Outsourcing Guidebook

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<p>1766.001 Thomas Phelps Mitchell Fleischer</p> <p>Strategic Outsourcing Decision GuidebookProduced under Technology Investment Agreement 20000962 Between NSRP (Advanced Technology Institute as agent for) and the Altarum InstituteMarch 29, 2002</p> <p> 2002 Altarum Institute. Distribution Unlimited</p> <p>Altarum 3520 Green Court, Suite 300 Ann Arbor, Michigan 48105-1579 (734) 302-4600</p> <p>AcknowledgementsThe Altarum Project Team gratefully thanks the following individuals for their help in developing this Guidebook. The Northrop Grumman Newport News Outsourcing Pilot Team: Kevin DeGraw Doug Livermon Mike Walsh Peder Wennberg Dexter Lilly Terry Volz Veasey Wilson Project Advisor: Bill Brill, Atlantic Marine, NSRP Major Initiative Team Leader for Business Process Technologies Program Manager: Leo Plonsky, Office of Naval Research Funding for the pilot project and this Guidebook was provided by the Navy Manufacturing Technology Program within the Office of Naval Research, and through the National Shipbuilding Research Program (NSRP).</p> <p>Cover photographs courtesy of Northrop Grumman and General Dynamics.</p> <p>Strategic Outsourcing Decision Guidebook</p> <p>i</p> <p>This page intentionally left blank.</p> <p>ii</p> <p>Strategic Outsourcing Decision Guidebook</p> <p>PrefaceBackground to the GuidebookThe Strategic Outsourcing Decision Guidebook focuses on a key area for U.S. shipbuilders the need to reduce costs while maintaining responsiveness to the difficult process of assembling some of the largest and most complex products in the world. One approach to this is to determine a companys required core competencies and to outsource remaining tasks to more efficient suppliers. The NSRP Advanced Shipbuilding Enterprise Strategic Investment Plan1 (ASE SIP) defined the three most important challenges to be addressed in the Business Process (BP) Technologies Major Initiative Area as Sourcing and Supplier Integration, Planning and Production Design Processes, and Pre-Contract Processes. The outsourcing decision process fits squarely in the midst of those three areas. According to the SIP, these three areas combined represent 84% of the relative benefit to be gained from the BP Technologies area. As a whole, the BP Technologies area represents 21.4% of the total benefit anticipated from the ASE program and was specifically identified as a high return on investment (ROI) area. Whether to outsource is one of the most difficult areas in which to make a decision. The people who work in the affected area are concerned for their livelihoods; the people who work with them have emotional ties with their colleagues; everyone is concerned that they are currently part of a process that at least works, while outsourcing raises many levels of uncertainty; and there may be a sense that, because the work has always been done inside, it is part of what defines the company. The very emotional nature of the outsourcing decision means that we must have good information on which to base it. Too often such decisions are made on the basis of good intentions and limited information. The Strategic Outsourcing Decision Guidebook is designed to provide a basis on which good decisions can be made. It does this by providing a template for an analytically oriented outsourcing decision process and a detailed description of the elements of that process. Moreover, the Guidebook goes beyond the outsourcing decision process per se, to address problems of implementation. In particular, an outsourcing decision may result in the need to form new relationships with new kinds of suppliers. The Guidebook provides support for these situations by providing advice on the types of new relationships that may be needed and how to form them.</p> <p>Sources for the GuidebookIn addition to the existing literature on making outsourcing decisions, this Guidebook is directly based on the results of two projects performed by Altarum. These were the Outsourcing Decision Analysis Pilot and the Shipbuilding Supply Chain Integration Project.1</p> <p>National Shipbuilding Research Program (2001). Advanced Shipbuilding Enterprise Strategic Investment Plan. Rev 2.</p> <p>Strategic Outsourcing Decision Guidebook</p> <p>iii</p> <p>The Outsourcing Decision Analysis PilotThis project defined a new model for the outsourcing decision process and piloted it at Northrop Grumman Newport News. The Newport News pilot was conducted on two types of internally produced products: motor repair and overhaul services and low-voltage switchboards and panels. The motor repair analysis showed that the most cost-effective path was to close the internal motor shop and outsource motor repair and overhaul work. The analysis of the switchboard and panel work led to an ambiguous result. That is, the analysis suggested a cost saving that was, while significant as a dollar value, within the uncertainty of the estimated costs. That uncertainty was enough to preclude a reliable conclusion. The potential savings, however, are enough that Newport News is planning to conduct a pilot purchase of a limited set of switchboards to help refine the estimates. The pilot project experiences served as the basis for many of the recommendations in the Guidebook. We recognize that Newport News is unique among U.S. shipbuilders. Not only are they the largest shipyard in the U.S., they are currently the most vertically integrated shipbuilder in the country (perhaps in the world) and therefore their potential outsourcing concerns are substantially greater than those of other shipyards. In addition, except for some commercial overhaul and repair work, they work exclusively for the U.S. Navy as a customer, while most other shipyards in the U.S. have commercial customers as well as Navy customers2. To ensure the Guidebooks applicability to other shipyards, it has been reviewed by an Advisory Panel from two other shipyards: NASSCO and Atlantic Marine. NASSCO performs a combination of military and commercial work, while Atlantic Marine primarily does commercial work. An additional member of our project team was Tom Lamb from the University of Michigan Transportation Research Institute (UMTRI), who has more than 40 years experience working in the shipbuilding industry at both shipyards and suppliers.</p> <p>Shipbuilding Supply Chain Integration ProjectThis project studied supply chain management practices in the U.S., Europe and Japan based on visits to shipyards and suppliers as well as previous work by the authors with the automotive, aerospace, and defense electronics industries. The project (Shipbuilding Supply Chain Integration Project3) defined 22 best practices that could be applied by the U.S. shipbuilding industry. Those best practices form the core for the new types of relationships recommended in this Guidebook. In addition to a variety of shipbuilding experiences brought to bear in preparing the Guidebook, members of the project team have extensive experience in the automotive industry. That experience has been used to suggest new approaches that could be tried in shipbuilding.</p> <p>2 3</p> <p>Bath Iron Works and Electric Boat are the other major exceptions, of course. M. Fleischer, R. Kohler, T. Lamb, B. Bongiorni, and N. Tupper (1999). Shipbuilding Supply Chain Management Project: Final Report, MANTECH Contract # F33615-96-C-5511. Ann Arbor, MI: Environmental Research Institute of Michigan.</p> <p>iv</p> <p>Strategic Outsourcing Decision Guidebook</p> <p>Table of ContentsExecutive Summary ........................................................................................................ ES-1 1 Introduction ...............................................................................................................1-1 1.1 1.2 Benefits of the Process ......................................................................................1-1 Types of Outsourcing Decision Processes.........................................................1-11.2.1 1.2.2 Strategic Outsourcing ......................................................................................... 1-1 Tactical Outsourcing ........................................................................................... 1-2</p> <p>1.3 1.4 1.5</p> <p>How Is This Approach Different?........................................................................1-2 How Does It Compare to Other Books or Articles? ............................................1-2 Tips for using this Guidebook .............................................................................1-31.5.1 1.5.2 1.5.3 1.5.4 1.5.5 Complete the Foundation Tasks First................................................................. 1-4 Modify the Process as Needed ........................................................................... 1-4 Include Major Stakeholders ................................................................................ 1-4 Train Participants ................................................................................................ 1-4 Improve the Process ........................................................................................... 1-4</p> <p>2</p> <p>Foundation Tasks .....................................................................................................2-1 2.1 2.2 2.3 2.4 Set Strategic Direction and Funding...................................................................2-1 Determine Core Competencies and Strategic Objectives ..................................2-2 Develop List of Candidates for Consideration ....................................................2-2 Appoint Process Implementation Team..............................................................2-3</p> <p>3</p> <p>Outsourcing Decision Process................................................................................3-1 3.1 Activity A Define Candidate Product Families .................................................3-13.1.1 3.1.2 3.1.3 3.1.4 Activity A.1: Initiate Outsourcing Decision Process ........................................... 3-2 Activity A.2: Identify Product/Process Categories.............................................. 3-3 Activity A.3: Identify Sub-Components of Items/Parts/Products........................ 3-3 Activity A.4: By Part Family, Determine Origin and Volume of Work................. 3-5 Activity B.1: Develop Process Map for Each Part Family .................................. 3-7 Activity B.2: Perform Internal Manufacturing Cost Analysis ............................3-10 Activity B.3: Document Requirements for Suppliers ........................................3-11</p> <p>3.2</p> <p>Activity B Analysis of Process and Associated Processes ..............................3-63.2.1 3.2.2 3.2.3</p> <p>3.3 3.4</p> <p>Activity C Evaluate Potential Substitutes.......................................................3-12 Activity D Determine Supplier Capabilities and Develop Ranking Criteria ....3-133.4.1 3.4.2 3.4.3 3.4.4 Activity D.1: Identify Appropriate Suppliers to Support Requirements ............3-13 Activity D.2: Investigate Suppliers Capabilities ...............................................3-14 Activity D.3: Develop Criteria and Data for Ranking Potential Suppliers.........3-15 Activity D.4: Perform Inquiry RFQ Process......................................................3-15</p> <p>Strategic Outsourcing Decision Guidebook</p> <p>v</p> <p>3.4.5 3.4.6</p> <p>Activity D.5: Rank Potential Suppliers .............................................................3-17 Activity D.6: Determine Likely Supplier Relationship .......................................3-17 Activity E.1: Predict Likely Program Impact .....................................................3-19 Activity E.2: Perform Final Cost Analysis..........................................................3-20 Activity E.3: Make Sourcing Recommendation to Steering Committee...........3-21 Activity E.4: Outsourcing Steering Committee Review ....................................3-22</p> <p>3.5</p> <p>Activity E Outsourcing Analysis and Recommendation.................................3-183.5.1 3.5.2 3.5.3 3.5.4</p> <p>3.6 3.7</p> <p>Activity F Outsourcing Decision.....................................................................3-22 Activity G Implement Outsource Decision .....................................................3-233.7.1 3.7.2 3.7.3 Activity G.1: Create Transition Plan .................................................................3-23 Activity G.2: Implement Transition Plan...........................................................3-24 Activity G.3: Outsourcing Process ...................................................................3-24 Activity H.1: Reserve Capital and Overhead ...................................................3-26 Activity H.2: Continue Internal Process ...........................................................3-26</p> <p>3.8</p> <p>Activity H Implement Keep Internal Decision.................................................3-253.8.1 3.8.2</p> <p>4</p> <p>Lessons Learned Summary .....................................................................................4-1</p> <p>Appendix A Selected Definitions .................................................................................. A-1 Appendix B Process Responsibilities .......................................................................... B-1 Appendix C Data Gathering........................................................................................... C-1 C.1 Data Gathering Interview................................................................................... C-1 C.2 Reference Checking Interview .......................................................................... C-5 Appendix D Cost Factor Analysis................................................................................. D-1 D.1 Labor Cost Factors ............................................................................................ D-1 D.2 Purchased Goods and Services Cost Factors................................................... D-2 D.3 Facilities Cost Factors ....................................................................................... D-3 D.4 Other Cost Factors ............................................................................................ D-3 Appendix E Appendix F Example Cost Factor Analysis ................................................................. E-1 Example Supplier Interview.......................................................................F-1</p> <p>Appendix G Example Supplier Comparison Sheet...................................................... G-1 Appendix H Example Supplier Rating Sheets ............................................................. H-1 H.1 Requirements .................................................................................................... H-1 H.2 Discriminators.................................................................................................... H-2 H.3 Motor Repair/Overhaul Supplier Rating ............................................................ H-3</p> <p>vi</p> <p>Strategic Outsourcing Decision Guidebook...</p>