Supply Chain Management: Outsourcing for Fast Results
Physical Security Manufacturer $160mm Sales Revenue
A physical security manufacturer well-established in the banking industry experienced sharply declining sales due to the downsizing of federal government contracts. In addition the company was finding it difficult to be competitive on price and delivery in commercial markets. Sales had decreased by 45 per cent over 4 years time while costs had decreased by only 26 per cent. It was evident that this pattern could not continue for long. For years, management under an old guard had been reluctant to invest in new equipment and machinery. The old equipment was designed for large batch quantities. While sales dwindled, order quantities became disproportionately smaller, and unit costs rose.
The main building that produced physical security equipment for some of the top banks in the U.S. for years was 100 years old and in disrepair. The building had expanded over the years a section at a time, where new additions were tacked on to common walls, and eventually the facility began to look like a series of lean-to's, or a rabbit warren. A mapping of the physical flow of a part was haphazard and spaghetti like as it moved across the building from operation to operation. It was an inefficient and costly process. Overhead allocations had reached 550 per cent.
The dilemma that current management faced was in determining whether profits could be restored or if the business should be sold. The objective for this assignment was to determine how to restore profitability by reengineering manufacturing and/or outsourcing some products, processes, or the entire plant: the classic make or buy question on a grand scale. Following an initial analysis, six alternatives were chosen:
1. Outsource minor
processes, downsize the manufacturing operation
2. Outsource most processes, downsize manufacturing operation
3. Outsource all product lines to dedicated suppliers
4. Sell one product line, outsource all the rest to dedicated suppliers
5. Outsource most processes, relocate to a new facility(greenfield)
6. Reengineer all manufacturing and office operations and in-source
products currently bought
To assess the potential of reducing costs by reengineering the plant, a cellular manufacturing approach was used for re-engineering production operations. Assembly cells were designed for streamlined flow, fast cycle times and fast throughput. Simultaneously, to test the potential of reducing costs through partial or complete outsourcing of products and processes, requests for quotations were sent out for prices and delivery
When quotations were received, and the reengineering analysis was complete, we compared the differences for all alternatives. A review of the costs and savings for each alternative revealed the differences in payback and one-time cash generation. Alternatives #'s 3(outsource) and 6(re-engineer) provided the best savings and cash generation.
The case for reengineering was strong. However, when compared to outsourcing complete product lines, the cost of outsourcing was substantially less. We also strongly considered which alternatives could provide the quickest results. The time to implement each alternative varied greatly. The time to implement the complete outsourcing of all product lines was estimated conservatively at 12 months, while reengineering would take 2-3 years.
One
other critical factor that was considered was the degree of risk of a
successful implementation. The risk for re-engineering the complete
manufacturing and office operations was high due to the difficulty in
overcoming paradigms, attitudes, old ways of doing things, and a
history of labor sit-downs or slow-downs. Since these issues were not
prevalent in outsourcing all the product lines, management decided to
close the plant and outsource all products. Implementation was executed
in 9 months, and the outsourcing effort yielded a 25-30 per cent
product cost reduction.