Strategic Sourcing

1. Strategic Sourcing Dr. Ron Lembke Operations Management

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

3. Vertical Integration • Henry Ford’s 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

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

5. Spring Hill, Tennessee

6. Saturn Layout

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

8. Chip Production • Chip burned in a $2b “wafer fab” • Wafer cut into chips and “packaged”

9. 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

10. 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

11. Headline Risk • 10 hour days, crowded dorms • Terry Gou:Clean, affordable • Good food • 17 suicides in 10 yrs • ¼ rate US college students • 9 in March-May 2010 • Below national average • HK ngo:12hr*13days iPad? • Counseling, outsource dorms • 10,000 horses galloping

12. 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?

13. 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

14. 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.

15. 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 Make or Buy Decision Reasons to Make Reasons to Buy

16. 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

17. 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

18. 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?

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

20. Outsourcing in the News • The World Is Flat • Bandwidth glut of dot-com boom • IT & telecommunications changes • Nobody can tell you’re calling India • White collar jobs – now it’s serious • Educated workforces • Call centers, programmers • Privacy / security concerns

21. 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

22. 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

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

24. 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

25. Delayed Customization Before Production Storage Shipping Storage After

26. 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 you’ll sell some minimum amount?

27. 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