Lean manufacturing and outsourcing

By Eric Olsen

Additional lean outsourcing info.

We have arrived at the nexus of two powerful trends in business process improvement and product manufacturing operations management. One, lean operations, offer streamlined flow of value to the customer with minimal inventory and waste. The other, outsourcing, offers dramatically lower cost of goods sold (COGs). Both can result in highly competitive pricing positions and healthy profit margins. Both trends are ostensibly valid responses to competitive price pressure, offering significant advantages with respect to cost. Combining the two would lead to an advantage, but one might ask, is 'lean outsourcing' an oxymoron? Many companies see the trends unfolding in this manner, viewing the outcome as no more than a tradeoff.

How do executives remain true to the tenants of lean while stretching their company value stream across the globe? How do companies build close relationships with suppliers if each party speaks, and acts, differently? How does an organization make value 'flow' when its raw materials, or products, might be arriving in batches the size of large, ocean-going ship containers, or perhaps even the size of the container ship? The situation becomes more complex when you realize many companies started their lean efforts in an attempt to save jobs by avoiding outsourcing and offshoring.

Identify value
For a partial answer, let's look at the first principle of lean thinking: Identify value. Womack and Jones, in their seminal work, "Lean Thinking" (Womack and Jones, 1996) lay out five principles, or steps, on lean thinking (Figure 1). Step one is to develop a thorough understanding of 'why' the customer is buying your product. Or, in other words, 'how' does he value the product or service your company provides.

Figure 1

Too often, companies take step one for granted and then immediately move on to mapping value streams; cutting waste, and implementing kanban systems and continuous improvement -- all the while, losing sight that neglecting a thorough identification of the 'value' can lead to not one, but possibly four, different outcomes. A two-by-two Value/Process Position Matrix displayed below
(Figure 2) describes these four potential outcomes.

Figure 2

It's important to keep in mind traditional manufacturers are becoming increasingly rare. For most companies, manufacturing executives are abandoning mass production and vertical integration models and are embracing a variable-asset business model or, outsourced contract manufacturing model, enabling companies and executives to become more globally competitive. In looking at contract manufacturers, or electronics manufacturing services (EMS) providers, those with a track record in lean manufacturing may have a competitive advantage with original equipment manufacturers (OEM) looking to go lean. (Tuck, 2006) A recent study by Oracle Corp., and conducted by Beacon Technology Partners (Baljko, 2005), confirms our own research that companies engaged in some form of lean implementation initiative have surpassed the 50 percent point.