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Archive for the ‘outsourcing’ Category

Shop on Amazon.com and you will find a lot of items sold by lots of different sellers. For many of those sellers, Amazon isn’t just handling acting as a store front; it is also handling the logistics of order fulfillment. Now suppose that Amazon has a particular product which both it and several third parties are selling out its warehouses. How should Amazon physically manage the inventory? Should it keep the inventory it is selling physically separate from that offered by third-party sellers? In many instances, Amazon chooses to do just the opposite, allowing for “stickerless, commingled inventory.” Here is an Amazon video explaining just what that means.

And here is how the Wall Street Journal explains the benefits of the program (Do You Know What’s Going in Your Amazon Shopping Cart?, May 11).

The system has enabled Amazon to make better use of its warehouse space and keep a wide variety of items in stock around the country. The idea is to give Amazon flexibility to ship certain products based on their proximity to customers, speeding delivery times. For third-party sellers, it saves them the trouble of having to label individual items sent to the Amazon warehouse.

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“Where does that come from?” sounds like an easy question to answer and at a high level it is. Which car models are produced at which plants is public knowledge so whether your Toyota was built in Kentucky or Alabama is easiest enough to figure out. But if you want to take it to another level — to know where different components came from and where the stuff that goes into the components comes from — is a lot harder. That is the conclusion reached in a blog post on Nautilus (The Secret Life of Everything: Where Your Stuff Comes From, Oct 29). Modern, global supply chains are so far reaching and support so much complexity that transparency (at least to the outside world) is lost.

I’d thought of [supply chains] mostly in terms of delivering Amazon orders and keeping Staples stocked. Those are just endpoints, the final few steps of a waiter carrying a meal on a tray. And what I really didn’t get was that supply chains don’t just carry components and ingredients, but synchronize their movements. Shipping a box of pens to Staples is the obvious part. Coordinating the arrival of barrels, caps, boxes, ink cartridges, and nibs (through which ink flows) at the pen factory—and also metal to the nib factory, oil to the plastics-maker, and so on—is the bulk of what supply chains do, and in the most efficient manner possible, with algorithms optimizing everything from shipping networks to the path of pallets through warehouses, with an eye to what happens when one of these many moving parts goes invariably astray.

The problem then is that unless you pick a real simple product — like a T-shirt — it is pretty much impossible to know where all the components come from and where all the various production steps are executed. NPR’s Planet Money took on this challenge of tracking a T-shirt from cotton field through production and shipping to the disposition of used American clothes in Africa. It’s an eye-opening  picture of global supply chains.

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This blog entry is a direct continuation of Marty’s post on Textiles in America and part of our ongoing posts on reshoring of work.  The New York Times Replica Edition is an exact electronic version of the in-print newspaper where I first saw these two nice pieces of data.  (I LOVE data.  Recall: “In God we trust, all others bring data”–according to quality guru Edward Demming.)

jobs evolution since 1990. (Source: Bureau of Labor Statistics, as reported in New York Times of Sep 20, 2013)

Jobs evolution since 1990.
(Source: Bureau of Labor Statistics, as reported in New York Times of Sep 20, 2013)

This chart provides hard data of the stories often told about job losses.  The huge transformation of textiles and apparel is striking–mind you, the data spans the relative recent 18 years!  I can only imagine the devastating impact to families working in that sector…  From an economic perspective, two key explanatory changes are: 1) offshoring to low cost countries after deregulation and 2) innovation leading to increased automation, and the substitution of capital for labor.  (I purposely use the “big” innovation word; later I shall also write about recent data linking innovation to offshoring.)

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While the initial reaction to Boeing’s 787 electrical problems was to blame outsourcing, there is more and more understanding that outsourcing itself is not the issue. Boeing has always outsourced the production of batteries. There are several explanation that emerged since.
(1) It’s not outsourcing. It is the trend of modularization: We know that more modular designs allow for lower cost, but come at the expense of quality and performance. One should say that this is a very valid argument, since modularization is clearly the enabler of the excessive outsourcing trend.

(2) An alternative explanation is that It’s not outsourcing itself, but rather the specific method of outsourcing where Boeing outsources the design and control over sub tiers.  This is the main focus of The Seattle Times’s article (“Boeing 787’s problems blamed on outsourcing, lack of oversight“).

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An interesting story from today’s Wall Street Journal (Companies Seek to Avoid China New Year Hangover, Feb 21). Basically, the Chinese New Year is complicating supply chain management.

For toymaker The Bridge Direct, Easter now begins in August.

That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.

The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.

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Chris Anderson, the former editor of Wired and current 3D printing cheerleader, has an intriguing piece in the New York Times (Mexico: The New China, Jan 27). it deals with his experience running 3D Robotics, a maker of civilian drone aircraft. 3D Robotics competes with firms that sourcing their production in China and hence they have had to find a way to take on competitors with low labor costs. Their answer? Tiajuna, Mexico. 3D is based in San Diego so engineering is done on the north side of the border but assembly is done on the south. Labor costs may higher than in China (but, as the article notes, the gap is closing as Chinese wages rise) but Anderson sees many advantages in his firm’s “quicksourcing” model that depends as much on speed as cheap hands.

First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. Strange as it may seem, many small manufacturers don’t have that option. When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods — money we wouldn’t see again until all those products sold, sometimes a year or more later. Now that we carry out our production locally, we’re able to make only what we need that week.

This point obviously depends on owning one’s own facility in Mexico or having a very tight relationship with the Mexican supplier. If a small buyer doesn’t have much negotiating power with a supplier it will still likely face large minimum purchase quantities when buying from Mexico. Still it is an interesting observation and suggests that some start ups may be making ill-advised trade offs between cost savings and flexibility. (more…)

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Apple, the world’s highest valued company, and its relationship, both competitive and cooperative, with Samsung provide a wonderful setting to discuss some fundamental questions that relate to strategy and operations:

FIRST: Which one is the more sustainable provider of Apple’s competitive advantage: design or the business model?

  • Daring Fireball’s John Gruber wrote three beautiful paragraphs to argue his view on what he termed “The New Apple Advantage“:

So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

  • James Allworth, co-author of How Will You Measure Your Life?, adds an important dynamic component to the argument by applying Clay Christensen’s theory to this question:

The design part of Apple’s equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it’s this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes “good enough”. The tech industry has always revolved around copying. Once folks work out how it’s done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.

  • In summary: the answer to whether design or the operating model is the more sustainable competitive advantage is the typical MBA response to a tough question: “it depends.”  The rather sophisticated reasoning involves the fact that products and services over time improve and then become “good enough” and the dimension of competition shifts. Notice that I did not say that design is a commodity and fully copyable (my personal favorite question: why can’t Lexus designs have the timeless sophistication and elegance as Mercedes?); rather, another dimension overtakes it in importance.

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