Declaration

This report entitled ‘Not at all manufacturing’ was composed by me and is based on my own

work. Where the work of others has been used, it is fully acknowledged in the text and in

captions to tables and illustrations.

Signed: ______________________

Dated: ______________________

Acknowledgements

There are a number of people to whom I owe many thanks and without whom this project would not have been possible. My thanks and appreciation therefore goes to the participants of my survey enabling me to conduct a major part of my analysis and to my supervisor Mr Brian Lawrence for his guidance, patience and friendly relationship throughout my whole year abroad.

Special thanks go to my family for all their love, encouragement and manifold support without I would never have been able to carry this project successfully to completion.

Abstract

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.

  Outsourcing Manufacturing  

Table of Contents

1  Introduction  5

1.1  Official project title and description  5

1.2  Emphasizing the problem  5

1.3  The aims of the project  6

1.4  The project s Objectives  6

2  Analysis of the outsourcing process and decision  7

2.1  Advantages and disadvantages of outsourcing  7

2.1.1  Advantages of outsourcing  8

2.1.2  Disadvantages of outsourcing  11

2.1.3  Decisions apart from cost  13

2.2  The core business thing  13

2.3  Life cycle adoption for efficient outsourcing  14

2.4  The execution of outsourcing  15

2.4.1  Details of contactor selection process:  15

2.5  Effect of different sourcing strategies  16

2.6  The economic impact of outsourcing  16

2.7  Virtual companies  17

2.7.1  Examples of virtual companies  18

2.8  Learning from interesting examples  18

2.8.1  Reverse offshoring  18

2.8.2  Collaborative Engineering  19

2.9  Summarized requirements for implementation  19

3  Solution and implementation selection  20

3.1  The case study focus  20

3.2  Industry Contact options  20

3.3  Selection  21

4  Questionnaire  22

4.1  Implementation sequence  22

4.2  Questionnaire design and launching  23

4.2.1  Identification of questionnaire specific aims  23

4.2.2  The easy and clear design  23

4.2.3  Contact data collection  27

4.3  Problems and subsequent improvements  28

4.3.1  General problems  28

4.3.2  Technical problems  29

4.3.3  Question specific problems  29

4.4  Data analysis  30

4.4.1  Variety and distribution of answers  30

4.4.2  Outsourcing evaluation and types of use  32

4.4.3  The sub contracting of manufacturing  34

4.4.4  Attitude towards outsourcing manufacturing  37

4.5  Summary  40

4.5.1  Analysis  40

4.5.2  This survey in general  41

5  Outsourcing in the automotive industry  42

5.1  Introduction  42

5.2  Trends in automotive business  43

5.2.1  Exponential supplier growth  43

5.2.2  Passionate final assemblers  45

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5.2.3  Challenges for modern suppliers  46

5.2.4  Software  47

5.2.5  VW Brazil Suppliers as assemblers  48

5.2.6  Horizontal collaboration and outsourcing pressure  48

5.2.7  R D shift causes brand communication  49

5.3  Company analysis  49

5.3.1  Daimler Chrysler  49

5.3.2  Toyota  50

5.3.3  Magna Steyr  51

6  Outsourcing in the consumer electronics and electric industry  52

6.1  Introduction  52

6.1.1  Market overview and growth  52

6.1.2  Growth strategies and drivers  53

6.2  Trends in electronics industry  54

6.2.1  Stages of outsourcing and Life cycle adjustment  54

6.2.2  Terminology  55

6.2.3  Suppliers as winner of LCD boom  56

6.2.4  12 inch wafers  56

6.2.5  Part reduction  57

6.3  Company analysis  57

6.3.1  Dell  57

6.3.2  GE-Samsung  58

6.3.3  SUN Microsystems  59

6.4  Economical impacts  60

6.4.1  Offshoring jobs and American economic fears  60

6.4.2  Labour shift in the UK economy  61

7  Pharmaceutical outsourcing  62

7.1  Common pressure in the pharmaceutical business  62

7.1.1  Merger business and accreditation dependence  62

7.1.2  Patent expiry  62

7.2  The contracting market  63

7.3  Contract manufacturing organisations in detail  64

7.4  Why use pharmaceutical contract manufacturing  66

8  Project timetable  68

8.1  Gantt Chart  68

8.2  Evaluation  69

9  Conclusion  70

10  Possible future work  71

11  References  72

11.1  Books and Articles  72

11.2  Webpages  74

11.3  Newspaper articles  75

11.3.1  Financial Times UK  75

11.3.2  German Papers  76

12  Appendix  78

12.1  Survey: introductory E-Mail Text  78

12.2  Survey: Complete Contact list  79

12.3  Automotive suppliers: strategic positioning in China  90

12.4  Outsourcing advice sheet for SMEs  91

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List of figures

  Figure 2 a: Reasons for in and outsourcing (VDI news February 27th 2004 - Fraunhofer  ISICCCCCCC

   7

  Figure 2 b: The contracting game (see Domberger 1998)  8

  Figure 2 c: cost cutting potential oer area (FT February 11 th 2004 Accenture)  10

  Figure 2 d: estimated cost savings (Domberger 1998 Indurstry commission)  10

  Figure 2 e: popularity of outsourcing (Coyle Bardy and Langley 2002)  11

  Figure 2 f: areas of outsourcing in different eras (FT February 11 th 2004)  14

  Figure 4 a: questionnaire implementation steps  22

  Figure 4 b: Questionnaire design on three pages  23

  Figure 4 c: distribution of researched industry sectors  27

  Figure 4 d: Outsourcing areas and future growth expectations  33

  Figure 4 e: actual overall outsourcing  33

  Figure 4 f: outsourcing concepts used  34

  Figure 4 g: actual outsourcing manufacturing  35

  Figure 4 h: future outsourcing manufacturing  35

  Figure 4 i: strategic advantages  38

  Figure 4 j: strategic disadvantages  38

  Figure 4 k: efficiency advantages  39

  Figure 4 l: efficiency disadvantages  39

  Figure 4 m: cost and finance advantages  40

  Figure 4 n: cost and finance disadvantages  40

  Figure 5 a: biggest OEMS (automobil production - web archive)  42

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

   42

  Figure 5 c: future and present OEM value added per function (automobil production)  44

  Figure 5 d: 10 year supplier decrease (VDI news February 6 th 2004 - prognosis Edscha)  44

  Figure 5 e:future change of value added (automobile production Audi)  47

  Figure 5 f: in-house production share (Hill 1999)  49

  Figure 5 gcar segments (AP Magna) Figure 5 h: OEM concentration (AP)  51

  Figure 1 a: worldwide IC markets (FT January 21st 2004)  53

  Figure 1 b: Outsourcing levels per CE or PC company (AT Kearney outsourcing shuffle)  54

  Figure 1 c: solectron sales (solectron financial report from website)  55

  Figure 1 a: Patent expiry (AT Kearney The outsourcing shuffle)  63

  Figure 1 b: pharmaceutical contact market (Reuters 1998 - datamonitor)  64

  Figure 1 c: manufacturing type adjusted conracting  66

  Figure 1 a: Project Gantt Chart  68

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List of tables

Table 4.a:  answer amount and percentage by and reply types  30

Table 4.b:  answer percentage by industry sector  30

Table 4.c:  company function type share  31

Table 4.d:  Answer distribution by number of employees  31

Table 4.e:  Answer distribution by sales volume in  31

Table 4.f:  Answer distribution by job function of person assessing  32

Table 4.g:  preferred future sourcing types  36

Table 4.h:  preferred future sourcing locations  36

Table 4.i:  reasons for future sourcing strategy  37

Table 4.j:  advantage to disadvantage percentage ratios per aspect  37

Table 1.a:  chip manufacturers (VDI news January 9th 2004)  52

Table 1.b:  OLED factsheet (VDI news April 16 th 2004 - displayresearch novaled)  56

Table 1.c:  the PC market 2003 (VDI news Gartner)  58

Table 1.d:  offshoring jobs (IEEE and Business week)  60

Table 1.e:  UK labour redundancies (FT January 1st 2004)  61

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Outsourcing Manufacturing

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

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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.

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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 ‘outsourcing 1 ’, ‘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

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

1 The word was artificially combined from outside + resources + using = outsourcing

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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 11 th , 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.

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

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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 11 th , 2004 – Accenture)

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.

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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.

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.

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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 exists 2 . 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

2 Boeing for example kept its wing production in-house as being most efficient wing producer in the world and wings were a core competency.

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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

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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.

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

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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 sales

2.4 The execution of outsourcing 3

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

3 The described way is of course not the only solution: an interesting way to sell big shares of complete business areas is the two step process of first making them an autonomous affiliate which is later brought to the stock market. Similar as Siemens did with Infineon. Control can easily be kept by the finance position kept.

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