofpartner needs to be made with some circumspection.What are the appropriate selection criteria?

As these relationships become increasingly interdepen-dent, partners are expected to go beyond the standardqualifications of “quality, cost, and quantity.” DuPontuses multiple criteria and a stakeholder approach to selec-tion; appropriate contract manufacturers are selected by amultifunctional team with members from sourcing, man-ufacturing, technology, marketing, and finance. Contractmanufacturer selection criteria includes consideration of:

• Technical capability

• Strategic fit

• Ability to meet safety, health, and environmentalstandards

• Ethical behavior

• Cost

• Working capital

• Security of supply

• Customer service orientation

• Commitment to continuous improvement

On the other hand, in choosing first-tier suppliers,automotive manufacturers are still struggling with thequestion of “Who is the natural integrator?” Should the selection be based on which supplier contributes the greatest value added to the system or module, or has the potential to supply system-critical technologyin the future? Or should the selection be based onwhich supplier could potentially expose the manufac-turer to the greatest product liability risk? Choosing afirst-tier supplier on the basis of system integrationand logistics management skills also has merit. As aresult, first-tier supplier selection criteria are systemand module dependent. Volkswagen (VW), for example,relies on its first-tier suppliers for the provision of cutting-edge technology and, by bringing them into closer con-tact with VW customers, is able to foster quick responseto changing consumer tastes (International Herald Tribune,July 1998). At the DaimlerChrysler plant in Vance,Alabama, almost every first-tier supplier is nowresponsible for the performance of its supplier net-work — making full service supply capability a deter-mining criterion (Automotive News Europe, June 1998).

BUILDING AND NURTURING THE RELATIONSHIP

The analogy to marriage can be extended beyond partner selection and the formalization of the union to making the marriage work. The outsourcing of manu-facturing implies an increasing interdependence betweenmanufacturer and supplier, and if the relationship is toprosper, both partners need to recognize their separateand joint responsibilities for building and nurturing it.Otherwise, the relationship may fall victim to complacency.

All too often a disproportionate emphasis is placed onthe obligations of the supplier, but manufacturers mustnot ignore their responsibilities. For example, once theautomotive manufacturer outsources a module there is a concomitant obligation to simplify the existing infra-structure, thereby achieving cost savings. Maintainingduplicate infrastructures justified on the basis of a “justin case” scenario defeats the purpose of outsourcing. Costsavings are not realized, and the focus and time necessaryto enhance those competencies considered critical to thebusiness are also dissipated.

The Stairs of Transformation in Figure 5 represent the different steps required in the relationship as bothpartners move toward a genuine partnership and theachievement of breakthrough costs/benefits. Climbingthe stairs implies an increasing degree of interdepen-dence and demands that both partners set and realizean aggressive improvement agenda for the developmentof not only the competencies necessary to execute aparticular activity, but also those necessary to improveperformance. For example, at the initial stage in therelationship, automotive suppliers need to focus onreengineering the assembly operations and the improve-ment of appropriate performance measures. Meanwhilethe automotive manufacturer needs to focus on reevalu-ating traditional make-or-buy decisions in light of futureselection criteria. The intent is to determine which activitiesare candidates for outsourcing.

Supplier AutomotiveManufacturer

Breakthroughcosts/benefits

Functionality

Assemblyschedulesupport

Assembly*

Logistics

BINM**

Design

Outsourcing

Infrastructuresimplification

Competencereconfiguration

Genuinepartnership

Conformance

Virtualintegration

Strategicfocus

Operationalfocus

Costreduction

Goal to beachieved

*Activity beingconducted

**Backward integration intonew manufacturing

THE STAIRS OF TRANSFORMATION: THE AUTOMOTIVE INDUSTRY

Figure 5



The way in which the outsourcing relationship mightdevelop is illustrated in Figure 6. At the Skoda Octaviaand VW Resende plants the partners are still in the earlystages of relationship development. The Octavia supplierjoint ventures are being asked as a first step to assumeresponsibility in the assembly of their respective mod-ules for system integration. The next goal is for them to take over responsibility for logistics from Skoda. Asimilar situation exists at Resende where the cab module,consisting of more than 800 components, is supplied byVDO, traditionally an instrument supplier. For VDO, thechallenge is to develop or gain access to the capabilitiesin the technologies and processes dictated by key com-ponents, other than instruments, that comprise themodule. This is in addition to eventually managing a complex logistics network of second- and third-tiersuppliers.

The potential benefits to be achieved in effectivelybuilding and nurturing such relationships are exempli-fied at the Felicia plant where, as a hole-in-the-wall supplier, Johnson Controls and Skoda have achievedbreakthrough costs/benefits and virtual integration. As a sole supplier, Johnson Controls has assumed totalresponsibility for the design, development, and deliveryof seat sets. Design takes into consideration the safetyand comfort of the vehicle’s occupants and incorporatesstate-of-the-art development in structural design, materials,and controls. Johnson Controls manages its own suppliernetwork. Skoda, in outsourcing seat sets to JohnsonControls, interacts at the vehicle design stage providingthe specifications for the passenger compartment as well as parameters, such as cost, fabric type, and soforth, within which Johnson Controls’ design engineersneed to operate.

In the crop protection business the safeguarding ofproprietary information regarding active ingredients is of paramount concern. This inevitability impacts the

nature of the relationship between manufacturer andsupplier. While DuPont has long-standing relationshipswith specific contract manufacturers for the multistepsynthesis of active ingredients, it prefers to keep thefinal steps in the synthesis of the biologically activemolecule in-house, or perhaps work with a joint venturepartner. In such instances, the contract manufacturerdoes not participate in either the design of the biologicallyactive molecule or the final steps in its manufacture. On the other hand, the contract manufacturer doeshave responsibility for all synthesis stages up to andincluding the penultimate step. The contract manufac-turer is expected to invest in those unit processesinvolved in each step of the synthesis, develop andengineer process improvements, and have the capacityavailable to meet market demand. The contract manu-facturer is also expected to manage suppliers and meetthe stringent requirements of regulatory agencies in theapplication of current good manufacturing practice aswell as safety, health, and environmental legislation. Asthe relationship matures, contract manufacturers increas-ingly become full-service, one-stop shops for a particularrange of chemistries and services.

In each instance, suppliers and manufacturers alike arenurturing the relationship through the establishment ofan aggressive improvement agenda driven not by “Whatdo we want to do now?” but by “What do we have to donext?” Any one stairstep is not a destination but anintermediate stage in a continuing journey. As partners,the supplier and manufacturer are investing in the rela-tionship and simultaneously accumulating experienceand knowledge. The goal is to achieve competitiveadvantage through the creation of a virtual organizationwhich dominates by virtue of its infrastructure.

It has to be recognized that such a goal is difficult toreach, though not unattainable. At the Resende plant,VW and its seven partners are experiencing the trialsand tribulations of making the marriage work. Nearlythree years after the opening the plant, the “dream fac-tory” has not met expectations. When the plant openedin mid-1996, VW promised that it would set new stan-dards for productivity. The factory’s productivity hasturned out to be less than that of comparable Americanand European plants. VW officials say that this is partlybecause truck sales have been disappointing, but it isalso attributed to inexperienced workers, some defectiveparts, and the scheduling of the flow of parts on theshop floor (International Herald Tribune, July 1998). Athird of the vehicles built at Resende need more workwhen they come off the line. VW admits it may havebeen too eager to give responsibility to its suppliers. But the firm insists that Resende can still meet its goalswithout abandoning the new approach if its managerssupervise suppliers more closely (The Australian, September1998). Perhaps when it comes to climbing stairs, walkingis more prudent than running.

Supplier Manufacturer

Breakthroughcosts/benefits

DuPont Agricultural Crop Protection

SkodaFelicia

Skoda Octaviaand VW Resende

Goal to beachieved

Activity beingconducted

MOVING TOWARD BREAKTHROUGH COSTS/BENEFITS AND VIRTUAL INTEGRATION

Figure 6



CONCLUSIONThe outsourcing of manufacturing is a choice, not a

panacea. The outsourcing decision is dependent uponthe structure and dynamics of the industry and thefirm’s competitive position. Manufacturing is out-sourced when it provides the firm with a sustainablecompetitive advantage, and often implies a transitionfrom multiple to single or sole supplier relationships.Today, companies in the automotive and chemicalindustries that are outsourcing manufacturing are likelyto be grappling with the shift from single to sole sup-plier relationships. This shift in supplier relationships is accompanied by the new management challenges ofchoosing appropriate partners and building and nurturingmutually rewarding relationships. Dealing successfullywith these challenges requires both partners to developthe necessary skills to make the marriage work and tosustain the relationship in the long term.

The outsourcing of manufacturing is seen as a realopportunity for many firms to deliver manufacturingexcellence. First-tier suppliers in the automotive industryand contract manufacturers in the chemical industry who take on responsibility for manufacturing practiceand regulatory and clinical testing are cases in point. In these sectors major manufacturers are increasinglyregarding outsourcing as a strategic choice, if not astrategic imperative. For suppliers in these sectors such actions represent singular business opportunities.However, to realize these opportunities, suppliers mustmeet the managerial challenges of building and nurturingrelationships over the long term.

REFERENCES“Car Makers Drive Brazil’s Industrial Revolution,” The Australian,September 8, 1998, p. 32.

“Financial Times Review of the Automotive Industry:Components,” Financial Times, February 23, 1998.

“Mercedes VP’s Advice — You Must Go Modular,” AutomotiveNews Europe, June 22, 1998, p. 20.

“VW’s ‘Dream Factory’ Wakes Up to Reality,” InternationalHerald Tribune, July 22, 1998, p. 13.

Collins, R., K. Bechler, and S. Pires, “Outsourcing in theAutomotive Industry: From JIT to Modular Consortia,” EuropeanManagement Journal, (15:5), October 1997, pp. 498-508.

Dwyer, F.R., P.H. Schurr, and S. Oh, “Developing Buyer-SellerRelationships,” Journal of Marketing, (51), April 1987, pp. 11-27.

Ellram, L.M., “A Managerial Guideline for the Developmentand Implementation of Purchasing Partnerships,” InternationalJournal of Purchasing and Materials Management, Summer 1991,pp. 2-8.

Miller, S., “Car Parts Makers Face Fresh Pressure from Mergers,”Reuters News Service, July 7, 1998.

Sleigh, P., The World Automotive Components Industry: A Reviewof Leading Manufacturers and Trends, (1), Economist IntelligenceUnit, 1996.

Spekman, R.E., “Strategic Supplier Selection: UnderstandingLong-Term Buyer Relationships,” Business Horizons, July-August1988, pp. 75-81.

Trent, R.J. and R.M. Monczka, “Purchasing and SupplyManagement: Trends and Changes Throughout the 1990s,”International Journal of Purchasing and Materials Management,Fall 1998, pp. 2-11.

Documents

Outsourcing in the Chemical and Automotive Industries: Choice or Competitive Imperative?