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Outsourcing decisions begin with an analysis of your company s existing supply chain skills and expertise. What is your company really good at
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CHAPTER 1 Core Discipline 1: View Your Supply Chain as a Strategic Asset
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What areas of expertise are or have the potential to become strategic differentiators These are the activities you should keep in-house and make even better. Consider outsourcing activities with low strategic importance or that a third party could do better, faster, or more cheaply. Outsourcing allows companies to ramp up or down quickly, build new products, or reposition themselves in the mar- Consider ketplace all by leveraging the expertise outsourcing and capacity of other companies. This added flexibility and agility can make an activities with low enormous difference in today s competitive strategic importance global markets. Most important, though, outsourcing allows companies to focus on or that a third party their core competencies and enhance their could do better, competitive positioning. Before moving forward, however, be faster, or more sure to carefully consider the risks and strategic ramifications of your outsourcing cheaply. decisions. Introducing new products, managing inventory levels, and ensuring that the supply chain configuration supports competitive customer lead times these are strategic activities that cannot be delegated to a third party. Be sure to consider other key questions that will drive your decision. Should outsourced skills also be maintained internally, or are they no longer needed Which existing skills should be strengthened Will new tools or skills be needed, such as the ability to manage inventory across the extended supply chain Thinking only in terms of Can it be done more cheaply outside is unlikely to provide a strategic solution. Outside partners can deliver three potential advantages:
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Scale Third-party providers often can offer services more cheaply because of a large customer base that keeps utilization rates high and unit costs low. External partners also can help companies to scale up production quickly without having to invest in new manufacturing capacity. Scope For companies that want to expand into new markets or geographies, outsourcing partners can provide access to operations in new locations which would not be economical to replicate internally at current business volumes.
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Strategic Supply Chain Management
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Technology expertise Outsourcing partners may have mastered a product or process technology that would require a sizable investment to develop internally.
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Despite these benefits, outsourcing isn t always the right decision. Before turning to external providers, consider four things: your source of differentiation, your operating scale, your power position, and the uniqueness of your operations. First, know how your company differentiates itself. What gives you a competitive edge If your product or process technology is a source of differentiation, don t outsource that aspect of your operations. Consider the case of one of the world s leading brands in watches. The Manufacture des Montres Rolex SA, known around the world for its Rolex brand, not only produces the components for its watches, but also produces machines, tools, and supplies for the manufacture of movements and other products.2 Manufacturing is an integral part of ensuring the high standards of quality that set Rolex apart as a premium watchmaker. For many companies, however, manufacturing is not strategic. Cisco, Compaq, and IBM outsource most of their production If your product or to contract electronics manufacturers such process technology as Flextronics, Solectron, and Celestica. And most industries use third-party logistics is a source of providers for transportation, customs, waredifferentiation, don t housing, and other value-added services, such as final packaging, configuration testoutsource that ing, software loading, and site installation. aspect of your Next, compare the scale of your internal operations against your requirements. If your operations. operations are at or near full capacity utilization with no plans to boost production you re unlikely to gain any cost benefit from outsourcing. For smaller players that want to expand, however, working with a partner can be the best solution. Outsourcing manufacturing operations to lower fixed and total costs is common practice across many industries. Top performers have set up these practices to yield other benefits as well. Tellabs, a U.S. manufacturer of communications equipment, provides an example. This company s approach to external manufacturing provides benefits to strategies in procurement, design, repair operations, and market penetration, in addition to reducing manufactured cost. Through external agreements and integration of internal practice disciplines, Tellabs
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