What decision would you make if your manufacturing plant could make a product for $40.00 but the same product could be made for $15.00 in another country? Would you outsource the product or would you make it?
This is a situation that almost all supply chain professionals professionals face every single day. Depending on where you are at in the world the economy may have drastically underpaid workers, material costs could be inflated or maybe technology just doesn't meet the needs. We all face different problems within the supply chain but the issue of outsourcing or not outsourcing can only be made accurately with one measurement. Total cost of ownership.
I recently had the opportunity to attend a manufacturing summit organized by the Coalition for a Prosperous America. Many manufacturing, pharmaceutical, consulting and government organizations came together to network and brainstorm the seemingly declining state of manufacturing in California. Although I won't outline the entire conference I would like to touch on two topics that were brought up.
Total Cost of Ownership
The total cost of ownership is defined by Apics as; the total cost of ownership of the supply delivery system is the total costs associated with every activity of the supply stream. The key word in this definition is "every." Often times when a decision to outsource is made it is based on the material and labor "piece price" used in quoting and proposals. However this piece price fails to account for, logistics, possible storage, travel fees, additional packaging and any other costs you might receive as a result of outsourcing activities. Let's create an example to help us understand. If a company were making a screw they would most likely quote the material, labor associated with making the screw and any processing fees that may be associated. Let's say that total adds up to $33.00. Now, supposing you receive a quote from a supplier with a piece price of $12.00. Well that sounds like a good price $21.00 off for me and my customer to split. Sounds like a pretty sweet deal right? Well not exactly. The piece price and the total cost of ownership are two very different pricing points. When a piece price is used as the basis for a subcontract opportunity we miss out on quite a few "hidden costs" and we factor in the variability of an organization's "shop rate."
Here is one thing that you can do when making the decision to subcontract or to manufacture.
1. Map the value stream out at a high level for manufactured products or services and for subcontracted products or services.
2. After mapping the value stream out review value - added items and business necessary items such as first articles, set-up and any other charges that may be necessary to the products compliance. Be aware that business necessary items are non-value and many will not pay for these items entirely.
3. Compare the two charges in order to make your decision based on the entire value stream not just the unit price.
Suggestion - After you have made the value stream visible, standardize a template that can be repeated for other similar items or activities, allowing you to analyze the total cost of ownership with minimal modifications.
Once you begin to see quotes and proposals as a value stream and not a unit or piece price then you can truly factor in everything that should be. This type of approach allows you to really see which is the better approach; make or buy.
At one point in the conference one attendee asked what I thought to be a very important question but do to time constraints I was not able to address the topic. I'd like to do so here. The question as accurately as I can recall was: "We've been talking a lot about trade and total cost of ownership, do you think that we should focus more on automation opportunities instead of labor opportunities?"
1. Before considering any level of automation to a process a cost to benefit analysis should be performed in order to see what level of automation fits your needs. As a side note the highest level of automation (level 5) is not always the best option.
2. Before even considering a cost to benefit analysis remove every form of waste possible from the process. Dare I say but this is often the one that is most overlooked of the two. With technology at such an advanced state we have a tendency to buy a much higher level than we really need. But the first step before pouring heavy investments into expensive high maintenance machines is to remove all forms of waste and variation prior to purchase. Taking an intricate view of our organizations various value streams often reveals that we have opportunities to improve changeovers, reduce setups and streamline processes which requires much less investment than automation. Then and only after removing all possible forms of waste should we consider automation. The other important data you can gather from reviewing the value stream is how safe the process is for employees. Of course it goes without saying but if a process is necessary to produce the required product or service and proves to not be safe for an employee to perform automation is something you should consider.
In closing both concepts elude to the fact that by applying lean principles in our organizations we often times can not only create a more efficient, effective and resourceful organization but we can make decisions based on real data and information. Of course establishing a strong supply chain is a given as it will assist your organization in getting what you need, when you need it without concern. However we should also consider ways to maintain a level of manufacturing that is healthy for our organizations based on true analysis which often results in reduced logistics costs, better control of product and services and often cuts down on many other forms of waste.
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