Manufacturing Outsourcing 

Our internal metal fab shop operated its own finished goods inventory warehouse. Scheduling and metal inspection was done internal to the metal fab shop. Small lots of metal parts were issued daily from this warehouse to final assembly; there were no freight costs involved beyond transporting raw materials to our plant.

The transition team had to address many obvious issues. When we first switched to outsourcing, we were overwhelmed by the cubic volume of metal parts entering our small receiving area. The lot sizes received each day were much greater than we had dealt with internally. We had to quickly develop an overflow area to accommodate the dozen skids of metal parts arriving almost daily. The first covers we received were so well wrapped in

protective plastic that it took two materials handlers six hours to detrash 100 parts. Electrical incoming inspectors had to be trained on reading prints for mechanical parts and on operating precision measuring equipment with metric dimensioning. The scheduling workload went down; the purchasing, cost accounting, incoming inspection, and materials handling workloads went up. Our freight-in costs went up dramatically.

The internal metal fabrication shop had been well equipped with 75 capital assets including two Strippit NC punch presses, Pacific brakes and presses of different tonnage, a perforating machine of internal design, an auto loading Muzak machining center, and an automated chromate line. It was essential to maximize the return on the sale of these assets in order to reduce the fixed portion of the overhead. One of the shop supervisors and one of our buyers were tasked with selling this machinery. Their objective was to maximize this sale and to have all machinery assets removed from the premises by March 1992.

A few key pieces of machinery had been sold to the suppliers who had been awarded our business. For example, the perforating machine was needed to fabricate our set of chassis covers in a competitive amount of time. Our buyer had had considerable experience buying raw material in sheet form, and was familiar with certain distributors and machinery brokers who might be interested in this equipment. He compiled a list of potential buyers, and set up individual appointments for each party to inspect the equipment and the associated tooling. Our terms included that our facilities staff would disconnect each machine at an agreed to date, that we had a firm deadline for the removal of the machine, that specified tooling would be included in the bid, that payment would be upon receipt in the form of a cashier's check, and that the equipment buyer would schedule and pay for rigging out of our building.

Our metal forming machinery was in excellent repair, and brought handsome prices. One exception was the automated chromate line. While we were able to sell the process line, there was considerable environmental expenses to be paid for the cleaning and proper disposal of certain plumbing parts and for the refurbishing of the area to the specification of the new tenant.

And, we experienced a very wide range of expertise in rigging with the several companies who came on site; one rigger actually damaged our loading dock.

From the beginning a process was defined and communicated to a cross functional implementation team with a very high priority set on continuity of supply. The team had sufficient resources and followed the process rigorously in order to achieve the aggressive deadline. The internal metal fabrication operation was completely terminated within seven months with all A and B parts outsourced as purchased parts from four key suppliers without any continuity of supply issues.

In the medium term the outsourcing of metal parts has resulted in the restructuring of the fixed and variable portions of the cost of goods sold lowering the breakeven point to make the plant more competitive and more flexible. In the short term several significant cost adders caused setbacks to profitability. These setbacks included increased piece part defects, increased piece part cost, a bulge in C part inventory, and incremental internal work to drop ship and account for raw material, to procure long leadtime specialty hardware, to transfer unique tooling fixtures, to store the higher volume of incoming metal, and to material handle the outsourced parts. Talented, experienced employees were encouraged to take an expensive incentive package and leave the company. Along the way our new supplier base gained a windfall in new business.

• Establish and communicate a process for outsourcing

• Set a simple, clear objective

• Set an aggressive implementation timetable

• Take a positive attitude with people issues

• Understand the many hidden costs to outsourcing

• Include the new supplier on the cross functional team.

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