Outsourcing – A Very Real Strategic Planning Option

Within the current recessionary business climate and within the Strategic Planning process, there may be a strong Business Case to outsource one of the Functional Areas of a company. Outsourcing is often made in the interest of making better use of capital, infrastructure, technology and current capacity rather than an expanded investment in brick and mortar. Outsourcing can also be a downsizing strategy.

The services that are commonly outsourced can be Information Technology, Human Resources, Facilities Management/Real Estate, Accounting, Design Engineering, Manufacturing, Test, Forward and Reverse Logistics, to name but a few.

The purpose of this article on Outsourcing is to deal of the role of Product Management and the transfer of the management of a product, product group or an entire product portfolio to a selected service provider.

An outsourcing arrangement is in the form of a two party Manufacturing Service Agreement (MSA) that describes the services to be provided and the metrics that will be used to measure the performance of the service provider for the term of the contract, usually one year and auto renewable.

To illustrate, the following steps will use will deal with outsourcing of electronic component manufacturing, specifically the transfer of a product to a low cost geography or to an alternate or the addition of a second supplier.

The fundamental building blocks of a successful outsource transfer is the process and the integrity of the information given from one company to another.

The seven key attributes or ‘critical success factors’ of this type of well orchestrated Product Management outsourcing arrangement can be broken down as follows:  

Documentation

• Documentation will be the foundation of the process and attention to details is paramount at this stage.
• The information needs to be complete and accurate.
• Drawings need to be of the latest revision and must include any ECO or planned ECO.
• The bills of materials must have complete part numbers, supplier’s names and it is always helpful if there are multiple sources.
• The master data must be created by the service provider and therefore both the drawings and the bills of materials must be reviewed and the revision level agreed to by both the service provider and the outsourcing company to insure the product is manufactured to the latest revision.

Supply Chain

• Inventory, a necessity to a successful manufacturing plan but, lack of inventory can be disastrous.
•  The client will need to provide sourcing information as to the percentage of the products will be coming form North American suppliers and also the percentage of suppliers from Asia and other parts of the globe.
• Contracts that exist need to be shared and letters of authorizations need to be provided to the service provider so as the suppliers will honour any existing pre negotiated contract pricing.
• Existing inventory needs to be reconciled and prepared for shipment to the service provider so as to minimize any duplicate purchases.

Planning

• Demand signals and the frequency of there receipt must be adhered to so the planning group can define the Replenishment Lead Time and supply the client with a delivery lead time that is attainable and acceptable to the client.
• A rolling 6 month forecast is a requirement to provide supply chain a view into the mix and number of SKUs that will be required as a forward look into the business.
• Without a forecast, lead-times and inventory becomes an Achilles heel to the manufacturing process.

Manufacturing

• Now the ‘build something’ begins with the preparation of the manufacturing process and profiles need to be developed.
• This will/can include any equipment programs and profiles for the SMT equipment, any special tools and/or fixtures that will be required for assembly.
• Manufacturing assembly instructions need to be created and details into people and tools and jigs that may be required.
• This aspect needs to be done in advance of the first build so as the process can start immediately.

Test

• All product that is manufactured needs to have an end to end strategy as to how it will be tested to insure quality product is manufactured in a repeatable process.
• Test processes, equipment, and test equipment manuals must be in place and the latest rev of the tests being performed must be signed off by the service provider and the client.
• This aspect of the process is one that requires some extra care and review to insure that the procedures and equipment are ready when the manufacturing process transfer takes place.

Logistics

• Now product is ready for shipment and the start of revenue generation.
• To do so the information on frequency of shipments, daily, weekly, monthly for example must be in place.
• Any international shipment requirements that include duties or tariffs or any licenses need to be completed and in place.

Infrastructure

• Infrastructure is of course the all encompassing front-to-back aspect of the process.
• Before any decisions get made does the service provide have the infrastructure required to manufacture the product.
• Are there clean room or special handling requirements for optical or leading edge technology products? What kind of power requirements is needed?
• The IT and network structure must be available when and where it is r
• Does the product have any security that needs to be created and put in place?
• required.

In conclusion, outsourcing to a service provider is a common practice and has been a longstanding key attribute of fortune 500 companies as well as start ups and everyone in between for decades.  It is something that with an interactive, robust outsourcing process with a good client project teams both the client and the service provider will have a long lasting relationship with benefits to both companies.

This BTG article was written in conjunction with Malcolm Wood, a long-time logistics solutions Senior Executive with Breconridge Corp., Breconridge Manufacturing Solutions and the founder of Caerus Solutions Group.