When outsourcing makes sense

July 13, 2006
Design teams responsible for the success of new-product introductions should be aware of the role outsourcing can play.

John Jenkins
General Manager
Alcoa Prime Services
Whitehall, Mich.

An effective outsourcing plan helps teams build better products faster and at a lower cost than those manufactured in-house.

Companies considering outsourcing must first check if the practice meets internal criteria. Has your organization picked an activity that should be outsourced in the first place? Are you considering outsourcing for the right reasons?

Answering the first part is easy. Never outsource an activity that is part of your core competency — that's giving away your future.

A valid candidate for outsourcing should be an activity that supports, but is not central to, your core competency. For example, an OEM of highly engineered systems would probably consider design and marketing core competencies. However, the manufacturing, finishing, assembly, and inspection of a variety of components and subassemblies comprising those systems are likely to be a noncore competency.

The downside of trying to maintain expertise across a broad spectrum of technologies is twofold. First, it drains funds that would be better invested in a core competency. Second, funds transferred from core to noncore competencies are generally insufficient to let your company compete with organizations that specialize in the latter.

The power of a single focus has been well promoted. So well, in fact, that there is a general perception most companies embrace the concept. Largely, it is not the case, and this is the strategic opportunity being missed by some businesses.

This brings us to the second part of our internal analysis: Is your company outsourcing for the right reasons. Outsource only when it's a proactive part of a strategy focused on ending the distraction of subsidizing a noncore competency, and freeing up resources to invest in a core competency.

Unfortunately, many businesses turn to outsourcing when demand overwhelms capacity, when efforts to cut cycle times or operating expenses fail, or when chronic quality problems resist attempted fixes. When outsourcing is a stopgap, rather than a focused strategy, an organization won't fully reap the benefits of outsourcing.

Perhaps the biggest barrier to effective outsourcing is lack of awareness of the true cost of performing noncore competency tasks. The burden of direct labor, inventories, and operating expenses are some of the costs associated with keeping work in house. Timeconsuming administrative, scheduling, logistics, and other support activities as well drain precious resources, but add little or no value. These kinds of embedded costs are typically not figured into new-product development.

Lastly, outsourcing does not necessarily mean offshoring. Many of the world's leading suppliers are U.S. based. Such suppliers can perform specialized functions with a speed and economy nonspecialists will never match. The right supplier will have experience working with a broad range of specialists. Suppliers employing workers with manufacturing skills know the right specialists to tap for a specific task. How these critical manufacturingbased skills can be put to use is the subject of the next Vantage Point.

Alcoa Prime Services is a supplier of investment castings for aircraft and industrial-turbine engines.

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