Hello again, James,
I would answer some of Programme Manager's comments as follows:
If you have a low volume, I can understand the reluctance to pump a lot
of capital investment into an under-utilised facility. So decisions have
to be taken:
Is the facility of any real use to the Company at all? Does it
contribute to the Company's core business? (Obviously not if the
Company isn't prepared to invest in it to keep it up to date!).
For how long is the facility required - short, medium of long term?
For how long will the facility be useful if investment in it ceases?
2. Sure a subcontractor can spread his investment costs over a number of
projects, but you now have to stand in line with those other projects to
get your one done, and it doesn't feel the same to stand in line when those
other projects belong to other Companies. Can you afford the delays to your
Company's schedules at times of peak demand and your subcontract job has
been left to lag because another Company has more influence than you do? Do
you have sufficient leverage with your supplier to get your jobs done on
priority?
3. Lowering overheads is accountant-speak, and as one of the contributors
to this thread pointed out, a Company can wind down facilities to cut
costs, but in doing do you lose capability, expertise, seamless
manufacture, morale and other things tangible and intangible. Carry on
doing that long enough or often enough and you cost-cut yourself to nothing
and you're then out of business. This is a typically short-sighted approach
that many Companies have not lived to regret.
4. Outsourcing may reduce material handling costs, but it doesn't
necessarily reduce the cost of your material - in fact it may go up because
you're paying someone else's material handling costs instead, plus their
mark-up on top of that. Or if they can do it cheaper than you can yourself,
what are you doing wrong? Another point is what is the material cost in
comparison with the labour cost? If labour costs are very high relative to
material costs, then there could be advantage to going somewhere with lower
labour rates. With lower labour rates, though, you have to consider the
possibility of poorer quality of labour or very long lines of communication
if you source from the third world, say. What effect would this have on
your product? If the material cost is relatively very high compared to
labour cost, is going anywhere else likely to make much difference?
Material costs may be lower if your subcontractor uses a sufficiently
higher volume than you do to get a significantly better bulk discount.
5. It's a reasonable argument to put forward that the very people who are
likely to lose their jobs because of outsourcing are also the very people
best placed to assess the potential new supplier for compliance with
required standards. There are, however, two sides to the coin about any
assessment done by those about to be chopped. One side is that of course
they will slate any other company in an attempt to preserve their own jobs.
The other side is that they might actually be right, and that the potential
supplier is rubbish. There must thus be a very watertight justification as
to why another Company is rubbish and serious review done of that
justification to establish the truth of it. It's a hard job to do, because
your soon-to-be-ex-colleagues are having insult added to injury by being
grilled over their assessment, but they are really the only people capable
of carrying it out. If they are truly right about another Company being
rubbish, then they will have won the battle, if not the war. Ignoring the
people best placed to do an assessment on the grounds that they will be
biased, and trying to do the assessment using people who aren't intimately
familiar with the requirements and quirks of the job is asking for trouble
- possibly very big trouble. Committment to out-sourcing has to be absolute
for maximum benefit to be realised - your PM is right in that - but in
doing so you burn bridges that are difficult if not impossible to rebuild.
Out-sourcing should never be a decision taken lightly, because it is "the
trend". It doesn't suit every business and IMHO, should only be considered
as an absolute last resort when you really cannot make an in-house facility
pay for itself. Your PM touches on the 'taking it personally' element, and
that fear and resentment usually spreads far wider than just the affected
area. Colleagues support colleagues, people not immediately affected fear
for their own future positions, morale can plummet (and does), and this
adversely affects productivity even more. It can become a vicious spiral
that ends when everyone is out the door unless it's very carefully and
thoughfully managed. Few senior managers, though, seem to come equipped to
understand, respect or even consider the human factors in these equations.
They're far too complex for managers to bother wasting their time with, and
besides most of the people affected are replaceable if necessary, anyway.
I know I'm sounding bitter and twisted, but I've experienced exactly this
response no fewer than 7 times in ten years and the results have been
disastrous in terms of morale and motivation of the survivors and thus
productivity of the remains of the business falls. When productivity falls,
further cost-cutting is called for (usually jobs), which further affects
morale, motivation, productivity, etc. It doesn't take much of that to
finish a business.
Having said all that, there are definite benefits to
suncontracting/outsourcing, especially if you don't have the internal
facilities or resources in-house in the first place. But there are plenty
of pitfalls as well that it would be irresponsible not to take fully into
account. One more to mention is what if your subcontractor goes bust all of
a sudden? If you have a precious in-house resource, hang on to it and make
it pay any way you can. Don't just throw it to the dogs and buy from
outside because its easier to manage. It's like always eating out -
eventually you forget how to cook and one day you'll starve if you can no
longer afford restaurant prices. If a refined, narrowly-focussed
streamlined business declines because its particular specialisation is no
longer required by the market, what can it do except shut up shop? It'll
have no internal diversity to fall back on.
I think it's well past time that I put my soap box away again.
Cheers
Pete Duncan
"Marsico, James"
<James.Marsico@D To: [log in to unmask]
P.AIL.COM> cc:
Sent by: TechNet Subject: [TN] More on outsourcing...
<[log in to unmask]
>
04/25/01 02:01
AM
Please respond
to "TechNet
E-Mail Forum.";
Please respond
to "Marsico,
James"
I've been passing the posts on outsourcing to some at my company (we're in
the process of out-sourcing), the following is a response from one of the
Program Managers. What do you think?
When your company does not want to continually invest in capital, because
your in-house volume is not enough to pay-back that investment, outsourcing
becomes a solid alternative. Contract Manufactures have the ability to
spread that investment in capital over many different jobs, as where a
company with only a few projects may not. Anything you can do to lower the
overheads benefits many programs, even those who do not have work in the
area you are out-sourcing. Out-sourcing will certainly lower your material
handling cost.
The problem occurs in that, you need a total commitment to out-sourcing.
Meaning that to reap the full benefit you have to first, find a lower cost
source, second, cut the staff (support and touch), equipment, and space in
relation to the out-source. If you do not do both of those things, then
out-sourcing is not worth while. Most companies are afraid to fully
commit,
which means that the program, providing you have found a lower cost source,
not the company will benefit.
Of further concern is that the same people who feel their jobs are in
jeopardy, due to out-sourcing, become the same people that are relied upon
to determine if the out-source supplier meets the company standard. I have
yet to hear anybody admit that another companies work is as good as theirs,
and in fact have heard too many times how the other company stinks.
Out-sourcing becomes a tough thing to personally do, especially because
most
times it has nothing to do with the skill and dedication of your work-force
and yet they cannot help but to take it personally.
Jim Marsico
Senior Engineer
Production Engineering
AIL/Electronics Systems Group
An EDO Company
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