Outsourcing at Boeing (…Revisited)

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“).

Read Full Post »

How the New Year in China affects supply chain reliability

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.

Read Full Post »

Innovation and quicksourcing

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.

Read Full Post »

Apple versus Samsung: Is Design or Business Model the sustainable advantage? What does that mean for Outsourcing?

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.

Read Full Post »

Why is GE bringing appliance manufacturing back from China?

The cover of this month’s Atlantic proclaims Comeback Why the future of industry is in America. It features two articles (The Insourcing Boom and Mr. China Comes to America) on how companies are “insourcing,” moving production back from other parts of the globe (primarily China) to the States. They make some interesting points. The Insourcing Boom focuses on General Electric’s decision decision to repatriate a significant amount of its appliance manufacturing to Louisville, Kentucky. Before you dismiss this as a bit of window dressing to provide some political cover, you should know that Jeff Immelt and company are dropping $800 million to make this happen. I’m sure Mr. Immelt likes political cover and good press as much as the next CEO, but he didn’t get to be head of GE by spending nearly a billion dollars on a whim. They really believe that they can make this work.

The article points out several factors that have come to favor producing in the US.

At Appliance Park, this model of production—designed at home, produced abroad—had been standard for years. For the GeoSpring [water heater], it seemed both a victory and a vulnerability. The GeoSpring is an innovative product in a mature category—and offshore production, from the start, appeared to provide substantial cost savings. But making it in China also meant risking that it might be knocked off. And so in 2009, even as they were rolling it out, the folks at Appliance Park were doing the math on bringing it home.

Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.

• Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
• The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
• In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
• American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
• U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

That’s a compelling list but all in one or another come around to saying that the US is cheaper (or China is more expensive) than you would have thought. But the article also makes the case that there are further benefits. 

Read Full Post »

How far does supplier responsibility extend?

How much responsibility does a downstream buyer have for how its suppliers behave? That has been a recurring question over the last several years as various news reports have highlighted tough working conditions in (largely) overseas factories. Apple’s relationship with Foxconn has been front and center here.

Now we have two stories that leave Wal-Mart facing similar questions. A horrible garment factory fire in Bangladesh killed over a hundred workers, some of whom were apparently making clothes for Wal-Mart. The problem, according to the Wall Street Journal,  is that they weren’t suppose to be (For Wal-Mart, Sears, Tough Questions in Bangladesh Fire, Nov 29).

Wal-Mart says it followed its play book when it yanked its business from a Bangladesh garment factory after the retailer’s inspectors found problems. But the chain’s clothing was still being produced there when the factory went up in flames last weekend, leaving at least 112 workers dead. …

The world’s largest retailer said it had revoked the factory’s authorization to make its products months before the fire, but declined to elaborate. It would not name the supplier it said was responsible for giving its business to Tazreen Fashions Ltd., a modern factory set up in 2007 near the Bangladeshi capital of Dhaka. …

Wal-Mart’s system of inspecting factories grades them on a color scheme ranging from green to red. It said most of the audits are done by outside firms, though Wal-Mart has an internal team that conducts surprise audits and checks factories with known problems. Factories with repeated bad grades can be banned from doing business with the company.

Wal-Mart said it is the responsibility of the suppliers to use factories approved by the company, and warns suppliers in an extensive manual that they can be banned from doing business with the retailer if they fail to do so.

Read Full Post »

Logistics sweatshops

We have had a few posts about the reported poor working conditions in e-commerce fulfillment centers (see here and here). Now The Guardian has an article describing similar issues in distribution centers for bricks-and-mortar retailers (‘They shout at you and harass you’: how workers toil at Walmart’s US suppliers, Jul 25). Many of the complaints are similar to those heard about fulfillment centers: unrealistic quotas, poor pay and benefits, and a general disregard for worker safety. And, as with some of the earlier reports, these are being publicized by organizations tied to unions.

For my money, the most interesting part of the article is its characterization of the Wal-Mart’s supply chain in California’s Inland Empire.

While much recent attention has focused on abuses at the outsourced Chinese supply chains of companies like Apple, some experts believe Walmart’s US-based supply chain is built on a similar model, but one constructed within America US itself.

As is common in China, the supply chain is marked by layers upon layers of subcontracting. So, while every single box packed and unpacked at NFI Crossdock is destined for Walmart, the warehouse is owned, run and staffed by myriad other companies. The supply model has been dubbed “insourcing”, and experts say it is defined by ruthless cost-cutting as each layer of subcontracting seeks to eke out a profit margin.

“Walmart’s suppliers run out of places to squeeze out the costs, and they are left with the workers,” said Catherine Ruckelshaus, co-author of a recent report on the supply chain called Chain of Greed, that was produced by the National Employment Law Project.

Walmart is not the only big-box retailer supplied by the huge warehouses of the Inland Empire. Other major firms, such as K-Mart, Home Depot and Toyota, also work there. But Walmart sets the model for the others by its sheer size.

Read Full Post »

Outsourcing of Public Security Service Operations to Private Firm G4S for London Olympics

G4S has been appointed the Official Security Service Provider for London 2012 Olympic and Paralympic Games.  In addition to much talk about social responsibility, the G4S website states:

We specialise in outsourced business processes and facilities in sectors where security and safety risks are considered a strategic threat, with expertise in the assessment and management of security and safety risks for buildings, infrastructure, materials, valuables and people.  G4S is the largest employer on the London Stock Exchange with over 657,000 employees.  We have operations in more than 125 countries.

G4S was contracted to provide 10,400 personnel but today Mr. Buckles, CEO of G4S, admitted in a grueling hearing at the British Parliament that G4S currently only had 4,200 security personnel at Olympic venues.   That’s right, only 40% of the promised service level!  And the shortfall is very unevenly distributed: only 30 out of a contracted 300 G4S personnel had arrived to provide security at the Olympic cycling event on Tuesday.  Moreover, the 51-year old Buckles also said that G4S “would provide a minimum 7,000” when the games begin.

A few comments on the operations strategy (outsourcing service ops and capacity planning) and management (execution): First on operations management: According to the New York Times,

Mr. Buckles said he learned of the looming crisis while he was on vacation in the United States on July 3, but the company informed the Olympic organizers only on July 11 that it could not meet its obligations.  He was forced to apologize, saying he was deeply sorry for the shortfall in security staff and blaming it on the failure of a scheduling system.

This is a failure of executive oversight of G4S’s highest profile project and a cheap blame.  Here we have a firm whose business is staffing and a project whose requirements were known years in advance and then blaming it on “a scheduling system?”  Your operations = Your firm.

Read Full Post »

Spain’s Bank Crisis hits the Airbus and Boeing Supply Chains: risk exposure to A350 and 787?

The financial troubles in southern Europe are spreading and impacting the supply chains of Airbus and Boeing (and Embraer).  Daniel Michaels and Darcy Crowe report in The Wall Street Journal that Spanish supplier Alestis was placed under court administration (the Spanish equivalent of US bankruptcy protection) earlier this month.

The interesting part is that Alestis is in the attractive business of new advanced composite materials (carbon fiber parts—as a cyclist, I love this stuff and have written about this great material before on this blog) manufacturing: it supplies

“major parts of jetliners including composite ribs, panels and skins for the hot-selling Airbus A320 and the A380 superjumbo, the world’s largest passenger jet. Its long-term contracts bring steady payments from established companies. But Spanish banks have slashed lending, so Alestis, like many skilled companies, is operating from one bill to the next.”

So why is this affecting Alestis?

“Alestis was established in 2009 from the merger of several small aeronautic companies around Spain with support from the regional government of Andalusia. It was just coming together when Spain’s real-estate industry went bust. Banks were left with piles of bad loans that have drawn scrutiny from authorities and financial markets. Last week, the government ordered all banks in Spain to raise their provisions against potential losses tied to real estate, which will reduce their capital for lending to companies like Alestis.”

Given that Alestis doesn’t disclose financial results, I don’t know exactly what’s going on but it is quite likely that they need some help in working capital and supplier relationship management. Carbon fiber and finance must go hand-in-hand. With strong long-term contracts from premier customers, Alestis should be able to manage its cash, inventory, and suppliers better.

Airbus and Boeing have learned their lessons when they burned themselves by transitioning to a system integrator business model. (Quick review from our Kellogg Operations Strategy course: They outsourced major parts manufacturing without a parallel sufficient investment in supplier relationship management. To minimize their financial risk, they were going to pay suppliers only when aircraft were finished.  Suppliers invested early but didn’t get paid with the delays in the A380 and the 787.  Subsequent supplier defaults forced A& B to buy up some key suppliers: A bought PFW Aerospace and B bought Vought Aircraft.)

The story with Alestis is different and A & B are keeping a close eye on this and are lending to Alestis.  Interestingly, Airbus must walk a fine tight rope: keep Alestis afloat yet not lend too much because that may make it liable to all of Alestis’ debt. Or will they buy Alestis?

Supplier management must combine strategic contracting and relationship management that drives continuous improvement. It is key to operations strategy and any outsourcing models.

Read Full Post »

Update time! Apple & Uber

Today we’ve got a few short comments on things we have touched on over the past few months.

We have had several posts in recent months on the travails of Apple and its manufacturing partner Foxconn. Now public radio’s Marketplace has a pair of stories on Foxconn’s factories — produced with a little more cooperation on the company’s part than similar stories (The people behind your iPad: The workers, Apr 11, and The people behind your iPad: The bosses, Apr 12). They also have this video of actually making iPads.

One of the more interesting observations from these articles relates to the kind of workers Foxconn is hiring (from “The Bosses” article):

But that hasn’t stopped hundreds of migrant workers from turning up every morning at Foxconn’s doorstep in the coastal city of Shenzhen. On this day, 500 people line up to apply for jobs. …

I ask Louis Woo what Foxconn’s looking for in these applicants.

Woo: To make sure that they can articulate themselves and they can understand instructions

OK. That doesn’t seem too hard. Still, Foxconn’s HR manager tells me that 200 of these 500 people won’t make it through the application process. Louis cuts in and gives some context on the labor pool they’re dealing with here.

Woo: I was told that there are young kids coming over here that have never flushed a toilet before. They’ve never taken an elevator. So if you don’t tell them what to do, they would just wait there until the next elevator comes along. Even going inside, they don’t know which floor to go up to.

Next up a service story.

Read Full Post »