On January 24, 2005 an underground fire gutted a New York City subway signal relay room that transmitted information about train positions. Metropolitan Transportation Authority officials told the New York Times they would need six to nine months to restore regular service to two subway lines. The reason: few people today know how to repair the original 1930's equipment.
Adam Chernichaw, an attorney with White & Case in New York, uses that recent example to point out one of the challenges manufacturers face when they outsource: they often lose employees who have the experience and knowledge to run their specialized systems to the supplier. "Many manufacturers have made large capital expenditures for specialized equipment that go back decades. What happens when something breaks?" asks the attorney, who rides the affected subway lines.
The challenge becomes compounded if that aged equipment uses legacy software whose authors have long since disappeared, gone out of business, or been acquired.
First, the attorney suggests manufacturers think carefully about sending key employees who have specialized knowledge of the production systems to the supplier. "Sometimes it's best not to outsource everybody," he says. "Someone on the shop floor or in the head office has to know what's up."
The Best Remedy: Document Everything
Regardless of who goes and who stays, Chernichaw advises manufacturers to make sure "everything is well-documented." In addition to equipment and process operations manuals, Chernichaw recommends putting in the outsourcing contract that the manufacturer owns any new code the supplier produces for its equipment. This is especially important if the manufacturer has kept key employees to run the shop who now need to understand and use the new code.
How Useful Are Penalties?
Another challenge is how to outsource the manufacturing process if the process includes a "secret sauce." What if the supplier has employees who work with several buyers, any one of whom could benefit from knowing that secret recipe? This can become a problem. "The manufacturer has to figure out a way to protect the confidentiality of its manufacturing trade secrets," he says.
For example, industry lore says only a handful of people at Coca-Cola know the entire recipe for its syrups. He suggests manufacturers develop ways "to insulate" this knowledge from the outsourcer to protect their trade secrets.
The outsourcing contract will probably have penalties if the supplier violates this trust, but "even if the contract has significant penalties, that may not make up for loss of a company's secrets," points out the lawyer.
Manufacturers whose distribution chain is reliant on the outsourced service also face significant risks. For example, if the infrastructure in the outsourcer's data center goes out, there will be ripples throughout the supply chain. "Will liquidated damages or service credits in the outsourcing contract make up for the lost profits?" the lawyer asks rhetorically.
In today's competitive environment, outsourcing is not an option but a necessity for manufacturers. Thinking about these sandbars in advance can make the sailing easier.