There was a time when manufacturing organizations used to manufacture all the goods in-house. But gradually organizations realized the advantages of outsourcing the components to external suppliers. Outsourcing of component manufacturing brings with it cost and quality advantages, but on the flipside it reduces the organization’s control over the manufacturing process and reduces visibility in the supply chain. Suppliers are spread all over the globe in different industrial clusters. The distance of suppliers from the organization’s manufacturing location leads to increased lead time and reduces the organization’s control over its suppliers’ processes. The success of Toyota production system has proved that organizations need to work in very close co-ordination with their suppliers and have a definite advantage if the suppliers are located closer to them. The dilemma is that it is not always easy to find a competent supplier (in terms of quality or cost) close by your location. There is always a trade off which organizations have to make between lead time and co-ordination on one side and the cost/quality on the other.  The decision of outsourcing component manufacturing to different suppliers has never been easy for manufacturing organizations.

There are components for which there are very limited good quality suppliers. In such scenarios, the organizations have limited choice but to outsource to the available suppliers only. Microprocessor is one such example, where organizations have only a couple of suppliers to outsource to. The decision in those scenarios is very simple. The challenge comes when there are multiple suppliers, both nearby and at far-off distances, to which organizations can outsource to.

Based on my experience in consulting multiple manufacturing organizations, I can suggest a guiding framework that can help organizations take correct outsourcing decisions.

Outsourcing Framework.png

The suppliers can be categorized into four groups (as shown in the Fig 1) based on their capability/cost advantage and lead time/distance from organizations. Organizations can strategically decide which components to outsource to which group of suppliers.

  • The simplest suggestion is that organizations should not outsource components to suppliers which are located far off and don’t offer any capability or cost advantage.
  • The suppliers (mostly ancillary units) which don’t provide high capability or cost advantage, but their closeness to the organizations provides an advantage in terms of lower lead times and better co-ordination, should be used to out-source non-critical and low value components.
  • There are suppliers which provide high capability or cost advantages and have very low lead times too. These are the suppliers to which we should outsource the highly critical or high/very high value components. But unfortunately such suppliers are limited in number.
  • The last categories of suppliers are those which, though provide high advantage in terms of capability and cost, are located far off. Such suppliers should be used for outsourcing of either critical or very high value components, so that the disadvantage of high lead time is offset with the cost or competency advantage

– Naman Sinha, Senior Consultant, Bristlecone

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