With complex products such as automobiles, integration is a key element of performance. That means managers must understand which activities and competencies they can safely outsource and which they need to keep.
In industry after industry, managers have taken deliberate steps to separate their value chains and shift
important activities and functions to outside suppliers. But what happens when companies become too
dependent on outside suppliers and cede them too much control when they lack the same degree of
understanding and awareness about how important product or service elements fit together and what’s
necessary? How can they go about reestablishing critical internal levers?
These questions arose during a multiyear research project examining supply strategy relating to new product development at a major European automotive company. In the late 1980s, the company–the authors call it Alpha–had direct supply relationships with more than 3,000 suppliers, most of them small companies that were involved in component production. In the early 1990s, however, management began shifting increasing amounts of design and engineering work to suppliers–a trend that was hastened by the proliferation of electronics in cars. By the mid-1990s, Alpha began to outsource the design of complete systems, such as dashboards, seats and safety systems.
Alpha management hoped to increase flexibility, reduce lead times and cut development costs while improving product quality. But as the internal engineering teams got smaller and less up to date on the specific design and technical issues, problems emerged with integrating systems and making decisions about trade-offs.
The article examines the difference between integrating physical systems and integrating the performance of such systems. The authors found that successful new product development depends on three main factors: component-specific knowledge; learning by doing; and technological renewal. Modular product architecture may make good sense for dealing with physical integration, but it is not adequate for resolving issues of performance.
3 Comments On: What Happens When You Outsource Too Much?
Article has indicated the weaknesses of the outsourcing paradigm. Although outsourcing is still the right thing to do outside the core competences of the company, people need to realise very well why they are outsourcing. In short there are only 3 reason why you would outsource and depending on these reasons you need to have a different management structure. At least my own research has shown this. When will we read more about similar topics?
Regards,
I run workshops on using third party suppliers and one of the real examples I use is an energy distributor that outsourced engineering activities but found that it needed to pull back the technology to deal with high-tension cables and transformers. It was made aware of the problem only through the level of spend in this area. But the concern about rising costs went from tactical to strategic when they recognised the implications on investment planning, of not understanding the technology implications well enough.
Above mentioned published paper is very helpful to understand what concenquences can be happened because of too much outsourse.But now a days many companies are doing outsourse and they are at competating position in their field.so I am curious about how can we decide that how much outsourse should be required? Instead of outsourse if company choose way to acquire those firms then is it good idea?