In-sourcing - Moss Adams

Current Trends in
Manufacturing
Sourcing categories and considerations
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AGENDA
I. About Manex Consulting
II. Outsourcing vs. In-sourcing vs. Near-sourcing vs. Hybridsourcing
III. Current Trends
i. What is coming back to US
ii. What is difficult to return
iii. Proactive measures by manufacturers and government
IV. Key considerations
i. Key Issues in outsourcing decision making
ii. Quantitative and qualitative considerations
iii. Best practices
V. Closing thoughts
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THE CORPORATION FOR
MANUFACTURING EXCELLENCE (MANEX)
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Since 1995, Manex has provided a broad array of proven solutions and
resources exclusively to manufacturers, distributors, and their supply
chains, enabling them to compete on a global scale
•
Manex uses a holistic and proven approach, from strategy to
implementation, to impact all facets of business performance
o Services areas include Strategy, People, Process and Performance
o Results: growth, profitability, and sustainable competitive advantage
• Manex is one of 60 NIST/MEP Centers throughout the US. We are here to help
manufacturers, distributors, and their supply chains grow profitably
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SECTORS THAT WILL HAVE DIFFICULT
TIME IN RECOVERING
• Construction
• Manufacturing
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jobs
• Installation, maintenance,
repair
o Auto, Textile, Chemical, HiTech, Electronics etc
• Bank Tellers
Realtor
• Other commodity goods
Pharmaceuticals
(high volume-high labor
content)
Newspapers
Airline (employees)
Telecom
State & local government
Source: Wallstreet, Huffington post
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Is the world flat?
Not anymore!
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SOURCING CATEGORIES
• Outsourcing/Offshoring
o Contracting out a business function, which was previously performed in-house,
to an external provider located outside the country
• In-sourcing
o Reversing the outsourcing/offshoring decision
o Outsourcing by a foreign company
• Near-sourcing
o Contracting out a business function, which was previously performed in-house,
to an external provider located in a neighboring country
• Hybrid-sourcing
o Collaborative partnering involving outsourcing/in-sourcing/near-sourcing
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THE OUTSOURCING DILEMMA
Graphic source: Kinaxis
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CURRENT TRENDS – WHAT IS COMING
BACK TO USA
Sector
Reasons
What will happen
in long-run?
Aerospace &
Defense
Quality issues and IP/technology
sensitivity, in-house productivity gains
In-sourcing
Heavy
manufacturing
Quality and cost issues, in-house
productivity gains, entry of foreign
players
Hybrid-sourcing
Food
Quality, lead time, food safety, cost and
environment
Hybrid-sourcing
IT
Cost, service quality, in-house expertise
Hybrid-sourcing
Biotech/Medical
Quality, lead time, IP
Near-sourcing,
Hybrid-sourcing
Contract
manufacturing
Quality, lead time, cost issues, in-house
productivity gains
Near-sourcing,
Hybrid-sourcing
Tooling & prototype
Lead time, cost, precision
In-sourcing
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CURRENT TRENDS – WHAT IS DIFFICULT
TO RETURN (BUT NOT IMPOSSIBLE)
Sector
Reasons
What will happen
in long-run?
Consumer electronics and Hitech manufacturing (not R&D)
Cost, capability
Hybrid-sourcing
Automobile
Cost
Hybrid-sourcing
Textile
Low skill, low wage, no
significant infrastructure etc
Outsourcing
Chemical
Environmental, cost etc
Outsourcing, nearsourcing
Pharmaceuticals (generic, nonpatent protected drugs)
Patent expiry, cost, copying
etc
Steel
Cost, infrastructure,
capability
Outsourcing, nearsourcing
Outsourcing
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CURRENT TRENDS – PROACTIVE MEASURES
BY MANUFACTURERS AND GOVERNMENT TO
SUPPORT IN-SOURCING
Manufacturers
• Reducing variation and
improving efficiency
• Adding capacity & building
internal infrastructure
• Investing in R&D
• Training workforce
• Switching to alternate
energy sources
• Consolidating and
realigning the supply chain
Government
• Tax breaks and incentives
• Infrastructure support
• Trade & investment
liberalization
• Monetary & fiscal policies
• Grants & Funds
• WIB (Workforce
Investment Board)
programs/initiatives
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KEY CONSIDERATIONS - ISSUES WITH
OUTSOURCING
• Evaporating cost savings
o Currency risk, rising labor costs, inflation, quality issues,
tooling cost, logistics cost, rising fuel prices etc
• Supply chain disruption risk
o Political instability, financial instability, natural disasters,
terrorism risk, other key risks specific to suppliers etc
• IP/Technology sensitivities
o Risk of critical/sensitive IP being copied or leaked/sold in gray
market, piracy etc
• Cultural misalignment
• “Outsourcing is our core competency” fallacy
• Lack of thorough due diligence and visibility of other
risks and of extended supply chain
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KEY CONSIDERATIONS - QUANTITATIVE
CONSIDERATIONS IN SOURCING DECISION
MAKING
Key In-sourcing costs
• Equipment investment
• Factory overhead
• Managerial costs
• Purchasing costs
• Inventory carrying costs
• Costs of capital & taxes
• Special personnel/external
help
Key Outsourcing costs
• Purchase price of part
• Transportation costs
• Warehouse cost
• Receiving and inspection
• Incremental purchasing
cost
• Incidental damage and
spoilage cost
• Quality/rework cost
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KEY CONSIDERATIONS - QUALITATIVE
CONSIDERATIONS IN SOURCING DECISION
MAKING
• Strategic considerations (scale, market penetration,
new market capture etc)
• Cultural alignment
• Legal and regulatory constraints
• Political stability
• Probability of natural disasters
• Probability of terrorist attacks
• Skill level of workforce
• Management of key risks – project management,
contract management and performance
management
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CONSIDER TOTAL COST OF OPERATING
THE SUPPLY CHAIN
Total Cost
=
•Logistics management:
support, admin etc
•Freight: air/surface/ocean
•Packaging cost
•Wage/labor
•Wage inflation: E.g. - China’s
wage inflation rate is 8%
greater than that of US
•Inventory: en-route, safety
stock, obsolescence, spoilage
•Prototype cost: development,
validation, rework/redesign
etc
•Currency appreciation: E.g. China’s currency appreciation
rate is 5% greater than that of
US
•Quality: rework, defect ,
returns , warranty etc
•Product liability: shipment
Insurance
•Miscellaneous cost: trips
made offshore, meetings,
staff to handle offshore issues
etc.
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FOCUS ON TOTAL COSTS AND NOT JUST
LABOR; GET YOUR METRICS RIGHT!
Income Statement
Enterprise KPI
Revenue
$26.2M
COGS
$16.8M
OTD
96%
Gross Profit
$9.4M
OEE
73%
Inventory TO
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Operating
Expenses
$5.5M
Net Income
$3.9M
Quality = (Total parts – Defects) =
Total parts
Operational Metrics
Availability
95%
Performance
90%
Quality
85%
(5000 - 750)
5000
OEE = Overall Equipment Effectiveness = Availability x Performance x Quality
OTD = On-time delivery
Inventory TO = Inventory turnover
Conclusion: High defect rate (due to rework, reject, returns etc) causes COGS to
rise. These costs, along with logistics and other costs, offset the gains due to lower
labor costs and due to other outsourcing parameters.
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SOURCING CONSIDERATION – LABOR &
VOLUME PERSPECTIVE
Labor content
Volume
High
Medium
Low
High
Outsourcing/Nearsourcing/HybridSourcing
Outsourcing/
Hybridsourcing
Near-sourcing
Medium
In-sourcing
In-sourcing/
Near-sourcing
In-sourcing/
Near-sourcing
Low
In-sourcing
In-sourcing/
Near-sourcing
In-sourcing/
Near-sourcing
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HOW TO PICK YOUR SOURCING
STRATEGY?
Key consideration
Outsourcing
In-sourcing
R&D intensive
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Advanced mfg
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Commodity product
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Hybridsourcing
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Confidential
technology/IP
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Lead time sensitive
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Geo-strategic
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Core competency
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Need for specialized
capability
Near-sourcing
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√
√
√
Quality
√
Project mgmt risk
√
√
√
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KEY STATISTICS: IN-SOURCING
(FOREIGN OUTSOURCING)
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In-sourcing companies employ 5.3 million Americans and Write $364.2 billion in
paychecks
The average compensation per American worker at In-sourcing companies is $68,317,
which is 32% higher than compensation at all U.S. companies
In-sourcing companies reinvested $68.5 billion of their U.S. profits back into their
American operations
In-sourcing companies bought $1.5 trillion in intermediate inputs from U.S. suppliers,
amounting to 76.8 cents for every dollar spent of their total input purchases of $1.96
trillion
In-sourcing companies spent $34.3 billion in the United States on R&D – over 13.8% of
all private-sector R&D
30% of American jobs at In-sourcing companies are in manufacturing and products
made by U.S. workers at these companies account for nearly 19%, or $195.3 billion, of all
U.S. exports
Many In-sourcing companies have been in the United States for decades; some have been
here for almost a century, demonstrating their commitment to and confidence in the
American workforce
In-sourcing companies paid a record $50 billion in U.S. corporate taxes, over 14% of
U.S. corporate taxes
Source: The Organization for International Investment
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TOP-15 BUSINESS FRIENDLY STATES IN
US
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Alabama
Florida
Georgia
Idaho
Kansas
Mississippi
North Carolina
North Dakota
Oklahoma
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Top-3 Small business
friendly states
Source: Manufacturing weekly
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“Being good is no help if you are not fast.
You can’t be fast if you are not good”
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BEST PRACTICE - ALIGN YOUR STRATEGIES
WITH LONG-TERM MARKET REQUIREMENTS
Enterprise Vision
Business Unit Strategy
Operations Strategy
Supply Chain Strategy
Sourcing
Production
Distribution
Sale
Competitive Advantage = f (Superiority, Sustainability, Significance)
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BEST PRACTICE - REDUCE OR ELIMINATE
VARIATION TO IMPROVE OPERATIONS AND
ALLEVIATE COST
Sources of Variation
Customer
Employee
• Incorrect order details • Difference in
• Incorrect forecasts
competency levels
• Frequent order
• Difference in
changes/cancellations approach to various
tasks (lack of
• Varying
Standardization)
billing/payment
procedures etc.
• Varying levels of
satisfaction, morale
etc.
Process
External
• Existence of a flawed
process or varying
processes across
different facilities
• Used of
inadequate/old
process
• Lack of control points
within the process
etc.
• Fluctuations in capital
markets
• Natural disasters
• Oil & commodity
price fluctuation
• Acts of terrorism
etc.
•Profit = Price – Cost
•Variation increases Cost, decreases profit
•Control variation to reduce Cost and be more competitive
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BEST PRACTICE - REDUCE OR ELIMINATE
NON-VALUE ADDED ACTIVITIES TO IMPROVE
EFFICIENCY AND SUSTAIN GROWTH
5.
6.
7.
8.
Activity
Value
Added
Process 4
Process 3
Defects
Overproduction
Waiting
Non Value Added
Processing
Transportation
Inventory
Motion
Employees
(underutilized
skills and intellect)
Process 2
1.
2.
3.
4.
Process 1
Non- Value
Added
Building Quality into Processes
Cost of Re-work
Eliminating or Reducing Non-Value
Added Activities
Process Sequence
Cost of fixing errors increases
dramatically as defects are
detected further into the process
stream or Supply chain
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CONTACT INFORMATION
Anand Pandey
[email protected]
(925) 807 5118
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