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:

• • Restrictions on in-house capacity or capital
  • Lack of specific expertise or required manufacturing, testing or inspection equipment
  • Demand variability related to product launches, kit builds or field replacements

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.
  • Assembly techniques: In addition to the complexity in the manufacture of the components, there are instances (such as with some instruments) wherein the critical capability is assembly. Given that fit and function are critical, a best practice is that the company doing the assembly also manufactures the majority of the components.
  • Complex programming: Like complex assembly, some parts require superior programing capability to optimize cost, delivery time and quality. This holds true for the contracted item as well as fixtures, tools or dies that may be required.
  • Specialty materials: A salesman may tell you that his shop can work with any material. Talk to a machine operator or engineer, and you may get a different story. You do not want your product to be their experiment. Require proof to the extent that non-disclosure agreements they are under will allow. If you are not able to find a supplier with verifiable competence, you may want to identify an alternative material that you can use for your capability audit.
  • Others: You may identify other critical features. The message here is, do your due diligence before you begin your request for quotation (RFQ).

Question 4: Are You Prepared for Outsourcing?

Once you have decided that outsourcing is the right strategy and have identified what you will outsource, you may think that you’re ready to release the RFQs. One more critical step must be taken to confirm that your internal team is prepared and your house is in order.

This step looks at the following elements.

• • Stakeholders: Outsourcing decisions are not just a procurement project. The engineering and quality groups may seem obvious to include, but what about accounts payable and regulatory? Take the time to map out the product, information and cash flows. Engage every area identified; some will be advisors and others participating team members.
  • Drawings and specifications: What might be clear to a design engineer may not be for a machine programmer or operator. Look for missing details or unclear specs. This is especially true for legacy items that have been manufactured in-house, as the tribal knowledge or design intent are difficult to document. Make sure that materials called out are used and can be procured.
  • Inspection requirements and technique: Give review of these documents as much attention as you do the drawings and specification. For example, a surface finish requirement of “scratches or blemishes shall not be apparent with the unaided eye at an arm’s length under normal lighting conditions” is a disagreement waiting to happen.
  • Acceptable alternate manufacturing techniques: Is it acceptable for something being machined to be molded or forged? You may be able to trade a one-time capital expense for substantial long-term savings.
  • Overhead absorption: As part of your make/buy decision, include the impact on overhead absorption.
  • Outliers: You may have alternate strategies for your core and outlier sizes. Consider this before releasing the RFQ. Don’t fall into the trap of optimizing the few to the detriment of the many. Low volume outliers may have a different solution than the high volume core.

In Conclusion

Success in outsourcing is complex and impacts the entire organization. Before you send the RFQ, make sure you know why you are outsourcing, know what you are outsourcing, complete all your due diligence and remember the advice of Coach Wooden: begin by putting on your socks.

In addition to being an author and speaker, David Finch is President and Founder of Insight Collaboration Partners, a consulting group that assists companies in M&A supply chain due diligence and post-acquisition integration, strategic partnering, improving collaboration & operational efficiency and lowering supply chain cost. Mr. Finch has more than 30 years of hands-on experience in global supply chain and manufacturing operations in the medical device and orthopaedic industries with Becton Dickinson, Johnson & Johnson, Wright Medical and MicroPort Orthopedics.

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