Lean outsourcing: it's coming

By John Tuck

Lean outsourcing. Think about it. Here are two terms that are, on their face, contradictory. Outsourcing, of course, means that an OEM requires a supply pipeline in place of internal manufacturing. But an external pipeline is antithetical to lean manufacturing, where conveyance is considered a form of waste. Yet the combination of lean manufacturing and outsourcing is on its way. How is this possible? The answer is two words - Cisco Systems.

Starting in its fiscal Q3 ending in April 2006, Cisco will embark on a six- to eight-quarter transition to a lean manufacturing model. Since Cisco, a pioneer of virtual manufacturing, is heavily outsourced, converting to lean manufacturing model is tantamount to creating lean supply lines of outsourced product. In published remarks, Cisco's CFO stated that the transition "will be a controlled process, planned in close cooperation with our contract manufacturing partners."

It is well known that Cisco has consolidated its manufacturing supply base to four EMS providers. MMI Top 50 data show that Celestica, Foxconn (Hon Hai Precision Industry), Jabil Circuit and Solectron all manufacture for Cisco (March, p. 2). Is it a coincidence that two of these providers, Celestica and Solectron, already have well-publicized lean initiatives of their own dating back at least two years (April 2004, p. 1-2). Since Cisco declined to be interviewed for this article, it is unclear whether some of Cisco's providers influenced its decision to go lean. Still, an OEM like Cisco cannot shift to a lean model without having all of its outsourcing partners on board.

Cisco's adoption of lean outsourcing, to coin a phrase, is a significant because Cisco has been an early adopter in the outsourcing world. If Cisco's lean model yields reductions in core manufacturing inventory and improvements in inventory turns, as Cisco expects, these results will not be lost on competitors and other savvy OEMs.

As a concept, lean manufacturing, has been around for decades, and many leading businesses, including well-known OEMs such as Apple, Dell, Delphi and GE and HP, are practitioners. Yet indications are that the lean model has not been widely applied to outsourced supply chains as they exist today.

Why? When outsourcing, especially to places like China, an OEM creates a pipeline in which goods are moved but value is not added. In other words, the OEM has created waste. Thus, the OEM has gone in a direction opposite to that prescribed by lean manufacturing, explains Eric Olsen, Ph.D., an assistant professor at California Polytechnic University and lean practitioner with VentureOutsource.com, where he helps companies adopt lean manufacturing solutions. "You've added a bunch of waste essentially into the process by putting that huge conveyance pipeline into the process," he says.

Nevertheless, many OEMs have opted for longer pipelines in order to tap low-cost labor sources in various parts of the world. "Now the thing is, there's probably a lean way to do that and a non-lean way to do that," says Dr. Olsen. "Lean would say I've got to work very closely with my suppliers."