2However, outsourcing manuacturing as part o post-mergerintegration isn’t consistently the better decision. Not only may it ailto deliver cost savings, but a poorly designed outsourcing modelcan also lead to organizational instability and loss o strategicadvantage. In some cases, it may even risk the overall viability o thebusiness.
Case 1: Create a manuacturing outsourcing strategy to matchcorporate business objectives.
A multibillion-dollar telecommunications inrastructuremanuacturer was acquired by a larger company that hadoutsourced its manuacturing to an electronic manuacturingservice (EMS) provider. Post-acquisition, the acquired companywas asked to perorm a detailed analysis o its current in-houseChinese, North American, and European manuacturing andsupply chain costs and determine i an outsourcing-ocusedmanuacturing strategy was a cost eective route or the newlyintegrated division.The process began by analyzing bill-o-materials (BOM) costestimates rom several EMS companies, long-term orecast unitdemand expectations, air and sea reight rates, and labor rates inChina, Mexico, and several locations in Eastern Europe, the UnitedStates, Italy, and France.Rather than simply going with the low-cost solution in China, themost eective manuacturing strategy or this company turned outto be a hybrid approach to managing production in each majorglobal region—North America, Asia, and Europe. Driving thisdecision were local content requirements in Western Europe, theinability o the company to pass along increased reight costs roma centralized, global China-based manuacturing organization,and supply chain risk concerns.As a result o the analysis, the company also decided to maintainin-house China manuacturing operations and implement a serieso global process-improvement and cost-reduction initiatives toimprove the protability and fexibility o its internal operations.European and North American manuacturing operations weretransitioned to contract manuacturers in those regions.
Lessons Learned and Effective Practices
This case illustrates what is missing rom many M&A deals: aserious consideration o the manuacturing strategy prior tomaking the outsource decision. Figure 1 outlines the criticalquestions a manuacturing strategy should address as part o apost-merger integration eort.
What type o manuacturing network is needed?
Themanuacturing network should be designed to serve the newcompany’s customers eectively while keeping costs in line withexpectations. Companies with high-volume, low-mix products andstable demand patterns stand the better chance o benetingrom a centralized, low-cost, country-ocused manuacturingnetwork. Companies producing low-volume, high-mix goods withvolatile demand patterns oten benet rom a hybrid approachwhere plants are located in both low-cost and higher-cost regionsdepending on product intellectual property content, degree olabor deployed in the manuacturing process, customer locations,and the ability o the company to pass along shipping costs toits customers.
How much capacity is required to meet market needs?
Excesscapacity can hamper long-term protability, but too little canconstrain growth. M&A deal-makers should determine capacityneeds based on expectations or market growth, productivity, andcustomer demand. One strategy is to maintain in-house regionalmanuacturing capabilities while contracting with suppliers andcontract manuacturers or fexible capacity in times o surgingdemand. Another strategy is to keep the technology-intensiveelement o the manuacturing value chain in-house, whileoutsourcing more labor-intensive activities such as assemblyand testing.
Should we make or buy manuacturing capacity? Where to locateplants?
The third and ourth considerations are intertwined. Thesedecisions should be made based on total landed cost estimates,risk considerations, and long-term demand patterns. When theseactors are taken into account, the answer is oten to maintainsome or all o the merged entities’ manuacturing assets.
Case 2: Create a valid business case prior to making theoutsourcing decision.
A multimillion-dollar telephone equipment company operatingunder an outsourced manuacturing model acquired a smallerwireless equipment company that manuactured its ownproducts. Beore the deal closed, executives made the decision tooutsource the acquired company’s products in order to maintain aconsistently outsourced operating model. This decision was made,however, without careul analysis o the acquired company’sproduct cost structure. Decision makers assumed that outsourcingto Asia would be less expensive than manuacturing in NorthAmerica.Ater the deal, the company worked with the preerred contractmanuacturer to develop a business case to measure the potentialshort- and long-term savings o outsourcing manuacturing versusin-house manuacturing. The analysis showed that while manydirect costs would be greatly reduced (e.g., wages, material),other indirect costs would only be partially reduced (e.g., IT, legal,acilities, insurance) under a ully outsourced operating model.Some other costs (e.g., travel) would actually increase. The totaloutsourced cost per unit was only marginally lower than the in-
Figure 1: Questions Addressed by an M&AManuacturing StrategyTo Outsource or Not? Three Examples.
To avoid these pitalls, companies should consider evaluating themanuacturing outsource/insource decision in detail. The ollowingthree case studies illustrate eective industry practices and lessonslearned in making the outsource/insource decision, and show howadopting these practices may help reduce risk and increase theoverall eectiveness o an M&A deal.
Where to locate plants?What type of manufacturingnetwork do we need?How much capacity isrequired to meet marketneeds?Should we make or buymanufacturing capacity?
•
Global
•
Regional
•
Domestic
•
Americas
•
Europe
•
Asia
•
Industry trends
•
Customerdemand
•
Competitors
•
Consolidate
•
Build
•
Outsource
Leave a Comment