Download - Outsourcing Transition Risk
Outsourcing Transition Risk
Date: Nov 14th 2006
Matthew Douglas, VP Operations (Andrew)
Bennett West, Cort Jacoby, Giri Varadarajan (Deloitte)
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Today, we will address the topic of Contract Manufacturing (CM) Outsourcing Transition Risks through our experiences at Andrew
D ata C en te r
A p p lica tion s
E n d U ser S ervices
N etw ork in g
E -C om m erce
O th er
IT O u tsou rc in g
F in an c ia l
H u m an R esou rces
P u rch as in g
M arke tin g
O th er
B u s in ess P rocess O u tsou rc in g C on trac t M an u fac tu rin g
F ood S ervice
Jan ito ria l
B ld g S ecu rity
O th er
N on -b u s in ess S ervices O u tsou rc in g
O u tsou rc in g
Product Lines
Business Units
CM outsourcing is a complex process presenting several transition risks. It is important to develop mitigation strategies prior to outsourcing to
minimize any negative financial or customer impact.
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Key Highlights
• Founded in 1937, Andrew employs 10,000+ people with operations in N. America, S. America, Europe, Africa & Asia Pacific
• Global leader in Wireless Communications Infrastructure
• Ranked #1/#2 in each major product group
Products Key Customers:
Andrew, a $2 B global manufacturer of telecommunications infrastructure equipment, has grown two-fold mainly through acquisitions over the last three years
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Andrew’s Base Station Subsystems Group does business in a very challenging market
Customers
Supplier
Competition
BSSG Marketplace
Customers
• Very large and consolidating
• Strong “buyer power”
Implications to BSSG Mfg
Must be:
• Low cost
• Global
• Flexible
Suppliers
• BSSG products are built using thousands of components and several hundred suppliers
• Raw material prices are increasing (Copper, Aluminum, Silver, etc.,)
Implications to BSSG mfg:
• Simplify the supply chain and focus
• Strategic Sourcing Partnerships
Competition
• Intense price competition
• Continued consolidation is likely
• Customers are also competitors
Implications to BSSG Mfg
• Regional, scalable, & flexible supply chain as a competitive differentiator
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Old Supply Chain Future Regional Outsourced Supply Chain
Americas EMEA APAC Americas EMEA APAC
Legend Inbound Supply Outbound Shipments Plants
• Self funded exit from high cost, highly labor regulated country to improve gross margin & cash flow
• Simplified supply chain
• Variable pricing model directly ties manufacturing costs to volatile sales demand
• Supply chain scalability & flexibility
• Enables Andrew to focus on product innovation, cost reduction, and customer relationships
Outsourcing Rationale
The Legacy BSSG Supply Chain was a “Spaghetti Chart” of Complexity and the need for speed was paramount – Manufacturing Outsourcing is our solution.
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Outsourced Manufacturing Introduces Several Transition Risks
Risk Dimensions
Risk Dimensions
Produ
ct F
ulfil
lmen
t
Labor Disruption
Customer Relations
Busin
ess
Case
Realiz
atio
n
Product Fulfillment
Description:
• Day 1 “Flip the Switch” production transfer to EMS Partner
Sample risks:• IT handoff failures• “Confidential” knowledge transfer • Supplier order book transfer
Customer Relations
Description:
• Alleviate customer apprehensions to minimize forecast surge & drops
Sample risks:• Site disqualification• Forecast drops/surges• Credibility/reputation risk
Labor Disruption
Description:
• Internal labor strike or sabotage
Sample risks:• Production shutdown• Order fulfillment stoppages• Physical violence/ product sabotage
Business Case Realization
Description:
• Realize outsourcing benefits within anticipated timeline
Sample risks:• Due diligence issues• Expat and severance costs• Capital equipment estimates• Every bus case assumption is a
risk!
Transition risks typically manifests either as a schedule delay or bad cost estimate
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Understanding Key Risks And Implementing Mitigation Strategies Is Critical To A Successful Outsourcing Transition
Category Description Sample Risk Scenarios Sample Mitigation Strategies
Product Fulfillment
Day 1 “Flip the Switch” production transfer to EMS Partner
IT handoff failures
Supplier order book transfer
“Confidential” knowledge transfer issues
Conduct physical/IT systems simulations for critical products
Develop inventory buffers & back up suppliers
Evaluate IP implications & secure protections
Labor Disruption
Internal labor strike or sabotage
Production shutdown
Order fulfillment stoppages
Physical violence/ product sabotage
Phased transfer of sites if multiple sites are involved
Identify alternate backup sites by key product lines
Accelerate NPI launch of replacement SKU’s at CM location
Develop comprehensive security plan
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Risks And Sample Mitigation Strategies Contd…
Category DescriptionPotential Risk
ScenariosSample Mitigation
Strategies
Customer Relations
Alleviate customer apprehensions to minimize forecast surge & drops
Site disqualification
Forecast drops/surges
Credibility/reputation risk
Conduct internal CM audits to enable site qualifications
Create sufficient buffers for critical products
Develop clear & consistent customer communications
Business Case
Realization
Realize outsourcing benefits fully within the anticipated timeline
Due diligence issues
Expat and severance costs
Capital equipment estimates
Every business case assumption is a risk!
Prepare clear information packets for due diligence
Budget conservatively for expat/severance costs
Evaluate CM leaseholder improvements, bldg & equipment requirements
Develop conservative business cases to account for business assumption risks
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Manufacturing Outsourcing Lessons Learned
Outline success criteria and get team alignment; check commitment regularly
Understand country’s cultural nuances to customize mitigation strategies
Get Customs/VAT compliance expertise from local tax and logistics SME’s
Resources, Resources, Resources – right resources minimize transition risks
Strong program management infrastructure to manage a cross-functional effort of simultaneous transitions in multiple continents/countries. Communication and coordination are essential!
TimeTime
Confidentiality, Confidentiality, Confidentiality – critical to mitigate labor disruption
Evaluate Sarbane-Oxley regulations especially FAS 146 implications to understand what can be classified as one time restructuring costs
Understand Freight Vs Labor tradeoff when allocating production to factories
Contract manufacturing is a marriage – understand CM partners profitability criteria and communicate openly to avoid surprise divorce
Involve cross functional leadership to gain 360° alignment on business case
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Impact Lessons Learned