Outsourcing gains popularity
By Anne M Porter -- Purchasing, 3/11/1999
In a rapidly growing economy with low unemployment, more firms are turning to outsourcing. In fact, better than half (54%) of the companies surveyed recently by Purchasing Magazine say they've outsourced manufacturing processes or services in the past 2-3 years versus 38% who have done no new outsourcing. What's more, 46% of companies say they've increased outsourcing activity over the past 2-3 years, versus just 4% who say they're moving in the opposite direction.Services--including engineering, prototyping, mail, reprographics, accounts payable, payroll, janitorial, grounds maintenance, and travel--are the most frequently outsourced, according to the survey. Both critical and non-critical production goods rate second and third for outsourcing popularity (especially where metals processing is involved). Somewhat surprisingly, management and administration of MRO goods (both critical and non-critical) and office supplies are cited least frequently as targets for outsourcing among buyers.
Outsource for growth
The rise in outsourcing popularity appears tightly linked to the quest for corporate growth and market agility. Companies attempting to insulate themselves from future economic bust cycles are using outsourcing to endow current growth while avoiding large investments in permanent work forces or capital equipment.
For example, one buyer says outsourcing, "adds overall capacity while saving tool costs." Another uses outsourcing to "avoid expensive tooling." The purchasing agent for a Cleveland-based manufacturer says her firm has increased outsourcing to "keep up with demand," while gaining "cost advantages and assistance in areas where we do not specialize."
The buyer for a major U.S. semiconductor manufacturer says the outsourcing of critical components is "cost-effective," and alleviates the "need to hire more [people]." Citing high overhead rates, the purchasing agent for a major aerospace concern says, "it's more cost-effective to purchase completed systems than it is to purchase components and assemble in house."
But for firms operating with strong labor unions, outsourcing can be a sticky wicket for management. While quite a number of survey respondents say outsourcing is a way to avoid making new permanent hires, most avoid discussions of outsourcing in context of labor reductions. The senior buyer for an Indiana-based OEM alludes to the issue when he says outsourcing decisions are typically made "by communicating with management to ensure that [there will be] no repercussions from the work force."
Two other trends fueling the drive to outsourcing--
* Management focus on "core competencies."
* The advent of better tools for measuring the true costs of performing tasks in-house and for tracking supplier performance.
Stephen Logan, purchasing agent for Olson International, a precision metal forming and assembly firm in Lombard, Ill., says, "In some cases, we find that other companies are better suited to produce in terms of either expertise, equipment, or machine time." The PA for a Midwest manufacturer says, "We can't be experts at everything, so we've used outsourcing to gain a competitive edge."
High marks
Among companies that have placed pieces of their operations with third-party providers, customer satisfaction levels are surprisingly high. Among buyers with an opinion on the matter, 82% say they are generally satisfied with the performance of their outsourcing partners, leaving 18% who are somewhat less enamored with their choices.
Unscrupulous suppliers and unforeseen costs have soured some on outsourcing, according to the survey. One buyer mentions a "logistics company that tried to rip us off," while noting that, "other companies have simply charged too much." Darryl Hunter, director of purchasing for Scotsman in Vernon Hills, Ill., says "even though we pre-qualified two sources, quality levels have not met our expectations."
Others report more mixed results. Shawn Keeling, lead sourcing agent, controls/sub-assembly CBT, for General Electric in Louisville, Ky., says, "We've had very successful outsourcing programs as well as a few notable failures." While noting "overall" satisfaction with outsourcing programs, the buyer for a major U.S. semiconductor manufacturer notes that "start-up problems are always a hassle."
For the most part, however, survey respondents say their outsourcing programs are delivering anticipated benefits. David Hermann, purchasing agent, for Sunstrand Aerospace, in Rockford, Ill., says, "So far, we've seen cost reductions and total cost savings by outsourcing." The senior buyer for another major U.S. aerospace interest notes that "quality ratings overall are higher than they were five years ago."
The purchasing pro for a Pennsylvania pharmaceuticals concern remarks "excellent service [on] non-critical services, managed by employees." Logan of Olson International says, "Most suppliers have performed adequately in service and quality, allowing us to service our customers without having to add equipment or labor."
Due diligence
Rigorous supplier qualification and monitoring are common denominators among those who are most satisfied with their outsourcing programs, according to the survey. Bob Schmid, senior buyer for Emerson Electric in St. Louis, Mo., says the firm uses "quality audits," to ensure that suppliers provide quality products and services. Another buyer notes that "more audits are done to ensure costs are in line with [our agreement]." Hermann of Sunstrand Aerospace says his firm has "a very stringent quality system in place," tracking rejects and allowing trends to be observed. "We work defect reductions very hard," he says.
Other popular mechanisms to ensure strong supplier performance include bullet-proof contracts and business incentives--both negative and positive. The senior buyer for an Indiana-based OEM relies on "contractual language and reports," to ensure satisfactory performance from suppliers. The PA for a Cleveland-based manufacturer says poor performance leads to "no future business from us." Others take a more positive tack, promising increasing levels of business with high-performing outsourcing partners.
Who outsources
The survey finds that cross-functional teams are--by a long shot--the preferred method for rendering outsourcing decisions in most U.S. corporations. In a few cases, respondents say outsourcing decisions are made unilaterally by either purchasing agents or plant managers. In other rare cases, outsourcing orders are handed down from corporate management. The buyer for a Midwest valve maker says "The [outsourcing] decision process is done at the corporate level."
Keeling of GE says outsourcing decisions are "completely cross-functional," comprising input from "purchasing, technology, quality, marketing, finance, manufacturing, etc." Hunter of Scotsman says cross-functional teams--including purchasing, manufacturing, advance manufacturing, engineering, and quality--approach outsourcing "using a thorough decision matrix."
The senior buyer for a major U.S. aerospace interest says, "Outsourcing is determined by make/buy teams involving purchasing, production, engineering, and program management." The purchasing pro for a Pennsylvania pharmaceuticals concern says, "[Outsourcing] decisions are made by purchasing teams which include a buyer, the director of operations, a financial analyst, and [representatives from] the customer base."
After outsourcing decisions are in place, survey respondents say contract administration and performance tracking duties fall most frequently to purchasing or supply management professionals and occasionally to end users affected by the programs.
Jury's out
While most survey respondents indicate general satisfaction with the performance of their outsourcing partners, only 35% believe wholeheartedly that outsourcing has lowered the level of unprofitable or non-value-adding activities taking place at their companies. Twenty-seven percent have witnessed no appreciable reduction in non-value-adding activities while 38% express no opinion either way.
The purchasing agent for a plastics molder in Indiana is one believer in the power of outsourcing: "I have more time to concentrate on day-to-day opportunities to keep the manufacturing process running smoothly." Logan of Olson International says, "[Outsourcing] allows us to commit presses to higher volume production items." Schmid of Emerson Electric observes that, "Labor and capital freed up for more critical activities."
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