There was a time when manufacturing organizations used to manufacture all the goods in-house. But gradually organizations realized the advantages of outsourcing the components to external suppliers. Outsourcing of component manufacturing brings with it cost and quality advantages, but on the flipside it reduces the organization’s control over the manufacturing process and reduces visibility in the supply chain. Suppliers are spread all over the globe in different industrial clusters. The distance of suppliers from the organization’s manufacturing location leads to increased lead time and reduces the organization’s control over its suppliers’ processes. The success of Toyota production system has proved that organizations need to work in very close co-ordination with their suppliers and have a definite advantage if the suppliers are located closer to them. The dilemma is that it is not always easy to find a competent supplier (in terms of quality or cost) close by your location. There is always a trade off which organizations have to make between lead time and co-ordination on one side and the cost/quality on the other. The decision of outsourcing component manufacturing to different suppliers has never been easy for manufacturing organizations.
There are components for which there are very limited good quality suppliers. In such scenarios, the organizations have limited choice but to outsource to the available suppliers only. Microprocessor is one such example, where organizations have only a couple of suppliers to outsource to. The decision in those scenarios is very simple. The challenge comes when there are multiple suppliers, both nearby and at far-off distances, to which organizations can outsource to.
Based on my experience in consulting multiple manufacturing organizations, I can suggest a guiding framework that can help organizations take correct outsourcing decisions.
The suppliers can be categorized into four groups (as shown in the Fig 1) based on their capability/cost advantage and lead time/distance from organizations. Organizations can strategically decide which components to outsource to which group of suppliers.
- Naman Sinha, Senior Consultant, Bristlecone
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