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