Lecture 10. Procurement and Outsourcing Strategies (Chapter 9)

Transcription

1 Lecture 10 Procurement and Outsourcing Strategies (Chapter 9)

2 What is outsourcing? 9.1 Introduction Outsourcing has been increased progressively over the years Companies outsourced everything Fashion Industry (Nike) (all manufacturing outsourced) Electronics Industry Cisco, Apple (over 70% of components outsourced) Not Just Manufacturing but Product Design, Too

3 Outsourcing Case Where is the Boeing 787 Dreamliner Made? American companies make the front and back of the plane. The rest come from all over the world.

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5 Comparison of Boeing's strategy for its 737 and 787 programs

6 9.2 Outsourcing Benefits and Risks Benefits Economies of scale Risk pooling Reduce capital investment. Focus on core competency Increased flexibility Outsourcing Risks 1) Loss of Competitive Knowledge 2) Conflicting Objectives open up opportunities for competitors lose their ability to introduce new designs preventing innovations that require crossfunctional teamwork

7 Is outsourcing to blame for Boeing s 787 Dreamliner woes? Boeing contracted with a top tier of about 50 suppliers in all, handing them complete control of the design of their piece of the plane, including the electrical system. Boeing can shorten the development time Reduce the development cost. As Boeing outsourced more, communication and coordination between Boeing and its suppliers became critical for managing the progress of the 787 development program.

8 Frequent accidents - Delay delivery time -A fire in electrical system, failure in brake equipment, fuel leakage - Boeing 787 Dreamliner battery problems

9 SC structure for airplane mfg. Boeing's strategy for its 787 programs

10 Is outsourcing to blame for Boeing s 787 Dreamliner woes? Very different on the 787 is the structure of the outsourcing. - A top tier of about 50 suppliers, who control the design of their piece of the plane. - Those major partners had to make the upfront investment, share the risk and own their design. Each was responsible for managing its own subcontractors. You only know what s going on with your tier 1 supplier. You have no visibility, no coordination, no real understanding of how all the pieces fit together. Can the management team trace all the way down the tree to every single supplier and unit? That s really difficult.

11 Questions/Issues with Outsourcing Why do many technology companies outsource manufacturing, and even innovation, to Asian manufacturers? What are the risks involved? Should outsourcing strategies depend on product characteristics, such as product clockspeed, and if so how?

12 9.3 Framework for Make/Buy Decisions How can the firm decide on which component to manufacture and which to outsource (purchase)? Focus on core competencies How can the firm identify what is in the core? What is outside the core?

13 Two Main Reasons for Outsourcing Dependency on capacity Firm has the knowledge and the skills required to produce the component,but For various reasons decides to outsource Dependency on knowledge Firm does not have the people, skills, and knowledge required to produce the component Outsources in order to have access to these capabilities.

14 Outsourcing Decisions examp. at Toyota About 30% of components in-sourced Engines: Company has knowledge and capacity 100% of engines are produced internally Transmissions Company has the knowledge of design and mfg. all the components 70 % of the components outsourced, depending on its suppliers capacities. Vehicle electronic systems Designed and produced by Toyota s suppliers. Depends on both capacity and knowledge outsourcing depends on the strategic role of the components

15 Modular product Product Architectures Made by combining different components Components are independent of each other Components are interchangeable Standard interfaces are used Customer preference determines the product configuration. Integral product Made up from components whose functionalities are tightly related. Not made from off-the-shelf components. Designed as a system by taking a top-down design approach. Evaluated on system performance, not on component performance Components perform multiple functions.

16 A Framework for Make/Buy Decisions Product Dependency on knowledge and capacity Independent for knowledge, dependent for capacity Independent for knowledge and capacity Modular Outsourcing is risky Outsourcing is an opportunity Opportunity to reduce cost through outsourcing Integral Outsourcing is very risky Outsourcing is an option Keep production internal

17 Hierarchical Model to Decide a specific component should be outsourced or Not The component s importance to the Customer Component Clock-speed Competitive Position Capable Suppliers: Architecture: Modular? Integral?

18 Examples of Decisions Criteria Example 1 Example 2 Example 3 Example 4 Customer Importance Important Not important Important Important Clockspeed High Slow High Slow Competitive Position Competitive Advantage No advantage No advantage No advantage Capable Suppliers X X Key variable to decide strategy Architecture X X Key variable to decide strategy DECISION In-house Outsource Inhouse, Acquire supplier, Partnership Outsource with modular; Inhouse or joint development with integral.

19 9.4 Procurement Strategies Impact of procurement on business performance - PC firms: >70% of cost The smaller the profit margins, the more important it is to focus on reducing procurement costs.

20 Kraljic s Supply Matrix Firm s supply strategy should depend on: 1) profit impact Volume purchased/ percentage of total purchased cost/ impact on product quality or business growth 2) supply risk Availability/number of suppliers/competitive demand/ make-or-buy opportunities/ storage risks/ substitution opportunities

21 Kraljic s Supply Matrix : Importance to customer experience Price is a large portion a single supplier long-term partnerships with suppliers quadrant high impact on profit Many suppliers cost savings competition between suppliers

22 quadrant: Bottleneck components Suppliers have power position Ensure continuous supply, even possibly at a premium cost long-term contracts or by carrying stock (or both) quadrant: Non-critical items Simplify and automate the procurement process as much as possible Use a decentralized procurement policy with no formal requisition and approval process

23 SUMMARY Outsourcing has both benefits and risks Buy/make decisions should depend on: a particular component is modular or integral? Whether or not a firm has the expertise and capacity to manufacture a particular component or product. Variety of criteria including customer importance, technology clockspeed, competitive position, number of suppliers, and product architecture. Procurement strategies vary with components: Four categories of components, strategic, leverage, bottleneck and non-critical items

24 Questions in Chapter 9 What are outsourcing benefits and risks? Page 274: Q5. Q7