THE GREATOUTSOURCING PUSH!
By James P Morgan -- Purchasing, 3/26/1998
Of all the supply chain strategies being put into place these days, outsourcing is perhaps the fastest growing.This was dramatized in a just-completed Purchasing Magazine national poll of procurement organizations. According to the purchasing operations taking part in the survey, outsourcing across all industry appears to be growing at rates that defy close tracking. To wit: 66% of the organizations polled report that spending on outsourcing is up anywhere from 10% to 1000% over the past five years. Another 18% said spending has remained about the same--but is at a very high level. Only 17% of those answering the survey reported a decrease in outsourcing. (For those looking for a quick and dirty definition, outsourcing represents taking an operation or function traditionally performed in-house and jobbing it out to a contract manufacturer or third-party service provider.)
Looking first
Dramatic as the growth in outsourcing may look at first blush, there really doesn't seem to be a great urgency to move manufacturing out the door of most manufacturing firms. Nor is there that much of a pressure to move inventories into the hands of suppliers. For the most part, what purchasing professionals around the nation are suggesting is that they are looking very closely at what they are doing in terms of manufacturing and handling goods and services. Where they are not tops in the field, they are looking for potential suppliers who can provide top competency. What's more, most are pursuing their investigations of outsourcing with the blessing and encouragement of top management.
Purchasing executives express this self-examination process in many ways. Most of their explanations, however, get down to conserving corporate resources for use where they are most effective. "We talk a lot about conserving our core resources," notes the senior purchasing manager for a large components manufacturer in Kentucky. "What that really amounts to is we don't have the resources to be the best at everything we do, so we currently are looking for suppliers who are the best in areas where we are weak. It's really common sense. If we can find a supplier who can do some part of our operation better, faster, cheaper, we use him and conserve our limited resources."
Too much business?
But while purchasing professionals may talk a great deal about outsourcing as a way of conserving corporate resources, most are quite pragmatic. In many cases, they admit that their companies aren't very good at manufacturing. Many say their firms don't have enough in-house technical expertise. Many others suggest that their firms can't handle the high costs of needed capital equipment. Added to these reasons for outsourcing is the fact that right now business is so good that some companies can't seem to keep up with orders. Over the past 8-12 months, a fair number of firms have simply been overwhelmed by demand that in some cases threatens their market competitiveness.
Tim Tabor, purchasing manager for Aaon Inc., a Tulsa maker of rooftop heating and cooling units, for instance, notes the irony in his outsourcing situation. "We are making a major capital expenditure to eliminate the need to outsource," but right now his company is forced "to outsource temporarily while we await the equipment" on order.
For some, the movement to greater use of outsourcing seems to be crawling. In truth, this perception has a degree of validity. Except in some obvious areas (in the electronics-using industries, for instance), it's possible to make much more of outsourcing than is really there. A close reading of Purchasing's survey makes this very clear. As a result, despite the fact that 78% of those responding to the poll are doing some outsourcing, in most instances the quantity of the outsourcing is still relatively small (see charts). In 83% of the firms taking part in the survey, for instance, outsourcing accounts for less than 20% of dollar expenditures on goods and services. Perhaps more telling is the fact that in almost 60% of the firms surveyed, outsourcing accounts for less than 10% of the dollars spent by purchasing.
Among the purchasing operations taking part in the survey, outsourcing, for the most part, refers to manufacturing. Companies that formerly made products, components, or parts are now having some of them made by outside contract suppliers. Slightly less than two-thirds (63%) of total outsourcing volume appears to be for direct goods (items that become part of the company's finished product).
Among the types of direct goods and services that most often get outsourced (listed in order of the number of times they were cited in the survey) these head the list:
* Design and manufacture of surface-mounted circuit boards and cable/harness assemblies.
* Contract assembly.
* Metal stamping and fabrication.
* Design and manufacture of pow-er transmission components and assemblies.
* Injection molding and plastic parts fabrication.
* Machining, tool and die making, stamping, and plating.
* Specialty chemical formulation.
Third parties
While most of the talk about outsourcing is centered on goods that are custom manufactured, there also is a fair amount of outsourcing taking place among indirect goods. For many firms, a major consideration in improving the operation of the supply chain is the cost involved in storing, ordering, and transporting maintenance, repair and operation (MRO) goods and services.
Just as many firms are finding that they can improve their operations by outsourcing the manufacture of components or systems, many firms also are finding that others can do a better job of handling their indirect goods. Many like J.E. (Jim) Latimer, director of purchasing at Genentech, San Francisco, suggest that outsourcing much of their MRO buying helps to "reduce the workload of a limited staff so they can focus better on value-adding opportunities."
Currently, most of the indirect goods and services outsourcing seems to be in, fall into these four categories:
* General services, including cleaning, hvac maintenance, machine maintenance, printing, and personnel services.
* Shipping and logistics services.
* Safety products and services.
* Stocking of general maintenance items, machine parts, bearings, electrical supplies, cutting tools, hand tools, and coatings.
An accepted practice
How has outsourcing affected purchasing professionals and their companies up to here? Perhaps the biggest change is that the entire process of investigating outsourcing potential has become a "formalized practice." In most cases, notes the worldwide assets manager for a major chemical company, this formalization of the feasibility process has resulted in the buy-in of senior management. The top corporate brass, in other words, is interested.
More fundamental, say many poll respondents, is the fact that more and more purchasing professionals are playing a leading part in the outsourcing decisions of their companies. As Dominic R. Perri, purchasing manager at SGS Tool Co. in Munroe Falls, Ohio, notes, "purchasing is now more involved" in the process and in supplier selection.
Inventories
One claim for outsourcing that is in need of revision, or at least clarification, is that outsourcing results in reduced inventories. The truth, according to survey respondents, seems to be that roughly two-thirds of the time it does result in reduced inventories. On the other hand, nearly 20% of the respondents who outsource say that it has resulted in higher inventories. Companies at a distance of 500 or more miles from key outsourcing suppliers appear to be the most vulnerable to inventory problems. In around 13% of the cases, outsourcing appears to play no part in raising or lowering inventory levels or costs.
Many of those with the most success in reducing inventories have done so by outsourcing big chunks of their shipping, logistics, and warehousing operations. In a few companies the entire distribution function appears to have been outsourced.
Materials, services costs
For more than 47%, outsourcing has resulted in cost savings on goods and services. In many cases the cost reductions have less to do with piece part prices than with taking costs out of operations. Kevin L. Hoover, purchasing manager at Therma-Wave in Freemont, Calif., notes, for instance, that major materials costs have been reduced in the areas of transaction processing, receiving, inspecting, and components kitting.
In many cases, however, the lower costs are the direct result of lower production costs of the supplier. Often these lower costs are the direct result of lower wage rates and overhead costs of the contract supplier.
For 26% of the firms that are actively outsourcing, it has produced no change in materials or services costs.
Quality
For Vincent L. Cordova, production manager at Delta-X Corp. in Houston, the most important outcome of outsourcing at his company has been the improvement in quality. He credits the improvement to "a true team effort and good communication."
He was among the 42% of purchasing managers who saw an improvement in quality as the result of outsourcing. This contrasts with 46% who saw no change at all in quality.
Competitiveness
In balance, 52% of all those doing outsourcing report that it has improved their competitiveness. The purchasing manager for a housewares producer in New Jersey probably expresses their feelings best: "We're still only dipping our feet into this (outsourcing). The figures we have for judging success are sketchy--at best. But from what is visible, I'd say we'll be doing a whole lot more over the next few years."
On the bland to negative side, 16% of the respondents see no change in competitiveness, 11% see a decrease, and 19% say they have not tried to measure competitiveness.
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