Strategic Sourcing

Dr. Ron Lembke

Operations Management

Old View of the World

One company does all processing, from raw material through delivery

Vertical Integration

Henry Ford’s River Rouge PlantOwned forests, iron mines, rubber plantation, coal minesShips, railroad linesDock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track

1927 Model A Production begins15,000,000 cars in 15 years120,000 employees in WWII

Supply Network View of the World

• Integrated international networks of companies process, produce and distribute products.

Spring Hill, Tennessee

Saturn Layout

Computer Example

Wacker Siltronic makes silicon wafers: buy sand

grow into long crystals

slice into thin wafers

Chip ProductionChip burned in a $2b “wafer fab”

Wafer cut into chips and “packaged”

CD DriveChip stuffed onto board by Flextronics, Celestica, etc.

CD drive assembled by separate contract manufacturer

Green Printed Circuit Board from different supplier

CD drive, with a brand name on it, sold to Gateway

Apple and Foxconn

EMS elect mfg services

Foxconn:Shenzhen, mile square

1 million workersLargest private employer in China

90 million iPhones

Global CE industry = $150b

Foxconn = 40% = $60b

Headline Risk10 hour days, crowded dorms

Terry Gou:Clean, affordable

Good food

17 suicides in 10 yrs¼ rate US college students

9 in March-May 2010

Below national average

HK ngo:12hr*13days iPad?Counseling, outsource dorms

10,000 horses galloping

Strategic Sourcing

Has to be feasible to outsourceAssembly line balancing – probably not a step in the middle

Figure out what to buy from whom

What do we want to accomplish?More effective!

More efficient!

Continuous Process Improvement?

Outsourcing - What is it?

Transfer activities to outside providersOutside providers do activities

Resources: people, facilities, equipment

Decision-making responsibility

OEM = Original Equipment Manufacturername on the product, does not produce

Flextronics/Solectron, Foxconn makes it for you

Outsourcing – Why do it?

Organizationally-driven reasonsFocus on what you do bestMore flexible capacity Employees: career paths

Improvement-driven reasonsBetter quality & productivity, cycle time

Gain skills not otherwise available

Associate with superior providers

Financially-driven reasonsReduce assets, improve ROALower fixed costsCash from selling capital equip.

Make or Buy Decision

DIY: Lower cost

No capable suppliers

Inadequate supply

Competitive Issues

Core competencies

Specialization

Low purchase cost

Lack of capacity

Want to gain skill

Reduce inv. costs

Management focus

Patent issues

Reasons to Make Reasons to Buy

Other Factors

Degree of coordination with other activitiesRelationship-specific investmentsEasy to copy technologies, or low IP (intellectual properties) protection

Second-tier sub-suppliers

What to not Outsource

Core activities

Key to the business

Do not confer competitive advantage

Strategic activities

Key source of competitive advantageX-box – Microsoft never considered making

Flextronics in Guadalajara$5 / hr vs. $1 in Doumen, China

A CautionaryTale

In 1981, IBM ‘PC’.

Consumers care about hardware

No one cares about the software that lets them talk to the processor.

Outsourced the OS to whom?

Anybody heard of “Microsoft?”

UCSD Pascal $450

CP/M $175

MS-DOS $60

IBM: 2005 Lenovo $1.75bMS: 2010 After Tax $18b

Outsourcing in the News

The World Is FlatBandwidth glut of dot-com boom

IT & telecommunications changesNobody can tell you’re calling India

White collar jobs – now it’s seriousEducated workforces

Call centers, programmers

Privacy / security concerns

Managing the Supply ChainPostponement -- withhold any modification until as long as possible. Keep product generic “vanilla”

HP BenettonHome Depot paint department

Channel Assembly -- have distributor assemble products from components

HP Inkjet Printers

Printers made in Vancouver, sent via ship through Panama Canal to EuropeEurope warehouse stocks inventory by country

physically different-- power supplymanuals different languagesSubstitution not allowed

Re-supply time very long

Euro Plugs

No standardized power supplies for Europe

Different power supply for every country.

HP Inkjet Printers

Redesigned printers so that power supply added in Europe

Re-engineer product, power supplyAssembly done in a warehouse (Quality?)Manuals added in EuropeMany expensive changes

Store ‘vanilla’ boxes – one pilePiles of power supplies & manualsCheaper to store than printers

Postpone point of differentiation25% cost reduction

Hau Lee, Corey Billington, Brent Carter, Interfaces, 1993

Delayed Customization

Production Storage Shipping Storage

Before

After

Benetton

Sweaters of undyed wool, dyed once demand is known

Dyeing LT much faster than production

How many undyed sweaters to make?

How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?

Behr Paints

Small # of bases

Small # tints

Unlimited # combinations

Keep stock colors on hand?How many gallons?

Which ones?

Lower labor costs

Higher inventory costs