Manufacturing is one of the oldest industries in the technological world, but even the old has to continually implement new concepts and processes — if it wants to maintain its competitive edge. General Motors, for example, fell behind Toyota in the auto market partly because of Toyota’s more flexible manufacturing process.
And flexibility is a vital part of a successful 21st century business. The current technological revolution shows no sign of abating any time soon. Old skill sets constantly become obsolete, the requirement for new skill sets continues to multiply, and it becomes harder and harder to find all the needed skills among permanent staff. “There are a lot of disparate technologies among manufacturers,” says Meredith Whalen, vice president of U.S. vertical industry research for IDC, a research firm based in Framingham, Massachusetts. And there are a lot of disparate core competencies required to manage those technologies. Constant retraining of permanent staff quickly becomes cost prohibitive, and the economic viability of outsourcing becomes correspondingly more attractive.
“Old skill sets are disappearing, making cost a primary driver in choosing outsourcing,” says David Tapper, senior analyst at IDC. Manufacturers are increasingly willing to spend money to save money, directing ever-larger portions of the budget toward outsourcing. In 2001, U. S. manufacturers spent $7.8 billion on outsourcing; IDC sources predict this will increase to $12 billion a year by the end of 2006.
“The soft economy is forcing firms to reevaluate,” says Diane Schwarz of Ultrak, a security system manufacturer in Dallas, Texas. Cost effectiveness is more important than it was a few years ago.
But not all companies outsource simply to reduce cost. “Improved quality of service can be even more important than money,” says Tapper. “Everyone’s looking for someone to do something as well or better, looking for alternate ways of having someone else run a system for them.”
A final reason for the rising popularity of outsourcing within the manufacturing industry is plain old convenience. Companies are adopting new technological innovations at astronomical rates. The increasing online presence of every industry from auto dealers to restaurant equipment manufacturers is only one example. By the end of 2003, a typical manufacturer will be dealing with its own Web site, an online server, computer software covering all operations, a telephone system with a dozen options and special services, and who knows what else may become essential. Not to mention that software, technology, and procedure will need updating almost every year. Outsourcing makes it easier to manage the whole environment, Tapper says.
Deciding What to Outsource
But not necessarily the whole environment. There are still sensitive areas, areas that manufacturers are reluctant to turn over to even the most capable of outsiders. Application is probably the most sensitive area, says Tapper, the one where management will most likely keep control.
Fortunately for managers, there are many ways to chop up outsourced projects into smaller packages. Flexibility is essential, says Whalen, adding that outsourcing will become increasingly popular for discrete short-term projects. Letting an outsource worker “take it all over” — handing over lengthy, detailed projects — used to be the standard approach. Now, more and more manufacturers realize the value of outsourcing smaller projects as well.
By the same token, an increasing number of businesses will be using multiple outsource providers. Tapper refers to the case of Proctor and Gamble, which set out to outsource its infrastructure through one provider and ended up enlisting three or four providers to handle different areas.
“It almost becomes a self-fulfilling prophecy,” says Schwarz. The more functions a company outsources and finds the results satisfactory, the more functions it considers outsourcing.
Which eliminates the distractions of having to do everything yourself. “Firms are more and more focusing on what they do best,” says Schwarz. When it comes to the plethora of functions involved in running a 21st century business, one company’s distraction is another company’s value-added activity. Handing over extra duties to outsource workers frees up resources that can be redeployed toward developing core competencies and serving customers. All the better for the company’s competitive edge.
Outsourcing the Second Time Becomes Easier
But not everyone sees outsourcing as a source of unlimited benefits. “Losing control is one of the biggest fears,” says Tapper, who likens outsourcing to a carpool — you reduce your own responsibilities and the corresponding worries, but you place yourself at the mercy of someone else’s “driving” skills. What if they cause a wreck?
Still, fears will continue to decrease as outsourcing becomes increasingly accepted within the manufacturing community. “Once you’ve shown your internal customers you can be profitable by outsourcing,” says Schwarz, “the second time around becomes easier.” She expects contract outsourcing — the field which management is traditionally least willing to trust to outsiders — to increase substantially in the near future. Manufacturing companies are increasingly turning to business process outsourcing (BPO) for such functions as human resources, while payroll is increasing even faster. IT outsourcing is practically taken for granted in the information age.
One thing is certain. The manufacturing industry — like political systems — is learning to see itself as a small but vital piece in a big world picture. And the many faces of outsourcing are among the most important pieces.
Manufacturing Outsourcing Trends in 2003:
- The use of multiple service providers will continue to grow.
- Within manufacturing, the use of service providers will increase faster in the area of discrete short-term projects than in the area of long-term projects.
- Cost-effective measures utilizing advanced technology (e.g., on-demand service for online capacity) will become increasingly popular.