What if a new facility for your manufacturing plant would add substantial value in terms of layout, process flow and robustness - all essential in order to deliver business needs more effectively - but you need another $2.0 million pounds (UK) to fund the facility? That's the challenge that faced IBC Vehicles (part of General Motors Europe) in 1999. One of only nine remaining GM vehicle manufacturing units in Europe, IBC is part of a joint venture with Renault to manufacture a commercial van.
But IBC's existing waxing facility was approximately 15 years old. It needed to be replaced or, at minimum, it would require major refurbishment. The existing facility was dirty and held potential liability from hazards because it didn't meet current regulatory requirements. There were process layout constraints. The facility was located in the wrong place to aid the new model process flow. Its functions were not automated, and its capacity was too small to handle the new van project's targeted 86,000 units a year.
Without a new facility, Bal Koura, IBC's contracts manager, says the plant potentially would have faced production volume constraints. It would have resulted in a process bottleneck that that would have raised eyebrows at GM, which was looking to shut down additional plants as cost-savings initiatives at the time. IBC developed a plan to use outsourcing as the strategy to obtain a new, larger waxing facility to meet the business needs.
But on the other side of the coin, IBC had a serious problem - attitudes and its labor union agreement prohibited any outsourcing. There were also budget constraints connected to outsourcing.
Koura says there was only enough money in the budget to operate the existing facility with remedial upgrades. IBC put together a business case analysis of the benefits of a larger, new facility, as opposed to upgrading the old one and then still needing to replace it in a couple of years. IBC's plan demonstrated the value in outsourcing - by outsourcing the waxing process, the service provider would put in place a higher-quality, more cost-effective process and would also fund 100% of the capital investment for the new facility.
Premier Manufacturing Support Services (UK) Ltd. was the most competitive supplier and was awarded the outsourcing contract. According to Koura, Premier is a major supplier of automotive manufacturing support services to the U.S. automotive industry. It's also part of the DURR organization, a tier-one supplier of automated plant and machinery to the automotive industry; DURR also had a UK-based operation at Warwick. With these competencies, Premier stood out among the other bidding suppliers, most of which focused on logistics as their core competency and had limited experience in plant engineering, maintenance and high-volume production operations.
Their agreement is a 13-year contract, coinciding with the expected life of the model (unique in GM corporate policy but necessary to amortize the cost of the new facility). All costs and liabilities for the project were accepted by IBC, and Premier commenced installing the facility in September 2000, even before the formal contractual documents were signed in August 2001.
Implementing the Solution
When a vehicle is manufactured, it's transferred from the end of the production line to a Premier employee, who drives the vehicle onto the waxing facility, processes it and then delivers it to sales. Premier is paid agreed cost based on projected volume. In the last month of the year, a cost reconciliation is agreed on between IBC and Premier, consolidating all variable costs and including savings from the outsourced process.
IBC, as part of GM Europe, was prohibited from recruiting additional permanent employees; yet the new van project created a need for approximately 200 more people in order to meet the projected volume of work and business needs. IBC's plan to outsource the waxing process was the ideal solution - but not without some challenges.
With regarding to union matters, the waxing facility set a precedent for outsourcing at IBC. The outsourcing of people performing the processes in the new facility was not part of the scope of the agreement with Premier because IBC was still in negotiations with the unions when Premier completed installation of the new facility and had been operating it for several months.
"If the unions had not agreed to the outsourcing strategy to gain additional people, we would have been forced to reduce head count in the plant because of the GM situation and potential volume reductions," says Koura. In view of that situation - and pointing out to the unions that outsourcing had taken place at IBC in the past - the unions allowed IBC to "substantially bend." The arrangement, Koura says, involves direct line heads working alongside IBC operators. "There is no other automobile manufacturer in the U.K. that has an agreement like this," he adds.
The new union agreement stated that outsourced hourly rates must be 85% of the wages paid to IBC union people. It was a major point. And there were other human resource issues. U.K. law requires that, if at any time IBC decides to terminate its contract with Premier, the Premier individuals who are operating the facility actually have a right to those jobs. IBC would have to hire them (under TUPE) or transfer them to the new service provider.
As Koura points out, the importance of outsourcing is not just reduced costs - "it's the value generated. At IBC, for example, we've been able to integrate other processes (such as the squeak and rattle test) into the facility, besides the original waxing process. The flexible contract allows for increasing or reducing service levels without penalties, and that has saved us several thousand pounds on a weekly basis."
The auto manufacturer's new facility provides more flexibility and space to add additional processes. Their contract has a flexibility mechanism that allows Premier to install additional kits or equipment needed for new processes they take on responsibility for, and those equipment costs also will be amortized. "We just increase the unit price, including the additional labor and additional materials and the additional markup that Premier wants for its services. We have an open-book policy with them."
The value in outsourcing keeps growing for IBC. Koura says, "it has developed into a bigger scenario. We are actually looking at major other process areas as part of a larger GM Europe strategy. These are major initiatives which no one else in the U.K. has considered doing but, by outsourcing to Premier, we can gain this tremendous value." Most important of all value factors, outsourcing has allowed IBC's "trim and final" leadership to concentrate on its core business.
Lessons from the Outsourcing Journal
- Outsourcing is an effective strategy for obtaining new equipment and even new facilities without the buyer having to invest in that infrastructure.
- Because outsourcing streamlines a process and adds the supplier's equipment and technology, it's often possible to add other processes and leverage the economies of scale.
- Where labor unions are involved in the process to be outsourced, the up-front negotiations with the new outsourcer may be affected by the unions. Unions can be incentivized to agree to some outsourcing if the case for value creation for the union is pointed out, in addition to the value for the buyer and supplier.