Figure 2-1 Increase in subcontracting in the defense industry (percentage of total product cost). Source: The Boeing Company, 1997.

facilities and compared them to capabilities available from outside suppliers, it became apparent that many elements of value could be purchased, or "outsourced," ("subcontracted" in the defense industry) more cost effectively. By the early 1990s, reengineering, downsizing, and outsourcing had become common business practices. Figure 2-1 shows the subcontracting trend in the defense industry.

The trend toward outsourcing was reinforced during the 1990s by Wall Street, as securities analysts increasingly focused on return on assets as a measure for valuing corporations. In response, OEMs have increasingly sold off parts-fabrication operations, which tend to require substantial investments in assets, and have focused on final assembly and services. As a result, OEMs have become increasingly dependent on outsourcing.

An estimated 22 percent of the world's gross domestic product consists of raw materials, components, and subassemblies purchased by OEMs. Thus, reducing the cost of these materials and making the procurement process more efficient can have a substantial effect on the global economy, as well as on the competitiveness of individual OEMs.

Case Study: Chrysler Corporation

Late in the twentieth century, two competitors in the automotive industry, Chrysler Corporation and General Motors (GM), made dramatically different choices regarding their respective supply chain structures. GM, which was consolidated into a massive, vertically integrated corporation early in the century, produced most of its components and subassemblies internally, although its Delphi parts operation was spun off in



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