Get ready for the outsourcing boom

By Douglas A. Smock -- Purchasing, 3/22/2001

This issue focuses on two converging trends with enormous importance to how corporate America buys goods and services: outsourcing through contract manufacturers and electronic procurement. American manufacturers typically used to buy 20%-30% of their total cost; today the percentages are 50%-80%. In 1986, 28% of IBM's revenue was spent with outside suppliers. Today it's well over 50%. IBM turned over its manufacturing plants to Celestica in 1994, and today Celestica is a more than $10 billion company that specializes in electronics manufacturing and logistics.

And even though the general economy is sluggish, "we will go through a boom in outsourcing in 2001," says Gene Richter, the former top buyer at IBM who is a now a consultant and member of PURCHASING 's Editorial Advisory Board. "We seem to go through an outsourcing boom in every recession. It's one of the ways OEMs reduce their overhead."

With that in mind, our focus is on what you should look for when selecting a contract manufacturer (CM). Manufacturing technology is now almost a given with this elite class of companies. Increasingly their ability to provide design is a major issue. And take a close look at how the CMs buy. Can they get parts in a tight market? The issues are spelled out in the article beginning on page 29.

In the e-procurement section (pages S1 through S56), it's clear that digital buying models are advancing, but in a very different way than was envisioned even a year ago. Only 16% of the purchasing pros we polled ever use third-party exchanges for buying. Companies instead are migrating to e-procurement systems that they host and control. They're trading with the same strategic partners who survived the supply chain shakeout of the past 15 years. Those partners will not be abandoned for a blind date on a reverse auction. Sun Microsystems spends 95% of its direct material budget with 40 suppliers. When dot.coms beckoned with the promise of new suppliers, Sun yawned. "There isn't a magical list of suppliers that we don't know about," says Sonia Syngal, Sun's director of procurement strategy.

Some of the dot.coms misfired because they underestimated the brainpower invested in a modern supply chain. Back to the contract manufacturers: Strategic suppliers were their backbone last year. Give them up for a fresh face today? Not without significant research. Would they pit those strategic suppliers against each other in a reverse auction? No way, Andrew Gort, Celestica's top supply officer, said in an interview with PURCHASING last month.