Outsourcing and Supply Chain Integration: Remaking American Industry
"THE CENTRAL EVENT of the twentieth century is the overthrow of matter," wrote George Gilder in his landmark book Microcosm. "In technology, economics and the politics of nations, wealth in the form of physical resources is steadily declining in value and significance. The powers of mind are everywhere ascendant over the brute force of things." We live in a world where the most powerful corporation is no longer the one with the biggest factories or the most real estate—but the one with the ability to rapidly turn ideas and thinking into new products, new services and new businesses (Wall Street Journal, January 27, 1999).
The estimated 330,000 U.S. small and medium-sized manufacturing enterprises (SMEs) have a substantial economic impact (Carr, 1998). Defined as having fewer than 500 employees, SMEs are important to the nation because they account for 98 percent of all manufacturing plants, employ two-thirds of the nation's 18 million manufacturing workers, generate more than half of the total value-added in the manufacturing sector, and are the source of many innovations in technology (Weber, 1997).
SMEs typically provide capabilities that their larger customers do not have or cannot cost-effectively create internally, such as:
greater agility in responding to changes in technologies, markets, and trends
greater efficiency due, in part, to less bureaucracy
greater initiative and entrepreneurial behavior on the part of employees resulting in higher levels of creativity and energy and a strong desire for success
access to specialized proprietary technologies, process capabilities, and expertise
Shorter time to market because operations are small and focused
lower labor costs and less restrictive labor contracts
spreading the costs of specialized capabilities over larger production volumes by serving multiple customers
lower cost customized services, including documentation, after-sales support, spare parts, recycling, and disposal
Thus, SMEs can provide a wealth of value if they are used effectively in integrated supply chains.
The term "SME" in this report refers only to those small and medium-sized companies actively involved in manufacturing that serve as suppliers to higher tier suppliers or to original equipment manufacturers (OEMs) (i.e., manufacturers that build products for end users rather than components for use in other products). SMEs vary greatly in terms of size, industry, capabilities, and financial strength. They range, for example, from sophisticated 500-person operations that design and fabricate electronic products to several-person local machine shops.
STUDY OBJECTIVES AND APPROACH
The nature of business competition is changing rapidly and with it the supply chains that support OEMs. In response to competitive pressures, U.S. manufacturers are purchasing increasing amounts of goods and services from outside suppliers and are increasing their efforts to integrate their supply chains to improve performance. A 1998 survey found that 80 percent of manufacturers have formal supply chain management programs or plan to start them in the next year (Manufacturing News, 1998). In this context, the Manufacturing Extension Partnership (MEP) of the National Institute of Standards and Technologies (NIST) and the Robert C. Byrd Institute (RCBI) requested that the National Research Council study the new roles and challenges for SMEs resulting from increasing supply chain integration. The Committee on Supply Chain Integration, formed under the direction of the Board on Manufacturing and Engineering Design, was asked to perform the following tasks:
Identify and analyze state-of-the-art supply chain integration concepts.
Define the requirements for successful SME participation in integrated manufacturing supply chains.
Define the gaps between the requirements and capabilities of SMEs.
Suggest strategies to assist SMEs in developing the capabilities necessary for successful participation.
Despite the strong overall trend toward increased supply chain integration, the extent of integration varies greatly from industry to industry. Defense industries, for example, are not allowed to make decisions based on the overall good of supply chains until changes have been made in the Federal Acquisition Regulations (FAR) and contract law. Contract law, especially in accordance with FAR, flows down fiduciary responsibility (i.e., each supplier is directly accountable for its portion of
the work as defined in the contract or purchase order). Thus, efforts to optimize overall supply chain performance for the mutual benefit of all participants are generally not allowed unless specifically permitted in the contract.
The committee supplemented its expertise and gained a deeper understanding of issues relating to SMEs and supply chain integration in several ways. First, the committee met with a group of representatives (mostly chief executive officers) of successful SMEs, who presented overviews of their companies and discussed their experiences with supply chain integration. The results of these discussions, combined with the collective experience of the committee members, were distilled into the list of characteristics of successful SMEs presented in Chapter 11.
To test their experience base, the committee developed a brief questionnaire asking SMEs about their technological capabilities and relationships with customers. Field agents of MEP and RCBI administered the survey to 99 SMEs. The results of the questionnaire, although not statistically significant, were useful for obtaining a deeper understanding of the issues confronting SMEs and their customers. The results are discussed in Chapter 6. (A copy of the questionnaire and a summary of the data are included in Appendix A.)
Although each SME has its own definition of success, the committee defined the phrase successful supply chain participation in a manner similar to the traditional definition of business success (i.e., participation in which benefits to the corporation substantially exceed the costs).
Although large suppliers are frequently cited as examples in this report, the lessons and principles generally pertain to SMEs as well. Some of the trends may be slower in coming to SMEs, which are often in the lower tiers of the supply chain. However, SMEs should study these and similar cases carefully so that they can improve their performance both as suppliers and as managers of their own supply chains.
This report is divided into two parts. Part I introduces the concepts of outsourcing and supply chain integration. Part II identifies the requirements imposed on SMEs by integrated supply chains, compares them with the capabilities of SMEs, and recommends courses of action that can enable SMEs to fill their own specific capability gaps.