Strategic Sourcing

Dr. Ron Lembke Operations Management

Old View of the World

One company does all processing, from raw material through delivery

Vertical Integration

Henry Ford’s River Rouge Plant Owned forests, iron mines, rubber plantation, coal mines Ships, railroad lines Dock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track 1927 Model A Production begins 15,000,000 cars in 15 years 120,000 employees in WWII

Supply Network View of the World

• Integrated international networks of companies process, produce and distribute products.

Spring Hill, Tennessee

Saturn Layout

Computer Example

Wacker Siltronic makes silicon wafers: buy sand grow into long crystals slice into thin wafers

Chip Production

Chip burned in a $2b “wafer fab” Wafer cut into chips and “packaged”

CD Drive

Chip stuffed onto board by Flextronics, Celestica, etc.

CD drive assembled by separate contract manufacturer Green Printed Circuit Board from different supplier CD drive, with a brand name on it, sold to Gateway

Apple and Foxconn

EMS elect mfg services Foxconn: Shenzhen, mile square 1 million workers Largest private employer in China 90 million iPhones Global CE industry = $150b Foxconn = 40% = $60b

Headline Risk

10 hour days, crowded dorms Terry Gou:Clean, affordable Good food 17 suicides in 10 yrs ¼ rate US college students 9 in March-May 2010 Below national average HK ngo:12hr*13days iPad?

Counseling, outsource dorms 10,000 horses galloping

Strategic Sourcing

Has to be feasible to outsource Assembly line balancing – probably not a step in the middle Figure out what to buy from whom What do we want to accomplish?

More effective!

More efficient!

Continuous Process Improvement?

Outsourcing - What is it?

Transfer activities to outside providers Outside providers do activities Resources: people, facilities, equipment Decision-making responsibility OEM = Original Equipment Manufacturer name on the product, does not produce Flextronics/Solectron, Foxconn makes it for you

Outsourcing – Why do it?

Organizationally-driven reasons Focus on what you do best More flexible capacity Employees: career paths Improvement-driven reasons Better quality & productivity, cycle time Gain skills not otherwise available Associate with superior providers Financially-driven reasons Reduce assets, improve ROA Lower fixed costs Cash from selling capital equip.

Make or Buy Decision

Reasons to Make

DIY: Lower cost No capable suppliers Inadequate supply Competitive Issues Core competencies Specialization

Reasons to Buy

Low purchase cost Lack of capacity Want to gain skill Reduce inv. costs Management focus Patent issues

Other Factors

Degree of coordination with other activities Relationship-specific investments Easy to copy technologies, or low IP (intellectual properties) protection Second-tier sub-suppliers

What to not Outsource

Core activities Key to the business Do not confer competitive advantage Strategic activities Key source of competitive advantage X-box – Microsoft never considered making Flextronics in Guadalajara $5 / hr vs. $1 in Doumen, China

A CautionaryTale

In 1981, IBM ‘PC’.

Consumers care about hardware No one cares about the software that lets them talk to the processor. Outsourced the OS to whom?

Anybody heard of “Microsoft?”

UCSD Pascal $450 CP/M $175 IBM: 2005 Lenovo $1.75b

MS: 2010 After Tax $18b MS-DOS $60

Outsourcing in the News

The World Is Flat Bandwidth glut of dot-com boom IT & telecommunications changes Nobody can tell you’re calling India White collar jobs – now it’s serious Educated workforces Call centers, programmers Privacy / security concerns

Managing the Supply Chain

Postponement -- withhold any modification until as long as possible. Keep product generic “vanilla” HP Benetton Home Depot paint department Channel Assembly -- have distributor assemble products from components

HP Inkjet Printers

Printers made in Vancouver, sent via ship through Panama Canal to Europe Europe warehouse stocks inventory by country physically different-- power supply manuals different languages Substitution not allowed Re-supply time very long

Euro Plugs

No standardized power supplies for Europe Different power supply for every country.

HP Inkjet Printers

Redesigned printers so that power supply added in Europe Re-engineer product, power supply Assembly done in a warehouse (Quality?) Manuals added in Europe Many expensive changes Store ‘vanilla’ boxes – one pile Piles of power supplies & manuals Cheaper to store than printers Postpone point of differentiation 25% cost reduction Hau Lee, Corey Billington, Brent Carter, Interfaces, 1993

Delayed Customization

Before Production Storage Shipping Storage After

Benetton

Sweaters of undyed wool, dyed once demand is known Dyeing LT much faster than production How many undyed sweaters to make?

How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?

Behr Paints

Small # of bases Small # tints Unlimited # combinations Keep stock colors on hand?

How many gallons?

Which ones?

Lower labor costs Higher inventory costs