Last week the Seattle Times reported that due to two cases of battery malfunction, Boeing has indefinitely grounded the 787 Dreamliner. The Dreamliner has made the news many times before this, and not for the right reasons: its construction has been plagued by delays and technical challenges.
Some blame outsourcing as the cause of the battery issues, but doesn’t every manufacturer outsource at least some of its components, especially for a product as vast and complex as an airplane? What could Boeing have done differently?
While Boeing worked closely with its top 50 suppliers, those suppliers in turn outsourced to others, and Boeing lacked the capacity to oversee so many factories, or to even create detailed specifications for the outsourced products, according to the author of a paper presented to Boeing back in 2001. While Boeing beefed up supplier oversight in recent years, it may have already been too late.
While it costs time and money to work closely with suppliers, and overseeing their suppliers is often difficult, we can learn a great deal from Boeing’s very public experiences with the Dreamliner. Managing your entire supply chain including providing your suppliers with guidelines and expectations about managing their suppliers is critical for success. Is it worth the risk of long-term reputation damage to save money by outsourcing without proper oversight?
I was just listening to one of the business news networks and they mentioned that American Eagle (the clothier) is moving a significant amount of their production back to the western hemisphere. They also mentioned that The Gap is moving from China to India.
I also recently had lunch with an operations manager whose company has sourced many of their raw materials in China, and this manager said they were having problems with lead times moving out, costs rising and quality declining (three strikes!). As I talk to operations executives, this is becoming a consistent theme.
The news suggests that labor costs are rising in China, raw materials prices (i.e., cotton) are rising and the Yuan will be slowly revalued. Many of the companies moving out of China are looking for speed more than cost reduction and thus are coming back to North and Central America. That would suggest being close to the customer with your plants and distribution centers is an important consideration.
The tide is turning. It is time to be looking at your supply chain strategy to make sure it is up to date in meeting the overall strategy of your company and your Operations objectives.
Many companies today are outsourcing the purchase of materials, parts and end products overseas believing that they are saving a lot of money. Upon examination, I find that they are comparing the item cost of on-shore suppliers to the item cost of off-shore suppliers. This is often referred to as PPV buying, for Purchase Price Variance. PPV is the difference in cost between what the bill of materials says an item should cost with what the item actually costs. In many cases, especially if there is a large labor component, off-shore sources are significantly less expensive than on shore based on PPV.
Enter the world of Total Cost of Ownership or TCO. TCO includes all of the costs associated with sourcing an item including freight, customs/duties, inventory holding costs, quality, sourcing itself (e.g., trips to Asia), supplier selection and support, etc. TCO can add significantly to the cost of a part, many times more than off-setting the savings achieved on a PPV basis.
I see many companies ignore the TCO element of off-shoring often because the responsibilities for many of those costs are dispersed throughout the company. If Purchasing is not responsible for those costs, they can overlook them when doing the cost trade-off studies for off-shore supply. With labor costs in Asia rising, TCO may suggest that on-shore supply is now actually cheaper. Be sure to look at the Total Cost picture when making off-shore decisions.
“The most economical manufacturing of the future will be that in which the whole of an article is not made under one roof… The modern method is to have each part made where it may best be made and then assemble the parts into a complete unit at the points of consumption.” – Henry Ford – My Life and Work
I am reading this wonderful work, an autobiography of Henry Ford. He goes into detail on how he started building cars and his philosophies on manufacturing and business. You can see much of modern Lean manufacturing in his thinking.
In the above, he points toward outsourcing and being close to the customer. That was about 80 years ago! I will write more on this…