Supply chain management

 OUTSOURCING 3.0

Outprofit, Outperform, Outsource

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Purpose of the Book

Besides the 3 O’s of Outperforming & Outprofiting via Outsourcing, it also signifies that we are now into the third generation of outsourcing.

In the first generation, before the 80’s, outsourcing was mainly cost driven. In the second generation, in the 90’s, arrived the capabilities and value driven outsourcing. The key focus was on how to extract the maximum value out of an outsourcing relationship.

Only recently, in the third generation are we moving into the strategy driven outsourcing paradigm. This subtle shift is leading the business leaders to question that very underpinnings of a modern organisation. The key focus is “How can outsourcing assist in driving even more strategic advantage to our business?”.

Outsourcing is becoming important for a winning strategy
For many people, outsourcing is a dirty word, and it might have been the same for me if I had not been incredibly lucky to see an outstanding example of successful outsourcing very early in my career.

In 1983, at the age of 18, I flew to Naikai Zosen Shipyard in Miihara near Hiroshima, Japan to start my first job as a cadet in the Merchant Marine. After one year of prior training, I was to work with the ship’s captain, chief engineer and other officers to make sure that the ship being built for our company was as per the contract specifications. As a cadet, I was the youngest person on board, and as a result worked the hardest. However, this opportunity also allowed me to observe the shipbuilding industry at close quarters.

“All great changes are preceded by chaos”
Shipbuilding was going through a period of immense change at that time. Traditional centres of the industry in Europe – including UK, Ireland, France, Spain, Italy and Nordic countries were all struggling to keep up with the onslaught of ‘cheaper’ imports from Japan (Korea and China were nowhere on the shipbuilding radar at that time).

Japanese shipyards had reduced the cycle time for shipbuilding for a typical ship by more than 80% from over 3 years to just 6 months. This was indeed the talk of the industry in Japan, while also stirring a degree of resentment from traditional centres of shipbuilding who blamed their yard closure on ‘cheap’ Japanese labour, and government subsidies.

While I did not know much about the subsidies and other government induced market distortions at the time, what really struck me was the magic of result-focused modularised outsourcing. All parts of the business network - from the largest manufacturer of ship engine (in Europe) to the smallest manufacturer of porthole (window) fittings - worked to a very tight schedule in a pre-determined sequence to build and supply their modules. The shipyard was an assembly point to combine these modules systematically and rapidly, so that the ship could be launched and tested before being handed to the new owners. To me, this was poetry in motion, which still stays fresh in my memory after 30 years.


Now this has become a global game


Many years later, when I watched the Boeing supply chain in action (please see the case study in chapter 1), it reminded me of the ship building example. I was impressed with how Boeing had gone many steps further to create an outstanding global network of business partners and suppliers to build the 787 Dreamliner. This is both poetic and pragmatic at the same time; how so many different entities can come together to build such a complex aircraft with equally impressive results.

Mamta’s hands-on experience in Information Technology outsourcing has been extremely valuable in shaping our joint approach to Results-oriented Outsourcing and Modularisation (ROM). With more than 22 years working in IT outsourcing projects around the globe, she has deep insights into the problems with traditional outsourcing.

The magic of outsourcing is not always seen


Outsourcing provides leverage. It allows you to do things you could, or would not do yourself, and it allows you to do those things faster, better and/or at a lower cost. Like all leverage, outsourcing is a double-edged sword. On one hand, it allows you to grow more and faster. On the other hand, if gone sour, it can easily kill your business. Abundant examples of failed outsourcing arrangements can be found by research and throughout this book, including the infamous FoxMeyer saga from 1996 that led the US’s then second-largest wholesale drug distributor into bankruptcy.

The trend of outsourcing continues to grow unabated with the whole gamut of services, from simple to mission-critical tasks. There is not a single company on earth that does not outsource anything. It is not just about cost arbitrage, it is also a finer expression of division of labour at the organisational level. Not only is outsourcing ubiquitous, it is also extremely important. In fact when I wrote my book on 5-STAR Business Networks, outsourcing was selected as one of the 5 key elements underpinning the success of these networks, along four other elements – Innovation, Cash-to-Cash Cycle Management, Transaction Optimisation Profitability, and Product Phasing. 

I believe outsourcing to be so important that as soon as I finished writing the aforementioned book, I started writing this book to cover outsourcing in adequate depth. If you have already read the book, you will notice some common themes and models in the discussions of outsourcing. However, here we will examine those elements in a lot more detail. If you have not read my previous book, you can get the first three chapters free from here (www.5starbusinessnetwork.com).

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