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Strategic Sourcing Dr. Ron Lembke Operations Management

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Old View of the World One company does all processing, from raw material through delivery

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Vertical Integration Henry Fords 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

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Supply Network View of the World Integrated international networks of companies process, produce and distribute products.

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Spring Hill, Tennessee

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Saturn Layout

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

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

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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

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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

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Headline Risk 10 hour days, crowded dorms Terry Gou:Clean, affordable Good food 17 suicides in 10 yrs rate US college students 9 in March-May 2010 Below national average HK ngo:12hr*13days iPad? Counseling, outsource dorms 10,000 horses galloping

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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?

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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

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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.

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Make or Buy Decision DIY: Lower cost No capable suppliers Inadequate supply Competitive Issues Core competencies Specialization Low purchase cost Lack of capacity Want to gain skill Reduce inv. costs Management focus Patent issues Reasons to Make Reasons to Buy

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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

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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

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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?

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Anybody heard of Microsoft? UCSD Pascal $450 CP/M$175 MS-DOS$60 IBM: 2005 Lenovo $1.75b MS: 2010 After Tax $18b

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Outsourcing in the News The World Is Flat Bandwidth glut of dot-com boom IT & telecommunications changes Nobody can tell youre calling India White collar jobs now its serious Educated workforces Call centers, programmers Privacy / security concerns

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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

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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

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

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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

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Delayed Customization ProductionStorageShippingStorage Before After

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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 youll sell some minimum amount?

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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