Seven Keys to Ensuring Success When Outsourcing

Industry Experts Share Myriad Strategies for Ensuring

Outsourcing Relationships That Will Thrive

Stacey L. Bell
Editor-at-Large

You’ve heard the horror stories: Outsourced projects that have cost hundreds of thousands of dollars more than originally expected. Deadlines and product launches missed. Products recalled.

Certainly, life bears its share of bombshells, but experts say that following seven strategies when outsourcing can significantly cut the number of unpleasant surprises you encounter in your work life.

Communicate,Communicate,Communicate People within the same organization often can interpret the company’s goals differently, according to how they personally define certain terms and strategies. For example, even a word as seemingly simple as “customer” means something different to someone in engineering than it does to someone in accounting or marketing. Misunderstandings can become magnified 10-fold when people in other organizations in other nations become involved in a project.

That’s why it’s essential to hold workshops both internally at the OEM and then with one’s chosen outsourcing partners to illuminate the objectives, requirements and business processes that are being outsourced, said Ralph Welborn, PhD, managing partner of the Unisys Global Transformation team and co-author of Get It Done! A Blueprint for Business Execution.

“These workshops help you identify and understand the experience of all those involved [people, processes, assets and technologies] in the actual processes to be outsourced, laying the groundwork for a successful outsourcing relationship,” Welborn explained.

Throughout the outsourcing relationship, continuing daily dialogue as well as holding additional workshops and conducting in-person observations of the manufacturing process will ensure that project expectations are met.

“It’s best to have one key contact on each side who has the big picture perspective, with layers of communication in which quality personnel at the OEM are talking with quality personnel at the contract manufacturer, engineers are talking with engineers about design, manufacturability and process issues, etc.,” advised Andrew Kinross, managing consultant for Navigant Consulting in Burlington, MA.

“Our most successful collaborations are when all department heads at both organizations, not just the project managers, talk to each other,” observed Paul Touhey, president and COO of Fujirebio Diagnostics, Inc. in Malvern, PA.

While e-mail has greatly improved communication—especially since drawings and time lines can be attached easily—Kinross noted that there is a trend to exploit the efficiencies of enterprise resoucre planning systems between organizations. That is, in the future, more companies will link their enterprise database systems to streamline communications, providing transparencies between the companies and fostering greater collaboration and efficiencies.

Set a Clear Path for the Project Successful outsourcing starts with thorough planning. Fortune 1000 companies are an excellent example of the truth of this statement. While only 19% of US businesses have an outsourcing strategy, 95% of Fortune 1000 companies have one in place, Welborn said. Why? He said the reason is that they can get their product to market faster and more profitably than the competition and, thus, remain among America’s most successful companies.

The OEM must determine which projects it will outsource and when, why and how. Developing clear specifications for products is job number one.

“Too often, specifications are not specific enough. For instance, when working with a design house, the manufacturer may provide design description in terms of function rather than actual specification,” explained Brent Noblitt, senior partner for Noblitt & Rueland in Irvine, CA.

He gave the example of using the specification “It should be easily readable” for an electronic display. Such language is nebulous and doesn’t provide an actual physical design specification. Should the display be visible from across the room? Should it be visible to an 85-year-old patient with poor eyesight in a poorly lit home environment or to a 25-year-old nurse with 20/20 vision in a hospital setting with fluorescent lighting?

“It’s better to define the physical characteristics of the screen—for example, type of display, size of digits, brightness in lumens, whether it is backlit, etc.,” Noblitt concluded. “A good specification should be testable. If you can’t write a clear test protocol for it, then it’s probably not a good spec.”

At the beginning of the project, it’s also essential to document in writing which department (or individual employee) at each company will be responsible for each function, what project milestones will be achieved and when as well as who will ensure the project proceeds on schedule.

“Through frequent discussions, monitoring project status updates, by agreeing upon what constitutes change and how to address and handle change, success will result,” said Tom Caron, vice president of sales and marketing for Donatelle in New Brighton, MN.

In addition, Caron pointed out that an outsourcing strategy should entail clearly defining all requirements and expectations as well as ensuring that one’s chosen supplier has fully capable processes, technologies and systems to match the requirements for the entire outsourcing supply chain.

Achieve the Right Mindset The most beneficial relationships for both OEMs and contract manufacturers involve each company buying into a new role, said Kinross. “The contract manufacturer needs to have a service mentality, as in ‘We are serving our customer. The customer is most important.’ This means being flexible in executing projects, since different customers have different needs.

“For OEMs, a partnership mentality is paramount,” Kinross continued. “It takes time to build trust, but over time, as more milestones and deadlines are met, trust grows. The attitude can’t be one of ‘We don’t care about this company. Let’s get the lowest price we can and that’s it.’ Such an attitude becomes self-defeating over time because you’re not building a relationship in which another company will be looking out for your best interests as well as their own.”

Indeed, Kelly Stichter, vice president of design development for Phillips Plastics, Inc. in Hudson, WI, noted that a partnership relationship increases the value proposition for both parties. “Independently, neither of our companies can be as strong as we are together,” she explained. “No one company can excel in everything. By leveraging the talents of people who are best in their areas, your companies can go further together than they could on their own.”

Having an adversarial—or more traditional customer-vendor—relationship helps no one, noted Mike Cheek, director of global supply chain for Kinetic Concepts, Inc. in San Antonio. “It’s best to align yourself with other companies that have [as much as possible] common values, strategies and business needs.”

Kelvyn Cullimore, Jr., president and CEO of Dynatronics Corp. in Salt Lake City, added that his company has benefited by partnering with its outsourcing vendors. “When you’re not doing the manufacturing, you’re often oblivious to improving the design in ways that would increase manufacturability and reduce costs,” he explained. “If you involve key partners in the design process, they can provide insightful feedback early in the process to help avoid sticker shock due to unnecessarily complex designs.”

Plus, as outside firms come to understand an OEM’s processes better, they can make observations that the OEM may not have considered, thus improving the OEM’s processes.

“That said, we still obtain occasional competitive bids to make sure they are not taking advantage of the relationship,” Cullimore continued. “[But] paying a premium for a good source may sometimes be the least expensive approach. Nothing is more expensive than a vendor who does not perform as required.”

Choose the Right Partner When looking for an outsourcing partner, an audit will tell you if the company possesses the capabilities you require. Talking with other customers is a must as well to ensure the organization can meet your expectations for timeliness, flexibility, reliability, service, quality and other considerations.

Supplier selection should be undertaken by a cross-functional group to ensure the entire organization’s needs will be met, according to Tom Podesta, vice president of health care for The Tech Group in Scottsdale, AZ. “A multidiscipline approach is a must. Someone from purchasing, quality, engineering and other areas should be involved in the initial visit, interviews and audit. It’s important to get a consensus,” he said.    

Selecting companies that embrace lean manufacturing techniques and are technologically advanced also is critical, according to Phil Stramel, operations manager for Novasys Medical, Inc. in Newark, CA.

“One reason we’ve stayed in the United States for outsourcing as opposed to going to Mexico or China for cheaper labor is because, while we could save a little on labor in the short term, those other suppliers wouldn’t be able to help us evolve our production to a more cost-efficient solution,” Stramel explained. “Technologically advanced suppliers can work to take labor out of a device, which I’d rather do than chase cheap labor.”

Stramel also looks for companies that follow a continuous improvement philosophy, since “for us to get better, they must get better.”

Just as you test drive a car before committing to a purchase, Jari Palander, vice president, North America for Invetech in San Francisco, CA, said OEMs should test drive a contract service provider before signing up for a major run.

“Initially, undertake a small assignment—maybe related to the main program—with them to see how well you work together. You’ll learn if the vendor understands the industry, technology and product and if it has the processes, systems and equipment necessary to meet your needs,” Palander said.

Finally, Kinross advised that OEMs should ensure that selected partners have a robust supply chain so that if one subcontractor is unable to supply a part, the vendor has other sources that can step in to fill the void.

Sign a Contract The use of contracts is becoming increasingly common in the outsourcing of medical products, Kinross said.

“Five or 10 years ago, you saw more handshake agreements, with a piece-part manufacturing price. Now, it’s a formal contract that includes a demarcation of who takes what responsibilities, which helps ensure a win-win arrangement and prevents misunderstandings later,” he said.

Noblitt cautioned OEMs to assess risks, including all business and safety concerns. The potential need for second sources also should be addressed earlier than later.

“Early in the relationship and negotiations, both parties usually focus on how many widgets and the price, but they don’t think about the ramifications that quality systems or other issues bring to the equation and who is responsible for each part of compliance,” Noblitt said.
“Each party may assume the other is going to handle it,” he continued. “Both parties will be very happy with this courtship until a problem occurs, and then the relationship may fall apart. Without a clear, complete purchasing agreement, you have a recipe for disaster.”
In other words, think about drafting a contract early on.

Retain Design Control Sometimes, in their haste to offload a project, OEMs neglect to keep close enough tabs on the product’s development and, over time, lose touch with the project.

“One company I know of outsourced the development of product, and now it’s paying way too much. It’s a great product, but it’s not a commercial success because of the project overruns,” Stramel said. “But the company can’t pull it back in-house, because it doesn’t know how to build it or the nuances involved.”

An OEM must retain design control—obtain all documentation from their outsourcing partner and be in the loop for all design control and CAPA issues—if it intends to keep the product as a core offering in the company’s portfolio.
    
Build Trust Over time, as milestones are met and numerous meetings are held, the OEM and its outsourcing partner will become more comfortable with each other and may even fashion joint plans. Solectron Corp., based in Milpitas, CA, performs a joint analysis with its customers, reviewing assets, inventory, marketing plans and what each organization does best to leverage each company’s strengths.

“We may find that we should own a particular factory, not [the other company], or they should move older product lines to us, or we should redesign a product to take costs out and enter new markets,” explained Dave Busch, Solectron’s vice president, medical market segment. “We find ways to make life better for both their company and for us. OEMs today want a complete solution.”

Ensuring the outsourcing solution has the most success requires leadership from both companies to be committed to the relationship.

“We take time at the beginning of the process to get the CEOs together to talk about general philosophies,” Stichter said. “They’ll then have monthly calls to stay in touch and keep the lines of communication open.”

Touhey agreed, noting, “My style is hyper communication. I stay in touch with several senior managers of each customer. In my opinion, if you’re too busy to call your customers, you shouldn’t be president of the company. We provide the ability to let you sleep at night.”

By following these seven steps to successful outsourcing, you, too, should be able to sleep easy. 

Editor’s Note: See a related article on outsourcing strategies, “Your Top 10 Outsourcing Problems—Solved” in the October 2006 issue of MPO.

Stacey L. Bell is a freelance writer who specializes in business and marketing issues. She is based in Tampa, FL.