Manufacturing Outsourcing 

Each part number was outsourced using the same repetitive process. These transfers required considerable coordination between supplier and customer engineering and between the customer's buyer and the supplier's order processing and scheduling. We prioritized the need for the transfer of a part number based on production schedules and MRP requirements. The supplier prioritized the initial production of a part number based on the availability of tooling and machine capacity. In some cases the same tool was required for new production at the selected supplier and C part production back in our shop. We had to transport certain unique tooling back and forth until our requirement for the tooling ended. Here is the transfer process that was used:

Transfer Step 1. The part specification drawing along with a purchase order is sent to the supplier. Transfer Step 2. The supplier reviews the part design for manufacturability. 

Transfer Step 3. Raw material is drop shipped to the supplier. Transfer 

We suffered a short term setback in part quality and part cost, plus we tied up some of our most experienced people for two years in order to achieve medium term gains in flexibility. On the plus side of the ledger the outsourcing effort resulted in a restructuring of the fixed to variable cost ratio, and has lowered our breakeven point making us more competitive.

While the transition team was very successful in meeting its objectives by closing the fab shop operation in just seven months without any continuity of supply issues, there were serious personnel issues. The second shift operation was terminated in October 1991. A few people transferred to the first shift, but lost their shift premium. All fab shop production activity was completed in January 1992. A few employees were absorbed into other site opportunities, two employees stayed on to assist in the disposal of the machinery, and the rest left the company. The company provided retraining resources, outplacement assistance, and an attractive incentive package. Several people took advantage of the incentive payout to go back to school and/or to move their families to other parts of the country. Several employees found employment opportunities with the new suppliers. But, for many months after the downsizing the morale of the plant was low as we had watched close friends leave the business.

Defect rates on every class of metal part increased while the new suppliers learned the necessary process controls. For some part numbers the initial lots ran 35X higher in PPM of defects than the actual run rate of our internal fab shop. Cosmetic defects, sliver problems with the vinylclad aluminum, and metal flaking with the heat sink extrusions caused very high initial levels of inspection and rework.

We attacked these issues through the transfer of process technology and the application of continuous process improvement. We provided immediate feedback to our suppliers on problems as they were found, and we quickly returned actual defect examples for their review. Problems were classified and plotted on pareto charts. We looked for repeating offenders on sequential work orders of the same part number. Each of our new suppliers already had in place a mature quality philosophy. To their credit our suppliers reorganized and simplified their process steps, tuned their performance measures, and trained all their employees in our quality expectations.

The first round of contracts gave a priority to continuity of supply and allowed each supplier some margin in piece part pricing because the supplier had never built our set of parts. Contract pricing negotiations had been built around certain benchmark part numbers with average prices for the volume of parts extrapolated by spreadsheet from these benchmarks. We had not allowed potential suppliers the time to review and quote on the thousand individual specification control drawings. During the first contract cycle as suppliers gained experience with our set of parts, it became obvious that we were paying noncompetitive pricing. While the volume weighted average price had looked reasonable, pricing on some specific part numbers ran 55% higher than the total material, labor, and overhead cost standards from our internal metal fab shop. This situation was eliminated at the start of the second contract cycle.

To Be Continued

Lean Six Sigma Training   Thinking Out of the Box   
Balanced Scorecards  Strategic Tactical Planning  
Supply Chain Inventory Management  Total Quality Management Principles
Lean Manufacturing Implementation  Lean Manufacturing Principles