Manufacturing Outsourcing 

As the word got out that our internal fab shop was closing, many suppliers came forward with offers to take our business. It quickly became clear that we needed to carefully articulate our needs in order to make a series of rational decisions about where we would outsource our metal parts.

We developed a supplier selection criteria to address the short term and medium term needs of our final assembly customer. This "must and want" criteria became the basis for selecting the short list of suppliers who replaced the production capability of our internal metal fab shop.

Musts

• Continuity of supply

• Transition from fabricated to purchased completed on time

• Piece part quality in PPM equivalent to internal fab shop quality 

High Wants

• Least total cost of outsourcing

• Minimize the total number of suppliers added to the supply base

• Favor geographically local suppliers to maximize communi­cations and minimize freight costs

A list of potential suppliers was compiled from a variety of sources including the list of current subcontractors, business contacts including those who had offered their services, references from other parts of the company, and local suppliers listed in the Thomas Register. After a little research the list was segmented into groupings by size of business and by fabrication processes offered. For example, not every supplier offered both sheetmetal fabrication and machined part capabilities. Since we wanted to outsource from a very small number of suppliers, we started negotiations with the larger businesses that offered a full range of capabilities.

A supplier day was held in which the business opportunity was described. Senior managers from several suppliers were invited to spend a day at our plant learning about our needs, viewing our processes in operation, and inspecting our metal forming equipment. Each was requested to prepare a quotation on the A and B parts that would be outsourced; each was told that our metal forming machinery was available for sale. We asked for their most aggressive offer along with any assumptions behind their quote, i.e., manufacturing the part using our tooling or machinery purchased from our shop.

In the weeks following the supplier day a team consisting of the author, the fab shop manager, a buyer, and a metals engineer toured the complete facilities of the top contenders. These day long meetings were conducted as supplier qualification audits. We looked for key differences among these potential suppliers, and we answered detailed questions about our request for quotation. Each supplier was offered a date to return to our plant for any follow on discussion necessary for them to develop their quotation. And, we articulated our decision criteria often to stress the expectation of continuity of supply within a win-win relationship.

The original plan was to sell the business to one of the large suppliers who could meet all of our diverse needs. As we conducted supplier qualification visits and reviewed the returned quotations, it rapidly became apparent that the local companies we had approached were optimized for sheetmetal fabrication or machined parts fabrication, but not both. We decided to switch to a strategy of managing a small number of suppliers split by process capability.

The machined parts side of the business boiled down to a decision between a custom extrusion house and a vertically integrated extruder/fabricator. The custom house depended on other extruders for the supply of raw materials shapes. The vertically integrated house would have to subcontract certain secondary assembly operations. The sheetmetal side of the business became a decision of whether or not to keep some competition between primary suppliers to motivate each into continuous improvement. We also came to a recognition that one supplier was stronger in painting and finishing processes. And, we already had an established relationship with a front panel decorator. In the end we settled on outsourcing the metal fab work of our one internal shop to four key external suppliers; two of these were totally new suppliers.

We then set about formalizing our newly formed relationships with purchase agreements for each of the key suppliers. The first round of contracts were for a one year period. Each contract set an agreed upon price for a specific range of part numbers, but emphasized continuity of supply and an aggressive quality performance measurement. The contract was worded to make it easy to both add new part numbers and to roll the contract into a longer term relationship once each supplier could demonstrate sustained performance. In return, we agreed to purchase 100% of the specified part numbers from that single supplier and to share our process expertise for building each pan. The team spent an additional full day at each of these key suppliers' locations

discussing the philosophy of how we would conduct business together and negotiating contract terms and conditions.

To Be Continued

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