Outsourcing Manufacturing

Bachelor Thesis , 2004 , 96 Pages , Grade: 80% England, 1,3 (A)

Business economics - Supply, Production, Logistics

Is Outsourcing manufacturing as the strategic solution to strengthen future competitiveness or just a modern trend? The aim of the project is to answer this and closely related questions with either economic or business content. The analysis begins with first generating an awareness of the nowadays employed outsourcing business and variances and the steadily surrounding decision making process. The advantages and disadvantages of outsourcing, outsourcing specifically manufacturing and the different sourcing strategies are shown and lead to further questions like the importance of virtual companies or the economic impact of outsourcing. As the outsourcing decision and amount is not universal but determined by very specific criteria a combined implementation way was chosen to finally reach the projects aims. Three industry case studies (automotive, electronics manufacturing and pharmaceutical production) were conducted to show contribution to the often unique processes and understand details influencing the decision. Furthermore an E-Mail survey was conducted assessing production managers’ (again of various industries) opinions about outsourcing manufacturing and researching their companies’ outsourcing degrees. Charts were extensively used to visualize the calculated data and the combination of both case studies and questionnaire finally led to the combined and entire evaluation of nowadays outsourcing business and its related swings and roundabouts. In this way the project could be brought to completion The self critical future work an problem sections mention further approached and solution possibilities for future project in the same field.

Table of Contents

1 Introduction
1.1 Official project title and description
1.2 Emphasizing the problem
1.3 The aims of the project
1.4 The project’s Objectives

2 Analysis of the outsourcing process and decision
2.1 Advantages and disadvantages of outsourcing
2.1.1 Advantages of outsourcing
2.1.2 Disadvantages of outsourcing
2.1.3 Decisions apart from cost
2.2 The ‘core business thing’
2.3 Life cycle adoption for efficient outsourcing
2.4 The execution of outsourcing
2.4.1 Details of contactor selection process:
2.5 Effect of different sourcing strategies
2.6 The economic impact of outsourcing
2.7 Virtual companies
2.7.1 Examples of virtual companies
2.8 Learning from interesting examples
2.8.1 Reverse offshoring
2.8.2 Collaborative Engineering
2.9 Summarized requirements for implementation

3 Solution and implementation selection
3.1 The case study focus
3.2 Industry Contact options
3.3 Selection

4 Questionnaire
4.1 Implementation sequence
4.2 Questionnaire design and launching
4.2.1 Identification of questionnaire specific aims
4.2.2 The easy and clear design
4.2.3 Contact data collection
4.3 Problems and subsequent improvements
4.3.1 General problems
4.3.2 Technical problems
4.3.3 Question specific problems
4.4 Data analysis
4.4.1 Variety and distribution of answers
4.4.2 Outsourcing evaluation and types of use
4.4.3 The sub contracting of manufacturing
4.4.4 Attitude towards outsourcing manufacturing
4.5 Summary
4.5.1 Analysis
4.5.2 This survey in general

5 Outsourcing in the automotive industry
5.1 Introduction
5.2 Trends in automotive business
5.2.1 Exponential supplier growth
5.2.2 Passionate final assemblers
5.2.3 Challenges for modern suppliers
5.2.4 Software
5.2.5 VW Brazil - Suppliers as assemblers
5.2.6 Horizontal collaboration and outsourcing pressure
5.2.7 R&D shift causes brand communication
5.3 Company analysis
5.3.1 Daimler Chrysler
5.3.2 Toyota
5.3.3 Magna Steyr

6 Outsourcing in the consumer electronics and electric industry
6.1 Introduction
6.1.1 Market overview and growth
6.1.2 Growth strategies and drivers
6.2 Trends in electronics industry
6.2.1 Stages of outsourcing and Life cycle adjustment
6.2.2 Terminology
6.2.3 Suppliers as winner of LCD boom
6.2.4 12 inch wafers
6.2.5 Part reduction
6.3 Company analysis
6.3.1 Dell
6.3.2 GE-Samsung
6.3.3 SUN Microsystems
6.4 Economical impacts
6.4.1 Offshoring jobs and American economic fears
6.4.2 Labour shift in the UK economy

7 Pharmaceutical outsourcing
7.1 Common pressure in the pharmaceutical business
7.1.1 Merger business and accreditation dependence
7.1.2 Patent expiry
7.2 The contracting market
7.3 Contract manufacturing organisations in detail
7.4 Why use pharmaceutical contract manufacturing?

8 Project timetable
8.1 Gantt Chart
8.2 Evaluation

9 Conclusion

10 Possible future work

11 References
11.1 Books and Articles
11.2 Webpages
11.3 Newspaper articles
11.3.1 Financial Times UK
11.3.2 German Papers

12 Appendix
12.1 Survey: introductory E-Mail Text
12.2 Survey: Complete Contact list
12.3 Automotive suppliers: strategic positioning in China
12.4 Outsourcing advice sheet for SMEs

List of figures

Figure 2.a: Reasons for in and outsourcing (VDI news February 27th,2004 - Fraunhofer ISI)

Figure 2.b: The contracting game (see Domberger, 1998)

Figure 2.c: cost cutting potential oer area (FT February 11th, 2004 - Accenture)

Figure 2.d: estimated cost savings (Domberger, 1998 - Indurstry commission)

Figure 2.e: popularity of outsourcing (Coyle, Bardy and Langley, 2002)

Figure 2.f: areas of outsourcing in different eras (FT February 11th, 2004)

Figure 4.a: questionnaire implementation steps

Figure 4.b: Questionnaire design on three pages

Figure 4.c: distribution of researched industry sectors

Figure 4.d: Outsourcing areas and future growth expectations

Figure 4.e: actual overall outsourcing

Figure 4.f: outsourcing concepts used

Figure 4.g: actual outsourcing manufacturing

Figure 4.h: future outsourcing manufacturing

Figure 4.i: strategic advantages

Figure 4.j: strategic disadvantages

Figure 4.k: efficiency advantages

Figure 4.l: efficiency disadvantages

Figure 4.m: cost and finance advantages

Figure 4.n: cost and finance disadvantages

Figure 5.a: biggest OEMS (automobil production - web archive)

Figure 5.b supplier ’ s automotive division size (automobile production and company research)

Figure 5.c: future and present OEM value added per function (automobil production)

Figure 5.d: 10 year supplier decrease (VDI news February 6th, 2004 - prognosis Edscha)

Figure 5.e:future change of value added (automobile production - Audi)

Figure 5.f: in-house production share (Hill, 1999)

Figure 5.g car segments (AP - Magna)

Figure 5.h: OEM concentration (AP)

Figure 1.a: worldwide IC markets (FT January 21st, 2004)

Figure 1.b: Outsourcing levels per CE or PC company (AT Kearney - outsourcing shuffle)

Figure 1.c: solectron sales (solectron financial report from website)

Figure 1.a: Patent expiry (AT Kearney, The outsourcing shuffle)

Figure 1.b: pharmaceutical contact market (Reuters, 1998 - datamonitor)

Figure 1.c: manufacturing type adjusted conracting

Figure 1.a: Project Gantt Chart

List of tables

Table 4.a: answer amount and percentage by and reply types

Table 4.b: answer percentage by industry sector

Table 4.c: company function type share

Table 4.d: Answer distribution by number of employees

Table 4.e: Answer distribution by sales volume in €

Table 4.f: Answer distribution by job function of person assessing

Table 4.g: preferred future sourcing types

Table 4.h: preferred future sourcing locations

Table 4.i: reasons for future sourcing strategy

Table 4.j: advantage to disadvantage percentage ratios per aspect

Table 1.a: chip manufacturers (VDI news January 9th, 2004)

Table 1.b: OLED factsheet (VDI news April 16th,2004 - displayresearch novaled)

Table 1.c: the PC market 2003 (VDI news - Gartner)

Table 1.d: offshoring jobs (IEEE and Business week)

Table 1.e: UK labour redundancies (FT January 1st,2004)

1 Introduction

1.1 Official project title and description

The official project proposal by Mr Brian Lawrence was chosen form the final year project list. The full description is as follows:

’ Not at all Manufacturing ’ (38)

‘ Much has been said and published about the concept of ‘ Virtual companies ’ and Ford has stated that they are moving in this direction and coined the phrase ‘ Not at all Manufacturing ’ . Some industries, at least for many years, have always operated in this way, for example publishing - publishers do not print books. At first sight this appears to be a devastating blow to UK manufacturing with much of our industry being relocated in cheap labour economies. Closer investigation however indicated that this may be an opportunity rather than a problem. Establish the extent of this approach to separation of manufacturing from intellectual property and the opportunity that it provides for appropriate manufacturers. A variety of industries should be researched, extensive case studies and contact with industry is expected. ’

1.2 Emphasizing the problem

In today's business world, better, smarter, faster dictates how things are done. For many businesses the only resort to withstand this competition and the quick innovation ratio seems to be focussing more and more on its core competences to reach highest possible competitiveness. But nowadays typical outsourcing candidates IT and accounting are not the only possibilities to streamline companies. Getting rid of production liberates the company’s forces and funds to concentrate on research, product development and marketing on the one hand, but perhaps shortens the range of finding innovations on the other. This movement allows the degree of in-house manufacturing to drop to almost zero, as most of the value- adding processes are shifted to suppliers. Problems seem to arise, as this movement is starting to scratch the companies’ core values like specialized knowledge and intellectual property - the process thus is somehow limited. Because of that delegating manufacturing to a supplier with state-of-the-art equipment and technology as well as flexible capacity no longer looks just like a win-win proposition. Furthermore, at a second glance, manufacturing is not outsourced on a large scale in all industries, which makes research difficult. Often functions that are deemed strategically important and efficient stay in-house, while those that are considered non-essential and inefficient can be passed on to a third party. But this approach can raise as many questions as answers. For example, what is considered ‘strategic’ and do functions have to be both nonessential and inefficient to be good candidates for outsourcing? Will strategic partnerships be the magic key to success or paralyze flexibility because of mutual dependence? Is the big fear of industrial espionage appropriate or exaggerated? Can the freed up cash and competence reach the expected leverage and boost sales?

These questions represent the project’s focus and the position where research will be started.

1.3 The aims of the project

The main aim of the project is to understand and characterize the multi layered outsourcing decision including benefits and drawbacks by establishing industry contact and conduct case studies. Accompanying fields of research are the economic impact of the outsourcing business and the construct called virtual factory. This bundled investigation will finally enable to establish the necessary differentiation of manufacturing and intellectual property. Of special interest in this approach will be the importance of the product lifecycle stage, capability of supplier, the aspect of business size, the type of industry, the open mindedness of managers and the use of a variable cost approach.

1.4 The project’s Objectives

The projects objectives are to develop a technique that easily determines a company’s essential functions and separates these form the ‘outsourcing potential’ to reach the aims in a structured way and facilitate their achievement. Furthermore, the in depth industry case studies are seen as an important factor to acquire a general overview of nowadays business. In further consequence the intense industry contact will develop a ‘feeling’ for business peoples attitudes and be invaluably important for the entire understanding of the outsourcing decisions, which is not always rational but often strongly biased by subjective personal thoughts. Another objective is the fact that the ‘ideas and solutions’ of the project will sensitize small and medium-sized companies evaluating their outsourcing chances for possible traps and are considered to be an objective assistance to their decision and implementation.

2 Analysis of the outsourcing process and decision

To determine the requirements for possible implementations this part will precisely analyze the outsourcing process and decision both in general and with a special regard towards manufacturing. It is regarded as the filament for the complete project as it familiarized with the multiple layers influenced by nowadays subcontracting decision.

The words ‘outsourcing¹ ’, ‘subcontracting’ or ‘contracting out’ will be used in the same meaning and are regarded substitutable and describe the transfer of value creation processes to suppliers. As suppliers often either follow OEM’s locations to keep distances short or are chosen from an existing local expertise the term ‘offshoring’ is a differentiation used to emphasize the often overseas and long distances of the relationship. Location doesn’t matter too much any longer as globalization facilitates global sourcing. ‘Insourcing’ describes the reintegration of outsourced activities because of serious problems occurring.

2.1 Advantages and disadvantages of outsourcing

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Figure 2.a: Reasons for in and outsourcing (VDI news February 27th,2004 - Fraunhofer ISI)

Outsourcing Manufacturing

Introductory to the discussion of advantages and disadvantaged the figure above helps understanding some general streams in outsourcing and shows that many companies feel kind of forced towards outsourcing because of the existing innovation and cost pressure. Especially on the long term this strategy seems to pay off. The Fraunhofer researchers further found out that especially SMEs use outsourcing as often being too small to manufacture all the work and machining intensive parts themselves. Similar results were gained in the questionnaire conduction in the implementation part. For which design this analysis part was necessary.

The contracting game as well facilitates understanding the following paragraphs and cuts a long story short - and even an article form the Financial Times (February 11th, 2004) is headed with the result learned from the contracting game - outsourcing only works, if both partners cooperate and pull at the same and of the rope.

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Figure 2.b: The contracting game (see Domberger, 1998)

After all facilitation the following section (combination of research, Hill 2001 and Heizer and Render, 2003) will give an entire overview of the pros and cons discussed when talking about outsourcing. As reasons show a manifold variety the aspects are structured after the following criteria: strategic, efficiency, cost, financial and personal. Repetitions and overlaps might occur as sometimes a separation is not 100% possible - a phenomenon that reoccurs throughout the entire outsourcing research. Values might show an analogy to ‘make or buy’ decisions but are specified more precisely.

2.1.1 Advantages of outsourcing

STRATEGIC ASPECTS

The concentration on core business and a smaller organizational structure which is easier to control are typical strategic advantages of outsourcing. Cooperation would furthermore substitute internal hierarchy conflicts. The transparency of costs (compare variable cost approach by KPMG, Revolutionary Shifts) improves controlling. Inadequate capacity can easily be adjusted and bottlenecks / constraints are avoided by the higher degree of flexibility. Business risk is transferred to the supplier and processes and products are standardized which thought further leads to a reduction of complexity. Technical and personal risk is reduced and innovation and know how are easily accessed. Moreover it enables easy market entry when regulation is required or compensation expected (offsets)

EFFICIENCY ASPECTS

Better performance is expected at better cost. This has three reasons because many internal conflicts that will be avoided (see Hill, 2001)
- less functional divisions require less management = less overhead,
- efficiency incentive of subunits does initially not exist as company is seen as customer paying all prices,
- manipulated in house cross border transfer prices are abandoned

Alternative sources are ensured and the high and versatile competency of the outsourcing partner is used. Work and responsibilities are clearly defined and own capacities are released. In consequence additional capacity is available quicker and an effective controlling department can be established. Furthermore the still in-house produced goods’ Quality will increase because of relatively higher attention.

COST ASPECTS

Reduced personal and in consequence training and management as well as lower investment levels and fewer required maintenance leads to a reduction of operating cost. Inventory costs are reduced as capacity cushions can be reduced or eliminated. The change of fixed to variable cost gives transparency. Purchasing gets cheaper as suppliers economies of scale can be used and planning will be improved. Outsourcing manufacturing furthermore has a good negotiation position with the outsourcing partner at beginning and low order handling costs.

The following charts show that 19% of the researched companies see further cost cutting potential in outsourcing and even 28% by smart procurement. Furthermore the average estimated cost saving levels of outsourcing in 1996 reached levels from 10 to 20%.

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Figure 2.c: cost cutting potential oer area (FT February 11th, 2004 - Accenture)

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Figure 2.d: estimated cost savings (Domberger, 1998 - Indurstry commission)

FINANCIAL ASPECTS

From a financial point of view capital is liberated by selling assets, which in consequence allows increasing R&D expenditure and purchase innovation and technological investment. The credit rating increases as equity ratio rises due to relatively fewer assets but a remaining capital structure. Possible tax advantages are another financial improvement.

PERSONAL ASPECTS

Personal problems like curtness, qualification or tariff restraints are reduced, and inadequate managerial or technical resources might increasingly force towards a buy decision. Management is liberated to deal with its primary business and an even better technical or management ability might be obtained. Personal supplier commitment is preserved.

Furthermore George Stigler in 1951 already knew: ‘There is too many people who believe that transactions between firms are expensive and those within firms are free…’

2.1.2 Disadvantages of outsourcing

This introductory chart represents the shifting trend in the evaluation of outsourcing and shall explain that outsourcing critics are rising and it probably is no longer a moders buzzword of the overall solution to production problems.

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Figure 2.e: popularity of outsourcing (Coyle, Bardy and Langley, 2002)

STRATEGIC ASPECTS

The outsourcing partner is difficult to change or the decision practically irreversible even though steady revision is recommended, causing big hesitation to managers. Furthermore the strong and close relationship with outsourcing partner and a possible lack of trust if specialized investment is needed at supplier often results in cancelled outsourcing plans. Mutual dependency stands in contrast to the flexibility increase often discussed. The draining of competency and know how and the technology expropriation is heavily feared. And besides, the fear of industrial espionage and technology drain is well-founded! The worldwide quota of reverse engineered goods / plagiarism is expected to be 10% (an even higher uncovered ratio is expected). The economical damage in Germany reaches annual levels of 35 billion € and is worldwide in the region of 300 billion € as VDI news (27.02.2004) reports. Further strategic drawbacks arise from different company culures, supply and quality problems and the disturbance of normally connected processes. Whilst supplier motivation could become difficult the company size could be increased or at least maintained if a decision against outsourcing would be made.

EFFICIENCY ASPECTS

The loss of know how and innovation might endanger competitiveness. Adequate supply and improved scheduling are required to assure a steady production flow. An eventual ISO quality norm at supplier might result in quality problems as only quality capability but not actual delivery is represented. Aerial distances matter though fewer every passing day. More difficult and increased information, communication and coordination demand leads to problems (see cost as well) Personal, labour and legal problems might exist and the risk of unsatisfactory performance often blocs contracting.

COST ASPECTS

Making can be cheaper than buying if efficient production exists². Surplus labour and facilities can help to utilize machinery and generate a marginal contribution. Supplier collusion is avoided and resulting price surges stopped if processes are kept in-house. Another cost drawback of outsourcing is seen in higher transaction cost and the cost for change and implementation. Furthermore the reference for salary and accounting definition would be missing and administration structures would become more complex. This might require special control and communication devices and putt an increased emphasis on supply chain management and ERP systems. The achievement of these goals requires modern techniques like Just in time systems, supply chain management, CAD, CAM and information technology to handle sensitive customer data - expensive and of course not easy to force suppliers to these investments, as it is becoming problem of sharing risk. Another danger is a possible price increase after initial success because of inescapable collaboration structures.

FINANCIAL ASPECTS

Although long term financial problems could occur there is no specific drawback.

PERSONAL ASPECTS

In-house staff might be harder to motivate and outsourcing on the long run will result in layoffs and suspension of staff. Otherwise organizational talents could be maintained and personnel protected from layoffs. Furthermore the refuse of managers to believe that others Outsourcing Manufacturing can do thinks better on that they can themselves is often underestimated and shows that decisions are often subjective and the personal component is very important (said by Robert Clamp in Heizer and Render, 2003).

2.1.3 Decisions apart from cost

As discovered the aspects surrounding this decision are manifold. Nevertheless, most decisions are still entirely based on cost comparisons as this is the most easily measurable factor. But although often practiced that way a systematic and structured outsourcing process in manufacturing is not based on short term unit cost comparisons only but includes long term strategic aspects as well. Outsourcing manufacturing should always be process orientated, that means with the aim to reduce complexity of the production process and focus on competition relevant and future process technologies. Strategic outsourcing manufacturing will therefore show characteristics that sequentially lead from outsourcing individual parts (a tuned workpiece) over production processes (turning a workpiece) to complete process-areas (turning shop) and increasingly reach direct and indirect administrative operations in these areas.

2.2 The ‘core business thing’

As it definitely already became obvious the growth of contracting has led to the popularization of the concept of ‘core activity’. Conventional wisdom states that core activities stay in-house and allow a company to concentrate on what directly wins it business in the marketplace whilst non-core activities can be contracted out. As there is a web of ambiguity behind the beguiling simplicity of this distinction a recent list (by Alexander and Young 1996) suggests that there are four meanings of core business:

- activities traditionally performed in house
- activities critical to business performance
- activities current or potential to competitive advantage
- activities that will drive future growth, innovation or rejuvenation

These definitions are partly unsatisfactory precise but have to be dealt with, as other approaches often fail to be general. Nevertheless, a trivial example of core competencies can be given by LEGO. Due to growth problems the strategy was revised and so the management decided to re-concentrate on creative toys (core) and license new short-term non-core products like electronic games and magazines to subcontractors. (from Financial Times)

The following figure describes mainly which processes were, are and will be outsourced together with an evaluation of whether they are core, support or mixed processes. Nevertheless, the important thing to notice apart from the fact that manufacturing is in the ‘today’ group is that nowadays outsourcing of finance and accounting and future of procurement and R&D is a break to the golden ‘never outsource core businesses’ rule.

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Figure 2.f: areas of outsourcing in different eras (FT February 11th, 2004)

2.3 Life cycle adoption for efficient outsourcing

To utilize the outsourcing processes most efficiently AT Kearny recommends the product life cycle adjusted use of different contracting depths. This would bring the focus of 100% outsourcing and virtual companies more towards the product and not the initially targeted complete firm and is regarded as a big help as it is so trivial. The three (four if both contract manufacturing models are counted) are roughly described below:

Integrated model in growth stage: technology is the critical competitive differentiator; the manufacturer owns proprietary technologies or processes and continuously innovates as older products and processes become obsolete Contract Manufacture model in maturity stage: the integrated model becomes less practical as fewer technical innovations exist; as products move away from proprietary technologies, differentiation and variety drive market share; the ability to produce at low cost becomes key competitive differentiator; two existing hybrids: final processing in-house whilst taking full advantage of suppliers R&D and having a good quality control or outsourcing of both final and sub assembly processes to drive further cost advantages whilst marketing and distribution is still kept in-house; parallel solutions exist depending on range of products

OEM model in decline stage: employed as product declines; the focus is on minimum investment getting by with lowest cost design and production by leveraging supplier capabilities; outsourcing everything and relinquishing all responsibility; licensing only brand name to drive sales³

2.4 The execution of outsourcing

The widely standardized execution of outsourcing usually follows the sequential order listed below. It is important to note that all results and regulations will be summarized in the outsourcing contract.

1. Preparation stage: development of a strategic plan, evaluation of existing products and production processes, identification of outsourcing chances, specification of success factors and decision criteria, development of a suitable outsourcing method
2. contractor selection process: choice restriction on competent bidders only, choice of suitable bidder, establishment of a company overlapping team
3. negotiation stage: unfolding of interests and resulting options for the partner, optimization of options, development of a conversion plan
4. implementing stage: establishment of a conversion team, development of a organization concept, formulation of the service agreements, installation of the cooperation
5. use of outsourcing: management processes, task handling, controlling and process guided optimization

2.4.1 Details of contactor selection process:

The selection process is either conducted in a bidding or negotiation process, whilst the second option combines the selection and negation steps. Whilst when negotiating one or more suitable suppliers are contacted to specify requirements and negotiate terms under a Outsourcing Manufacturing great flexibility, but very limited competition the bidding process divides into two option. An initiated tender is either widely advertised and open to all or designed in a two step selective process. The open (single stage) option requires provision of a lot of information and addresses all selection criteria. This allows to choose form the maximum number of contractors under highly transparent circumstances, but is an relatively expensive procedure that may suffer under a reduced number of bids due to a low perceived probability of success. The selective (multiple stage) tender using a pre-qualification before starting the bidding has lower selection costs and a greater certainty about the suitability of a contractor but has limited transparency and an application of pre-qualification criteria may be challenged. (after Domberger 1998)

2.5 Effect of different sourcing strategies

Similarly important as the pros and cons about outsourcing is the decision whether to rely on a single or several suppliers. SINGLE sourcing facilitates supplier quality assurance (SQA) and the establishment of more durable relationships. Furthermore this dependency encourages commitment and effort which leads to a better communication. New products can easier be integrated in existing processes and higher scale economies and confidence is reached. Failures of course make this system vulnerable and individual suppliers are often highly affected by volume fluctuations. On the other hand monopolist suppliers might use their position for increasing prices. MULTI sourcing would solve some of these problems and has some more benefits: competitive tendering allows price reduction for the OEM and sources could be switched in case of failure. Moreover procurement would have access to wider sources of knowledge and expertise. In contrast supplier commitment is harder to generate and SQA is difficult or expensive to develop. Communication becomes more difficult and economies of scale are obtained harder. (compare Slack 1998)

This overview proves the compensating arguments of sourcing strategies that can finally only be found by specifically evaluating each decisions swings and roundabouts. Although in nowadays the communication problem might become more to an chance (thinking of feedback and shared forecasts) other disadvantages are often still prevailing risky outsourcing decisions.

2.6 The economic impact of outsourcing

General information about the economic impact of outsourcing is rare and often contradictory and so are the newspaper articles researched under this background. As the Financial Times reported the US senate is concerned about economic impacts of outsourcing. So it for example recently decided to bar companies moving jobs offshore from federal contracts if they planned to carry out some or all of their work abroad. This leads to wide company complaints feeling that a baseless threat was put on future profits and that analysis of impacts still was too crude. GE, as a multinational company, for example kept its number of US employees constant over the last 10 years although this period saw big outsourcing waves. Although another article from the IEEE found in the Consumer Electronics case study reports the same disastrous economic impacts and shows expected fears in more detail contradictory parties argue that outsourcing has a net positive on economy by reducing costs and leading to the creation of higher skilled jobs (FT January 17th, 2004). Outsourcing is set to give economy a 16 billion pound boost (in five years) due to business increase caused by higher efficiencies. Whilst the 2003 contribution was 80 million pound this amount is expected to rise to 444 mill pound in 2008. (research by LogicaCMG - Centre for Economic and Business Research). This analysis caused a huge political backlash and further uproar was ignited by Gregory Mankiw, the chairman of the White House Council of Economic Advisers when he thought he was stating the obvious and explained outsourcing and offshoring as another way to do international trade. He furthermore insisted that nowadays more things were tradable than probably in the past and that outsourcing on the long run was probably a plus for the economy (FT February 13th,2004).

2.7 Virtual companies

The virtual corporation is a temporary network of independent companies - suppliers, customers, erstwhile rivals - linked by information to share skills, costs, and access to one another′s markets. It will neither have a central office, nor an organization chart. It will have no hierarchy and no vertical integration. This new, evolving corporate model will be fluid and flexible - a group of collaborators that quickly unite to exploit a specific opportunity. Once the opportunity is met, the venture will, more often than not, disband. Life spans are manifold and reach form short to long term. Low overhead is needed and the flexible structures allow a rapid market response. The technology allows an OEM model with information sharing and new business frameworks. The focus is on lining up best-of -breed capabilities regardless of whether they are in house or external. The significant advantage is that it is more scalable and flexible in dealing with market fluctuations and customers. There is a strong bias towards postponement of manufacturing by making generic components standard and adding optional features as late as possible. The point of variation is moved towards the customer and allows mass customisation. Often only the soft facts like image and brand name remain in the company whilst hard facts like production take place in outside companies. The biggest problem is therefore seen in the required manifestation of the soft facts in the no longer existent company structure. Summarizing the virtual company is a notional ideal and more a theory of business than practicable reality.

2.7.1 Examples of virtual companies

Nevertheless examples of ‘virtual company’ close constructs are manifold and two of them should be mentioned:

MCI has never been an equipment manufacturer but provides services on networks that consist of other suppliers’ equipment. To sell services a sales person of MCI might create a virtual company in conjunction with sales persons form organizations selling telephones, computers and / or software. (form Heizer and Render, 2003)

Benetton’s family business was started in the late 1950s and the company sees itself neither as a manufacturer nor a retailer, but as a ‘clothing services company‘. More than 500 subcontractors in the region north of Venice are used for manufacture. Approximately 80 per cent of production takes place in Italy, and Benetton‘s own operations are relatively small in terms of in-house staff. It has retained only the design, cutting, dyeing, and packing of garments which it markets under its own label, contracting out the remaining manufacturing operations. Its retail outlets are operated by independent entrepreneurs, enabling it to grow fast and to reduce working capital requirements. But unlike a conventional franchise system, the outlets do not pay royalties, nor does Benetton accept unsold stock from die retailers. (from Domberger, 1998)

NIKE is famous for two things: the 40 million pairs of running shoes it sells each year and the fact that it does not manufacture any of them. An advanced worldwide network of subcontractors was developed over the last 25 years and allows this outsourcing degree.

2.8 Learning from interesting examples

2.8.1 Reverse offshoring

A surprising strategy is pursued by the leading control equipment manufacturer Trumeter based in Manchester as Financial Times reports. As high automation disengages from location and labour cost dependence the work formally by 60 employees of a sub-contractor in

Thailand were wage costs are a fifth compared to Britain was integrated in a new automated production line. In spite of the disparity in labour cost it was regarded as more cost-effective to do certain kinds of production in the UK, partly it could be controlled more easily by senior managers based at headquarters.

2.8.2 Collaborative Engineering

As VDI news reports (February 27th, 2004) German manufacturers expect cycle times to decrease by 38% and cost savings around 35% through collaboration and partner work. So not only vertical relationships but also horizontal collaboration still offers further efficiency increase potential - an example of this can be found in the automotive case study where GM and Toyota cars are assembled in the same plant.

2.9 Summarized requirements for implementation

Having acquired this overview of knowledge of outsourcing processes and combining it with the projects aims and objectives a suitable implementation now requires the following features:

- An theoretical approach has to be excluded as it can never capture the detailed structure of outsourcing decisions
- Only intense industry contact and primary research can solve the problem of non universal solutions to the problem
Detailed points of interest the implementation has to deal with are:
- Life cycle adjusted outsourcing use
- Outsourcing as a strategic or aggregate decision
- Shift of core competencies
- Supplier growth, OEM shrinking
- Mass customization

3 Solution and implementation selection

The expectations for a possible implementation were already predetermined in the project proposal as extensive industry contact and case studies. As their adoption seems possibility and is considered suitable to achieve the identified aims and objectives their implementation has to be differentiated in more detail.

3.1 The case study focus

The general layout of the case studies could have been done in two completely different ways. Whilst one possibility would concentrate entirely on industry figures (excluding the specific analysis of single companies) and in this way offer objective and homogeneous results the second option of company based analysis in its industrial sector would respect the fact that outsourcing reasons and use even vary within the same industrial sector, but of course have heterogeneous data as a result, which would be harder comparable.

Apart form each case studies precise focus’ it was considered to research four different industries to achieve a wide enough picture of the outsourcing businesses and types employed.

3.2 Industry Contact options

Whereas the case study establishment was considered quite straight forward, for industry contact establishment two main concepts were tried. Knowing that contact persons would have relatively high career positions and be accordingly hard to reach personally the option of company visits was generally regarded as impractical, additionally of course due to the distances and amount of interviews needed. Although finally another option was chosen it is noteworthy that plant tours at two car manufacturers (Rolls Roye in Goodwood and MINI in Oxford) could be established allowing the live evaluation and first habd input of some outsourcing data that will be presented in the implementation.

The first concept that was considered proacticall was the survey conduction via E-Mail. This concept was regarded to be easy and efficient as an attached word document would be sent as an attachement allowing the ticking of boxes and dropdown fields directly on the PC screen. The evaluation and analysis of results would be conducted in an excel spreadsheet. The second almost similar option concentrated around the construction of a web based questionnaire linked to an access data base. A working test run could be established and was considered suitable for implementation as well. Data analysis would even be quicker as answers would directly be transferred into access.

3.3 Selection

Finally the E-Mail questionnaire was chosen due to a lack in Web programming capability. Although the test run was successful the questionnaire was not detailed enough and further degrees of detail required in depth programming knowledge. Furthermore the compatibility problem was considered to be less urgent at the E-Mail method which moreover had no drawback to the web based one.

Concerning the case studies the company focussed method will be pursued as it allows more detailed assessments of specific processed and respects the stated important factor of outsourcing deviations within the same industry branch. The initial number of sectors was reduced from 4 to 3 due to time management reasons and a possible combination of the consumer electronics and PC and chip industry. The other two case studies will focus on automotive business and the pharmaceutical industry.

Furthermore, the case study section shall be understood as generally spotting outsourcing trends in different industries and is pursued rather by specific company examples than connected industry overviews.

4 Questionnaire

4.1 Implementation sequence

As the E-Mail questionnaire was regarded to be the best method to acquire representative and secure data from aimed sources only, the implementation steps will now be described more precisely. This first section is meant to give a general overview whilst the following parts will give detailed information about methods used, findings made and problems faced. Figure 4.a below visualizes the sequential steps undertaken.

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Figure 4.a: questionnaire implementation steps

4.2 Questionnaire design and launching

4.2.1 Identification of questionnaire specific aims

To design appropriate and precise questions aiming at the main research topics these were again identified and made clear concentrating this time on the opportunities a questionnaire would offer.

Major topic areas were:
- General information about the company researched
- Assessment of outsourcing employed already in different areas of the company
- In particular the actual outsourcing manufacturing degree and types
- Specific outsourcing manufacturing growth potential in the company
- Evaluation of the managers’ attitude towards outsourcing

These main topics were then converted into the five main sections of the questionnaire each again with several subsections.

4.2.2 The easy and clear design

The questionnaire was designed in Microsoft Word, using tick-boxes and dropdown elements. Although this might limit the answering variety, this way was pursued because of big advantages in final comparison and a facilitated and quick answering way. Moreover, this option was necessary as questions were supposed to be answered on the computer screen (without printing out). Answering sections were highlighted in blue to get the participants attention and a document protection was enabled so that no data except in the answering sections could be changes. The whole system was designed as easy as possible - even the mailing back could be done by using the ‘send to mail recipient as attachment’ button in Word’s file menu (often even automatically appearing in the icon bars).

To avoid software problems the questionnaire was sent to friends and lecturers and proved to be as failsafe and easy as expected. These test runs even took care of different software versions of both Word and the operating system.

The following pages show the questionnaire as it was sent to the recipients. As the dropdown variables of the subsections are hidden and only appear by a mouse click, they are attached at either top or bottom of the page.

Figure 4.b: Questionnaire design on three pages

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[...]

• College: University of Greenwich (School of Engineering)
• Grade: 80% England, 1,3 (A)
• Author: Boris Kuster (Author)
• Publication Year: 2004
• Pages: 96
• Catalog Number: V27945
• ISBN (eBook): 9783638298582
• Language: English
• Tags: Outsourcing, Manufacturing, Thema Outsourcing