Outsourcing Transition Risk
Matthew Douglas, VP Operations (Andrew)
Bennett West, Cort Jacoby, Giri Varadarajan (Deloitte)
Date: Nov 14th 2006
Today, we will address the topic of Contract Manufacturing (CM)
Outsourcing Transition Risks through our experiences at Andrew
Outsourcing
Outsourcing
IT Outsourcing
Outsourcing
BusinessITProcess
Outsourcing
Business
Process
Outsourcing
Contract
Manufacturing
ContractServices
Manufacturing
Non-business
Outsourcing
Data Center
Data
Center
Financial
Financial
Product
Lines
Food Service
Applications
Applications
Human
Resources
Human
Resources
Business
Units
Janitorial
End User Services
EndPurchasing
User Services
Purchasing
Bldg Security
Networking
Networking
Marketing
Marketing
Other
E-Commerce
E-Commerce
Other
Other
Other
Other
N
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CM outsourcing is a complex process presenting several transition risks.
It is important to develop mitigation strategies prior to outsourcing to
minimize any negative financial or customer impact.
Andrew, a $2 B global manufacturer of telecommunications
infrastructure equipment, has grown two-fold mainly through
acquisitions over the last three years
Key Customers:
Products
Key Highlights
• Founded in 1937, Andrew employs 10,000+ people with operations in N. America, S. America,
Europe, Africa & Asia Pacific
• Ranked #1/#2 in each major product group
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• Global leader in Wireless Communications Infrastructure
Andrew’s Base Station Subsystems Group does business in a very
challenging market
Customers
Competition
• Very large and consolidating
• Intense price competition
• Strong “buyer power”
• Continued consolidation is likely
Implications to BSSG Mfg
Must be:
• Low cost
• Global
Customers Competition
BSSG
Marketplace
• Customers are also competitors
Implications to BSSG Mfg
• Regional, scalable, & flexible supply
chain as a competitive differentiator
• Flexible
Supplier
Suppliers
• BSSG products are built using
thousands of components and several
hundred suppliers
• Raw material prices are increasing
(Copper, Aluminum, Silver, etc.,)
• Simplify the supply chain and focus
• Strategic Sourcing Partnerships
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Implications to BSSG mfg:
The Legacy BSSG Supply Chain was a “Spaghetti Chart” of
Complexity and the need for speed was paramount – Manufacturing
Outsourcing is our solution.
Old Supply Chain
Americas
Future Regional Outsourced Supply Chain
EMEA
Legend
Inbound Supply
EMEA
Americas
APAC
Outbound Shipments
APAC
Plants
Outsourcing Rationale
• Self funded exit from high cost, highly labor regulated country to improve gross margin & cash flow
• Simplified supply chain
• Variable pricing model directly ties manufacturing costs to volatile sales demand
• Enables Andrew to focus on product innovation, cost reduction, and customer relationships
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• Supply chain scalability & flexibility
Outsourced Manufacturing Introduces Several Transition Risks
Labor Disruption
Description:
Description:
• Day 1 “Flip the Switch” production
transfer to EMS Partner
• Internal labor strike or sabotage
Sample risks:
• Production shutdown
• Order fulfillment stoppages
• Physical violence/ product sabotage
La
b
Di
sr
up
tio
n
io
at
Re
al
iz
el
a
Ca
se
er
R
tio
ns
ss
Sample risks:
• Site disqualification
• Forecast drops/surges
• Credibility/reputation risk
om
ne
• Alleviate customer apprehensions
to minimize forecast surge & drops
st
si
Description:
Cu
Bu
Customer Relations
n
Risk
Risk
Dimensions
Dimensions
Business Case Realization
Description:
• Realize outsourcing benefits within
anticipated timeline
Sample risks:
• Due diligence issues
• Expat and severance costs
• Capital equipment estimates
• Every bus case assumption is a risk!
Transition risks typically manifests either as a schedule delay or bad cost estimate
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uc
tF
ul
fil
or
Pr
od
Sample risks:
• IT handoff failures
• “Confidential” knowledge transfer
• Supplier order book transfer
lm
en
t
Product Fulfillment
Understanding Key Risks And Implementing Mitigation Strategies
Is Critical To A Successful Outsourcing Transition
Description
 Day
Product
Fulfillment
Labor
Disruption
1 “Flip the
Switch”
production
transfer to
EMS Partner
 Internal
labor
strike or
sabotage
Sample Risk Scenarios

IT handoff failures

Supplier order book
transfer

“Confidential”
knowledge transfer
issues

Production shutdown

Order fulfillment
stoppages

Sample Mitigation Strategies

Conduct physical/IT systems
simulations for critical products

Develop inventory buffers &
back up suppliers

Evaluate IP implications &
secure protections

Phased transfer of sites if
multiple sites are involved

Identify alternate backup sites
by key product lines

Accelerate NPI launch of
replacement SKU’s at CM
location

Develop comprehensive
security plan
Physical violence/
product sabotage
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Category
Risks And Sample Mitigation Strategies Contd…
Category
 Alleviate
Customer
Relations
Potential Risk
Scenarios
Description
customer
apprehension
s to minimize
forecast surge
& drops
 Site
disqualification
 Forecast
drops/surges
 Credibility/reputation
risk
Sample Mitigation
Strategies
 Conduct
internal CM audits to
enable site qualifications
 Create
sufficient buffers for
critical products
 Develop
clear & consistent
customer communications
 Prepare
 Realize
Business
Case
Realization
outsourcing
benefits fully
within the
anticipated
timeline
diligence issues
 Expat
costs
and severance
 Capital
equipment
estimates
 Every
business case
assumption is a risk!
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 Budget
conservatively for
expat/severance costs
 Evaluate
CM leaseholder
improvements, bldg &
equipment requirements
 Develop
conservative business
cases to account for business
assumption risks
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 Due
clear information
packets for due diligence
Manufacturing Outsourcing Lessons Learned
Impact
Lessons Learned
 Outline success criteria and get team alignment; check commitment regularly
 Understand country’s cultural nuances to customize mitigation strategies
Time
$
Benefit

Resources, Resources, Resources – right resources minimize transition risks

Strong program management infrastructure to manage a cross-functional
effort of simultaneous transitions in multiple continents/countries.
Communication and coordination are essential!

Confidentiality, Confidentiality, Confidentiality – critical to mitigate labor
disruption

Evaluate Sarbane-Oxley regulations especially FAS 146 implications to
understand what can be classified as one time restructuring costs

Understand Freight Vs Labor tradeoff when allocating production to factories

Contract manufacturing is a marriage – understand CM partners profitability
criteria and communicate openly to avoid surprise divorce

Involve cross functional leadership to gain 360° alignment on business case
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