Standardized Products

Here an outsourced manufacturer primarily produces standardized products which are sold under one or more brands into multiple markets. The outsourced manufacturer is responsible for product design, engineering and manufacturing specifications, and

controls its own production processes and quality standards. The focal firm evaluates the manufacturer’s products and, based on pre-determined quality and price targets, selects those products from the manufacturer’s product portfolio which will be labeled and sold under the focal firm’s brand. Market conditions may determine the degree to which the manufacturer will release partial control over quality and costs in so much as is needed to

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secure the focal firm’s business. For this type of outsourced manufacturing relationship, the focal firm may have received information concerning the outsourced manufacturer’s design, engineering and manufacturing, and quality control processes as part of its initial manufacturer evaluation process. If this detailed analysis was not accomplished, our findings suggest that this information should be obtained and included as a critical information flow into the relocation decision making process. However, if there is a sufficient number of qualified manufacturers of the standardized product (i.e., suitable form, fit and function properties), and switching costs are low, price/costs comparisons for standardized product manufacturers may be sufficient to support a manufacturing relocation decision.

Figure 11 captures the primary engineering design and manufacturing process complexity factors discussed for each of the three focal firm-manufacturer relationships presented. Managers should develop ‘how?’ and ‘why?’ questions for each complexity factor then work with their outsourced manufacturing providers to address each question.

Figure 11 – Engineering Design and Manufacturing Complexity Factors Engineering Design and

Manufacturing

Process Complexity Factors

Timely, Accurate and Complete Information

Custom Manufacturing

-True Manufacturing-related Costs -Actual Manufacturing Processes -Appropriate Performance Metrics

Customization of Standardized Products

-Manufacturing Processes -Quality Control Processes -Design and Integration Strategy

Standardized Products

-Suitable Form, Fit and Function -Switching Costs

Relocation Decision

69 4.7 Supply Chain Structure

In addition to the need for decision makers to consider engineering design and manufacturing complexities, we also identified the complexity of the outsourced manufacturer’s supply chain structure as a critical information flow which must be considered. The focal firm’s ability to control or influence supply chain structure is also linked to the focal firm-manufacturer relationship type.

The second category of process complexity factors addresses the structure of the outsourced manufacturer’s upstream supply chain. As has been well documented, multi- tiered upstream supply chain structures become more complex the longer they are in place and tend to add significant costs to manufacturing processes (Bozarth et al., 2009).7 Study participants identified cost reduction as a primary driver for relocating outsourced manufacturing workload. However, without insight into the manufacturer’s supply chain structure and an understanding of supply chain-driven costs, decision makers do not have a sufficient level of information to correctly evaluate current outsourced manufacturing workload against the spectrum of relocation opportunities. Information concerning the evolution of the manufacturer’s supply chain structure and how this evolution may have affected production quality and manufacturing costs over time should be identified as a critical information flow into the decision making process. Here again, consideration of financial factors alone would not provide decision maker’s insight into the upstream supply chain structure’s potential cost-drivers and risks.

7. See Bozarth, Cecil C., Donald P. Warsing, Barbara B. Flynn, and E. James Flynn (2009), “The impact of supply chain complexity on manufacturing plant performance,” Journal of Operations Management, Vol. 27, pp 78-93.

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Table 7 – Influencing the Manufacturer’s Supply Chain Structure

As shown in Table 7 above, the focal firm’s ability to control or influence the manufacturer’s supply chain structure is again a function of asset specificity. The importance of understanding the focal firm’s influential position concerning the supply chain structure is tied to the ability to ‘lift and shift’ supplier relationships as part of the manufacturing relocation decision. In the focal firm-custom manufacturing relationship, the focal firm has considerable control over the engineering design and manufacturing process elements. This degree of control positions the focal firm to influence material quality, material costs and the overall inventory strategy within the manufacturer’s supply chain structure. To a lesser degree, the focal firm has the ability to influence overall supply chain performance, supplier selection and supplier performance. The focal firm’s ability to control or influence the supply chain structure decreases as the level of asset specificity decreases, to the point where the focal firm has very little control with the focal firm-standardized products relationship. For this relationship type, any ability of the focal firm to control or influence the supply chain structure may be limited to quality

Relationship Type:

Overall Supply Chain Performance Supplier Selection Supplier Performance Material Quality Material Costs Inventory Strategy

Firm Perspective (+) <---Asset Specificity---> (-)

Focal Firm Manufacturer

Custom Manufacturing Customization of

Standardized Products Standardized Products

Supply Chain Structure Elements

Degree of Control or Influence Degree of Control or Influence Degree of Control or Influence

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evaluation and acceptance of lot quantity shipments and an agreed upon inventory strategy to meet the focal firm’s product delivery requirements.

Another level of supply chain structure complexity is associated with the type of relationships the manufacturer has developed with its suppliers. As with the focal firm, manufacturers may also be engaged in custom manufacturing, customization of

standardized products, and standardized products relationships. As indicated in Figure 12, each multi-tiered relationship structure must be considered and evaluated by the focal firm in order to identify potential cost-drivers or risks within the manufacturer’s upstream supply chain structure. These potential cost-

drivers and risks, along with mechanisms to mitigate each, should be carried forward as information flows into the manufacturing relocation decision making process. Without the ability to control or influence the upstream supply chain structure, gaining

access to information about the various supply chain elements may prove difficult.

Custom Manufacturing Customization of Standardized Products Standardized Products F O C A L F I R M

Focal Firm Control Manufacturer Control Manufacturer Control

Upstream Supplier Control

72 4.8 Managing Your Way To Information Access

We found there are four primary ways focal firms obtain access to manufacturing process and supply chain structure complexity information. Toyota, through its focus on supplier relationship development within Toyota Production System (TPS), may best exemplify the importance of developing supplier relationships.8