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4 Questions to Answer Before Outsourcing

Outsourcing decision making is no different than the basic steps that coach John Wooden gave his players: Put on your socks, and then tie your shoes.

Many companies approach outsourcing in the same way that Wooden’s players thought they would start their college careers: by learning a new offensive strategy and running onto the court to play ball. The problem is that if you did not first cover the basics, you’re setting yourself up for failure. Halfway into the game is not the time to discover you have a blister on your foot.

Companies jump into supplier selection and contract negotiation without proper preparation and due diligence. This often results in uncovering issues well into the process. Too late to make corrections, companies have to start over or abandon the outsourcing effort.

A better strategy is to first answer these four questions.

Questions One and Two: Why Are You Outsourcing? What Do You Seek?
Outsourcing can be motivated by a number of drivers. For example:

For these and other reasons, a company may need to outsource capacity short term or permanently. Implementing an outsourcing solution can be complex and will impact the entire organization. Unfortunately, the internal challenges of outsourcing are the same, regardless of time frame or quantity. Make sure that you have exhausted all internal solutions first.

These internal solutions might include:

    • Overtime: This may increase cost or negatively impact operations budgets in the short term, but could be the best long term solution given the total cost of outsourcing.
    • Planning: Forecast requirements and start early. This will impact the balance sheet and inventory turns, but is self-correcting once product is shipped.
    • Internal operator efficiency: If you have low overall equipment effectiveness (OEE) or manufacturing efficiency, then dollars spent on lean initiatives and other productivity improvements are a better long term investment.
    • Inefficient equipment layout and bottlenecks. A well-done Kaizen event with full organization participation should offer a number of ideas for improvement.
    • Communication: You do not have to implement a full-fledged manufacturing execution system (MES) to see improvement. Simple and inexpensive visual systems, such as a color-coded tracking board, can work just as well.

There could also be valid business reasons to outsource, such as:

    • Execution of a balanced capacity plan: This could be related to not loading your facility in excess of 80 percent capacity or covering demand variability-related product launches, kit builds or large field replacements. In-house capacity that covers 100 percent of these peaks will lead to low equipment utilization during normal operations.
    • Access to leading edge innovation and engineering capacity: Bottlenecks on the engineering side can be outsourced effectively with properly executed supply agreements.

Question Three: What Are You Outsourcing?
The answer given to this question is often a particular item, such as an implant, a broach, a coating or packaging step, etc. Although the end result is a physical item, you outsource the capability to manufacture that item. If you begin your outsourcing effort without identifying what you are outsourcing, then you stand the chance of selecting the wrong supplier, in addition to unnecessary and inefficient use of internal supporting departments such as engineering and quality.

To avoid this outcome, keep these in mind.

    • Manufacturing method: For machined parts, are they ground, milled, turned, etc.? You need to require demonstrated competence of the machine method and include it in the capability audit of your manufacturing supplier selection process. You should prefer that the supplier has this competence in-house and not contracted, as this further complicates the project.
    • Testing and inspection requirements: As with manufacturing capability, the preference is that the supplier has the required equipment and competence in-house. However, specialized tests may have to be outsourced. If this is the case, you will want to include your supplier’s supplier in your capability audit. In addition, the supplier must have an acceptable supplier quality management system in place. 

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