Framework for outsourcing manufacturing: strategic and operational implications

ABSTRACT

Over the last decade, outsourcing has proved to be a relevant strategic option for companies narrowing their operations to focus on core competencies. This paper analyses the process of outsourcing manufacturing to cost-efficient and innovative suppliers in support of internal resources and capabilities. A scientific reference model founded on manufacturing strategy is proposed to help choose the right level of analysis and steer the research process. From this, a system model is developed to enable identification of the production system elements and internal support functions. Finally, a framework that links the phases of the entire outsourcing process to strategic planning is synthesised. The framework includes a logical sequence of key activities with built-in performance measures and expected output for each of the phases. The research methodology combines theory study with case study and action research in Aalborg Industries, which operates in the heavy industry. Thereby, the research pursues both academic and industrial application.

Keywords: action research, case study, competencies, manufacturing strategy, open systems theory, outsourcing framework

1. Introduction

Entering the third millennium, most industrial sectors face intensified conditions both in th marketplace

and within the corporate boundaries. The customers are putting higher demands and constraints on their upstream linkages. Formerly, the customers focused mainly on low total systems cost, high quality and good delivery performance. Presently, they also expect short product life cycles and time-to-market, innovativeness and customisation [1]. The companies and their suppliers are experiencing the emergence of a global economy and rapidly changing markets. At the same time, the complexity of products and technologies is increasing and their functionalities are expanding [2]. Globalisation and technological innovation appear to be common denominators of these marketing and corporate business challenges. From a corporate strategy point of view, they add new competitors and markets and put strong pressure on companies’ competitiveness and profitability. From a combined business and functional strategy viewpoint, they call for improved organisational adaptability and more flexible and advanced systems relative to manufacturing, logistics, engineering, information and process technology and the like [3,4].

Table 1 specifies the wide range of trends in the industry and their implications. Besides, the table

includes examples of initiatives that may be taken to proactively meeting the trends and implications.

It is noticed that the trends, implications and initiatives are not fully consistent in the sense that certain interdependencies and overlaps exist in practice. Nevertheless, they represent the problem context of the paper.

As indicated in the table, globalisation and technological innovation present a particular paradox.

Technology facilitates the integration of business operations between separate companies while the

rapid market changes on a global scale increase the investment risk in new technology, because it might become obsolete within the payback period [5]. In the table, I take a step further by arguing that the rapid development of information and process technology may reduce the need for middle management based on the rationale that some operating procedures may be automated. This contributes to obtaining flexibility and cost savings, and links to the trend of downsizing. Lewin and Johnston [6] support this point stating that while downsizing initiatives were initially aiming merely at increasing profitability by reducing costs, they now also reflect the search for more flexibility (cf. automation). The advances of information and process technology, thus, largely prompt the gradual change within the corporate boundaries.

In consequence of the internal and external conditions given above, companies must be able to change their organisation, operations, product portfolios, customer segments, etc. rapidly and efficiently as well as on a continual basis. This may involve a new approach to the strategic planning process in which production and operations management and industrial marketing are seen as integral parts. There is evidence to suggest that the success of outsourcing depends largely on such inside-out perspective which assigns production strategic considerations the same importance as market strategic considerations [7–9]. Hence, the frequently used term ‘‘paradigm shift’’ is highly legitimate at present, not only for the industry, but also for the scientific problem addressed in this paper.