Doing Outsourcing Right

In a previous post, “Don’t Lose How To Make Things,” I discussed some of the perils of outsourcing either your production or your production technology.

Yet there are many successful companies that manage to do just that. One of the most successful is Apple.

We all know Apple as a cutting-edge innovator. Their products have created, and destroyed, entire industries and changed social paradigms.

What is behind that cutting-edge innovation, though, is one of the best (if not the best) supply chain management systems on Earth. Lets look at a couple of key characteristics of how they do this, and you can compare them to the more common mindsets about outsourcing.

First, Apple understands intimately how an iPhone works and how to make one. While they may outsource actual production, they do not outsource their core knowledge. They know their product and their process.

But what really got my attention (and inspired me to write this) was a fascinating anonymous response to a question about a logical strategic investment for Apple.

The comment describes how Apple uses their resources and supply chain knowledge to stay on top of the cutting edge and maintain competitive advantage.

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards.

He goes on to describe how Apple first has exclusive access to the latest technology, then as it becomes commoditized, maintains cost advantage as they are searching for the next paradigm shift.

What I think this does is allow Apple to use their supply chain savvy to change things up faster than their competitors can respond.

Apple is not just crushing its rivals through superiority in design, Steve Jobs’s deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Here is the bottom line: If you want to outsource, that is actually OK. But only if you are using that as an opportunity to continuously improve your process of supply chain management while striving to become the best in the world.

If it is a short term ROI problem, rather than working hard to develop a key strategic advantage, well, good luck with that.

4 Replies to “Doing Outsourcing Right”

  1. Apple is the quintessential example of planning and strategy driving decision making. They, like Toyota understand the critical nature of partnering with suppliers as a strategic “weapon” in a rapidly evolving marketplace. Being able to influence the marketplace by ensuring supply to meet demand is genius. Even when the iPad2 suffered from constrained supplies they were able to keep product flow and in some cases beat their delayed promise dates!

  2. Very few companies truly understand how to outsource. That’s because most of them do not have an underlying strategy behind the outsourcing – other than lower piece price. If your only strategy is to outsource whatever you can buy for less than you can make, you’re doomed. The sad truth is that if you think you’re going to retain just the design and engineering functions and outsource everything else, you will very quickly lose the ability to design and engineer because you won’t see (and have to solve) the problems you created. Worse yet, you won’t see this problem sneaking up on you – until it’s too late. And by the way, this is a cliff one cannot simply claw their way back up on. Once you lose this talent, you’re pretty much all done because the kids just ate the parents.

    Yes, Apple does a stellar job of managing its outsourcing, but one cannot forget Toyota either. Toyota has long understood that they cannot be the master of all elements of automotive design and manufacturing. But, they also realized that if they did not control a critical portion of the entire process, one quickly hollows out the company and has nothing left.

    Maybe the most critical difference between those that do outsourcing right and those that don’t is the way the suppliers are treated. At Toyota and Apple, they’re not just suppliers, they’re partners. At companies who do it wrong, they’re just the lowest price vendors.

  3. Tom Warda is right about treating suppliers as partners. Toyota does this to the extent that Toyota engineers spend time with the suppliers to help them with problems.
    Toyota will even go beyond this, and help suppliers who express a willingness and desire to do so, to take their first steps towards Lean manufacturing and introduction of kaizen.
    I have even known Toyota to put whole teams of production and engineering people into a new partner supplier’s factory if it is close to Toyota premises, to help them establish standardised work and get their processes running smoothly.
    They do this because they genuinely consider their suppliers to be partners for the long term.

  4. If I could share this quote from a blog that I’ve recently bumped into could help.
    “Don’t worry about problems of success before you’re successful. Business success boils down to three things. Acquisition, conversion and retention. Don’t worry about the last two if you haven’t figured out the first one.” -Liam Martin
    I think it simply means you should cross the bridge when you get there. Yes, there are lots of problems you’ll encounter along the way when you’re outsourcing. However, you should not think about those problems when you’re still not there yet. Instead, you should focus on the things you need to do in order for you to get there. You should face the problems on the present for you to get to the next stage. If you have a problem on your business and you think outsourcing is the only solution. You should try it and see where it would get you.

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