Professional Documents
Culture Documents
Altarum 3520 Green Court, Suite 300 Ann Arbor, Michigan 48105-1579 (734) 302-4600
Acknowledgements
The Altarum Project Team gratefully thanks the following individuals for their help in developing this Guidebook. The Northrop Grumman Newport News Outsourcing Pilot Team: Kevin DeGraw Doug Livermon Mike Walsh Peder Wennberg Dexter Lilly Terry Volz Veasey Wilson Project Advisor: Bill Brill, Atlantic Marine, NSRP Major Initiative Team Leader for Business Process Technologies Program Manager: Leo Plonsky, Office of Naval Research Funding for the pilot project and this Guidebook was provided by the Navy Manufacturing Technology Program within the Office of Naval Research, and through the National Shipbuilding Research Program (NSRP).
ii
Preface
Background to the Guidebook
The Strategic Outsourcing Decision Guidebook focuses on a key area for U.S. shipbuilders the need to reduce costs while maintaining responsiveness to the difficult process of assembling some of the largest and most complex products in the world. One approach to this is to determine a companys required core competencies and to outsource remaining tasks to more efficient suppliers. The NSRP Advanced Shipbuilding Enterprise Strategic Investment Plan1 (ASE SIP) defined the three most important challenges to be addressed in the Business Process (BP) Technologies Major Initiative Area as Sourcing and Supplier Integration, Planning and Production Design Processes, and Pre-Contract Processes. The outsourcing decision process fits squarely in the midst of those three areas. According to the SIP, these three areas combined represent 84% of the relative benefit to be gained from the BP Technologies area. As a whole, the BP Technologies area represents 21.4% of the total benefit anticipated from the ASE program and was specifically identified as a high return on investment (ROI) area. Whether to outsource is one of the most difficult areas in which to make a decision. The people who work in the affected area are concerned for their livelihoods; the people who work with them have emotional ties with their colleagues; everyone is concerned that they are currently part of a process that at least works, while outsourcing raises many levels of uncertainty; and there may be a sense that, because the work has always been done inside, it is part of what defines the company. The very emotional nature of the outsourcing decision means that we must have good information on which to base it. Too often such decisions are made on the basis of good intentions and limited information. The Strategic Outsourcing Decision Guidebook is designed to provide a basis on which good decisions can be made. It does this by providing a template for an analytically oriented outsourcing decision process and a detailed description of the elements of that process. Moreover, the Guidebook goes beyond the outsourcing decision process per se, to address problems of implementation. In particular, an outsourcing decision may result in the need to form new relationships with new kinds of suppliers. The Guidebook provides support for these situations by providing advice on the types of new relationships that may be needed and how to form them.
National Shipbuilding Research Program (2001). Advanced Shipbuilding Enterprise Strategic Investment Plan. Rev 2.
iii
2 3
Bath Iron Works and Electric Boat are the other major exceptions, of course. M. Fleischer, R. Kohler, T. Lamb, B. Bongiorni, and N. Tupper (1999). Shipbuilding Supply Chain Management Project: Final Report, MANTECH Contract # F33615-96-C-5511. Ann Arbor, MI: Environmental Research Institute of Michigan.
iv
Table of Contents
Executive Summary ........................................................................................................ ES-1 1 Introduction ...............................................................................................................1-1 1.1 1.2 Benefits of the Process ......................................................................................1-1 Types of Outsourcing Decision Processes.........................................................1-1
1.2.1 1.2.2 Strategic Outsourcing ......................................................................................... 1-1 Tactical Outsourcing ........................................................................................... 1-2
How Is This Approach Different?........................................................................1-2 How Does It Compare to Other Books or Articles? ............................................1-2 Tips for using this Guidebook .............................................................................1-3
1.5.1 1.5.2 1.5.3 1.5.4 1.5.5 Complete the Foundation Tasks First................................................................. 1-4 Modify the Process as Needed ........................................................................... 1-4 Include Major Stakeholders ................................................................................ 1-4 Train Participants ................................................................................................ 1-4 Improve the Process ........................................................................................... 1-4
Foundation Tasks .....................................................................................................2-1 2.1 2.2 2.3 2.4 Set Strategic Direction and Funding...................................................................2-1 Determine Core Competencies and Strategic Objectives ..................................2-2 Develop List of Candidates for Consideration ....................................................2-2 Appoint Process Implementation Team..............................................................2-3
Outsourcing Decision Process................................................................................3-1 3.1 Activity A Define Candidate Product Families .................................................3-1
3.1.1 3.1.2 3.1.3 3.1.4 Activity A.1: Initiate Outsourcing Decision Process ........................................... 3-2 Activity A.2: Identify Product/Process Categories.............................................. 3-3 Activity A.3: Identify Sub-Components of Items/Parts/Products........................ 3-3 Activity A.4: By Part Family, Determine Origin and Volume of Work................. 3-5 Activity B.1: Develop Process Map for Each Part Family .................................. 3-7 Activity B.2: Perform Internal Manufacturing Cost Analysis ............................3-10 Activity B.3: Document Requirements for Suppliers ........................................3-11
3.2
3.3 3.4
Activity C Evaluate Potential Substitutes.......................................................3-12 Activity D Determine Supplier Capabilities and Develop Ranking Criteria ....3-13
3.4.1 3.4.2 3.4.3 3.4.4 Activity D.1: Identify Appropriate Suppliers to Support Requirements ............3-13 Activity D.2: Investigate Suppliers Capabilities ...............................................3-14 Activity D.3: Develop Criteria and Data for Ranking Potential Suppliers.........3-15 Activity D.4: Perform Inquiry RFQ Process......................................................3-15
3.4.5 3.4.6
Activity D.5: Rank Potential Suppliers .............................................................3-17 Activity D.6: Determine Likely Supplier Relationship .......................................3-17 Activity E.1: Predict Likely Program Impact .....................................................3-19 Activity E.2: Perform Final Cost Analysis..........................................................3-20 Activity E.3: Make Sourcing Recommendation to Steering Committee...........3-21 Activity E.4: Outsourcing Steering Committee Review ....................................3-22
3.5
3.6 3.7
3.8
Appendix A Selected Definitions .................................................................................. A-1 Appendix B Process Responsibilities .......................................................................... B-1 Appendix C Data Gathering........................................................................................... C-1 C.1 Data Gathering Interview................................................................................... C-1 C.2 Reference Checking Interview .......................................................................... C-5 Appendix D Cost Factor Analysis................................................................................. D-1 D.1 Labor Cost Factors ............................................................................................ D-1 D.2 Purchased Goods and Services Cost Factors................................................... D-2 D.3 Facilities Cost Factors ....................................................................................... D-3 D.4 Other Cost Factors ............................................................................................ D-3 Appendix E Appendix F Example Cost Factor Analysis ................................................................. E-1 Example Supplier Interview.......................................................................F-1
Appendix G Example Supplier Comparison Sheet...................................................... G-1 Appendix H Example Supplier Rating Sheets ............................................................. H-1 H.1 Requirements .................................................................................................... H-1 H.2 Discriminators.................................................................................................... H-2 H.3 Motor Repair/Overhaul Supplier Rating ............................................................ H-3
vi
vii
viii
Executive Summary
This Guidebook identifies three factors that should be used as the basis for outsourcing decisions, namely: Strategic concerns for core competence and employee and community relations Lowest total cost (or best value) Impact on operations
It provides a structured, deliberate process that attempts to involve all stakeholders, balance a variety of factors, collect data about those factors, and then make a reasoned decision. This is necessary because good decisions about outsourcing are generally not the result of seat-of-the-pants approaches. It is too easy to overlook a key issue that will adversely surface later. The systematic, structured outsourcing decision process will lead to reduced costs and fewer delays. There will be fewer delays because the closer relationship that results from the process will bring with it delivery closer to just-in-time than is possible from current relationships. An outsourcing decision analysis assesses the costs and benefits of having work performed by internal shops versus outside suppliers. There are two forms these outsourcing decisions can take: Strategic Outsourcing where the shipyard decides whether it wants to make or outsource a type of commodity, and Tactical Outsourcing where the shipyard decides whether it wants to make or outsource a specific part or assembly for an individual ship or series of ships.
The supplier-customer relationships formed will be different for tactical outsourcing decisions as opposed to strategic ones. Much closer relations are required for the strategic decision to be effective. This Guidebook is primarily focused on strategic outsourcing decisions. However, most of the methods discussed here could be used for tactical decision-making. In contrast to the typical outsourcing decision processes in many shipyards, the approach recommended in this Guidebook is: More complete More accurate More structured
The concept of outsourcing is hardly new. There are many articles and several books on outsourcing. The primary contribution of this Guidebook is that it provides a step-bystep (structured) process that focuses on the unique needs of the U.S. shipbuilding industry, particularly that portion of the industry that serves the U.S. Government customer. Being a government contractor places unusual requirements on a shipyard, particularly in regard to procurement requirements. However, the Guidebook should also be applicable to commercial shipyards.
ES-1
A second contribution this Guidebook makes is that it uses a comprehensive approach to building cost models. This approach provides a substantially more accurate view of costs than the typical direct labor plus overhead. The heart of this Guidebook is a process to follow in order to reach outsourcing decisions. This process has been tested (and improved) as a result of pilots at Northrop Grumman Newport News. Nonetheless, it may not be perfect fit for other shipyards. Therefore, tips or suggestions on how to use the Guidebook are given as follows: Complete the Predecessor Tasks First Modify the Process as Needed Include Major Stakeholders Train Participants Improve the Process
The overall outsourcing decision process is divided into a series of steps as shown in the high-level diagram in Figure ES-1 below. The details of the high-level boxes are provided in the body of the Guidebook. Undertaking an outsourcing decision process requires considerable effort. Several tasks that build a proper foundation for outsourcing decisions should be completed before undertaking any outsourcing decision process.
Figure ES-1: Overall Outsourcing Decision Process
Foundation Tasks Set Strategic Direction & Funding Determine Core Competencies & Strategic Directions Develop List of Candidates Appoint Process Implementation Team
Analyze Process + Associated Processes Define Candidate Product Families Evaluate Potential Substitutes
Outsource Determine Supplier Capabilities & Develop Ranking Criteria Outsourcing Analysis and Recommendations
ES-2
Introduction
An outsourcing decision process is not just finding an excuse to outsource more work. The purpose of the outsourcing decision process is to make the most rational decisions about where something should be produced or assembled. In this Guidebook we recommend that you base those decisions on three factors: 1. Strategic concerns for core competence, as well as employee and community relations 2. Lowest total cost (or best value) 3. Impact on operations In effect, we recommend a structured, deliberate process that attempts to involve all stakeholders, balance a variety of factors, collect data about those factors, and then make a reasoned decision. This is in contrast to blindly choosing whether to outsource without a full analysis. It is also in contrast to many outsourcing decision processes that we have seen which fail to consider total cost on both sides of the equation. Good decisions about outsourcing are generally not the result of seat-of-the-pants approaches. It is too easy to overlook a key issue that will later come back to haunt you. You need to take the time to do it right if you really want to improve your business.
1.2.1
Strategic Outsourcing
In the Strategic Outsourcing decision, the shipyard decides whether it wants to make or buy a type of commodity at all. If it decides to buy that type of commodity then most likely it will close the facility currently used to make it. Since the consequences of this type of decision are so significant, the process used to make it should be as accurate as possible. The political considerations are significant as well, suggesting that careful attention be paid to bringing all major stakeholders into the process. Perhaps the most successful outsourcing is when the internal customer never notices that the outsourcing has occurred, but sees that service and costs have improved. This Guidebook is primarily focused on strategic outsourcing decisions.
1-1
1.2.2
Tactical Outsourcing
In the Tactical Outsourcing decision, the shipyard decides whether it wants to make or buy a specific part or assembly for an individual ship or series of ships. While a series of tactical decisions may well lead to a strategic outsourcing decision in the future, the immediate consequences are not so large. A shipyard may want to make these forms of outsourcing decisions as a type of experiment to learn which types of commodities it is good at (in part by benchmarking against external sources), and to learn more about the supplier community before it attempts to make a strategic decision. The specific types of supplier-customer relationships formed will be different for tactical outsourcing decisions as opposed to strategic ones. Much closer relations are required for the strategic decision to be effective. Although this Guidebook is primarily focused on strategic decisions, most of the methods discussed here could be applied tactical outsourcing decisions.
Quinn, James B. and F. G. Hilmer. Strategic Outsourcing, Sloan Management Review, Vol. 35, No. 4, p. 19, 1994. Prahalad, C. and G. Hamel. The core competence of the corporation, Harvard Business Review, May-June 1990, pp. 79-91.
1-2
does not provide how-to guidance. Simon Domberger6 has written a book that provides substantial background information on outsourcing, but also does not provide a process to guide the user. It would be a useful source of supporting alongside the process presented here. A new book with background information for outsourcing by Michael Milgate7 has recently become available. Like the book and articles described above, it does not describe an outsourcing process. It instead focuses on the relationships between companies involved in alliances and outsourcing relationships in the context of lean organizations. The best how-to book we have seen is by David Probert8, but it is not very easy to get in the U.S., having been published by the Institute for Electrical Engineers in Great Britain. It provides an excellent conceptual overview and a step-by-step process, although it is not customized for shipbuilding nor does it have a lot of supporting information. Another recent book, by Maurice Greaver9, defines an outsourcing process. The process it describes is similar to the one described in this Guidebook, but again not focused on the shipbuilding industry. Either Proberts or Greavers book would be a good alternate source to have as a supporting reference to the outsourcing process provided here. The primary contribution this Guidebook makes is that it provides a step-by-step process that focuses on the unique needs of the U.S. shipbuilding industry, particularly that portion of the industry that serves the U.S. Government customer. Being a government contractor places unusual requirements on a shipyard, particularly in regard to procurement requirements. That does not mean, however, that this Guidebook only applies to government procurement. In fact, organizations such as American Bureau of Shipping (ABS) play a very important role in setting standards for the commercial shipbuilding industry. This Guidebook should also fit the commercial shipyards needs reasonably well. A second contribution this Guidebook makes is that it uses a comprehensive approach to building cost models. This approach provides a substantially more accurate view of costs than the typical direct labor plus overhead.
6 7 8 9
Domberger, Simon (1998). The Contracting Organization A Strategic Guide to Outsourcing, New York: Oxford University Press. Milgate, Michael (2001). Alliances, Outsourcing, and the Lean Organization, Westport, CT: Quorum. Probert, David (1997). Developing a Make or Buy Strategy for Manufacturing Business, London: IEE. Greaver II, Maurice F. (1999). Strategic Outsourcing A Structured Approach to Outsourcing Decisions and Initiatives, New York: AMACOM.
1-3
1.5.1
1.5.2
1.5.3
1.5.4
Train Participants
Everyone who is going to use the process needs to be trained in it. In other words, it does not help to have a Process Implementation Team made up of people who do not really understand the process they are supposed to be using. Take the time to train the team in the process. It seems obvious, but because it takes time and effort, we have observed many examples of failure to do adequate training.
1.5.5
1-4
Foundation Tasks
Undertaking an outsourcing decision process requires considerable effort. Therefore, going through the process when the outcome is preordained is unwise. Not only is the effort itself wasted, but conducting a pointless outsourcing decision process only leads to suspicion and lack of faith in the process for future applications. Figure 2-1 shows a set of tasks that build a proper foundation for outsourcing decisions and that should be completed before undertaking any outsourcing decision process. Note that these foundation tasks are not numbered. They are not part of the outsourcing decision process itself. The numbered tasks of Section 3 are the steps that are applied in each individual outsourcing decision process. These foundation tasks should be undertaken by a highlevel management committee with the responsibility to oversee the overall process of outsourcing. We refer to this committee as the Outsourcing Steering Committee.
See Appendix B
The foundation tasks are: Set strategic direction and funding Determine core competencies and strategic objectives Develop list of candidates for consideration Appoint process implementation team
Appendix B provides guidance on the distribution of responsibility for outsourcing analysis and decisions.
Figure 2-1: Foundation Tasks That Precede Applications of the Outsourcing Decision Process
Set Strategic Direction and Funding Develop List of Candidates Appoint Process Implementation Team
(A)
2-1
properly undertaking the outsourcing decision process. Part of ensuring outsourcing decisions fit within the strategic direction is designating a management representative to champion the overall process. Top management will need to allocate human resources and funding to the outsourcing decision process. The Outsourcing Steering Committee will need to develop the candidate list and oversee the overall outsourcing decision making process.
Fincantieri Example:
One of the best examples of knowing core competencies that we have seen in shipbuilding was at Fincantieri, the Italian shipbuilder. When we visited them in 1997 they had just completed an explicit analysis of their core competencies. At that time they believed their core competencies were design, naval architecture, building the hull, and integration with the customer.
10
Doig, Stephen J., R.C. Ritter, K. Speckhals, and D. Woolsen. Has Outsourcing Gone too Far?, McKinsey Quarterly, No. 4, 2001 (www.mckinseyquarterly.com).
2-2
product alternative, or partnership) for the product that requires those capabilities. The organization is required to sustain the capability specifically by contract. The organization needs to develop this new technology to achieve a competitive advantage in the markets in which it competes. There does not exist potential for partnerships or outsourcing of this technology. Labor relations issues arising from outsourcing the work would lead to excessive extra costs or work interruption.
3. The remaining outsourcing candidates should be prioritized for consideration, based on the judgment of the management committee on a combination of the likelihood of success and long-term benefit. Although any part or system not considered a product of the companys core competencies is a potential candidate for buying, other criteria will serve to rank those candidates for the deeper consideration of the outsourcing decision process. There are scenarios where the cost comparison is likely to favor outsourcing. Labor. In the case of a product for which the majority of the actual cost comes from labor, the comparative costs will likely be in favor of outsourcing if the actual internal labor costs are higher than the typical suppliers labor costs. This is a common situation when the potential suppliers processes and business model are focused to producing a particular product or family of products whereas shipyard processes are set to produce a very wide variety of items. Additionally, the overall relatively small workload for the shipyard processes may be highly cyclical, swinging from capacity overload situations to no work situations. By performing work for a number of customers, the potential supplier is often able to better level load their facility and leverage economies of scale that the shipyard facility cannot. This variability and lack of scale experienced by the shipyard process incurs higher labor cost for the shipyard processes than is experienced by the potential supplier. Materials. For products where the material cost dominates, the relative purchasing power of the supplier versus the shipyard becomes a critical factor. If the supplier can find a cost advantage through quantity purchasing, then its overall costs are likely to be lower as well. Equipment. A third relevant cost area is capital equipment costs. Expensive equipment that is only lightly used will lead to increased overall per-item costs. A supplier that can more efficiently use expensive manufacturing equipment will generally have lower costs than a small facility that cannot afford the most effective equipment.
Of course, when two or three of these elements come into play at the same time is when the case for outsourcing is likely to be substantial.
2-3
qualified personnel, including core representatives from purchasing, engineering, manufacturing, planning, and finance. In addition, there may be part time members from other departments as needed, especially including representatives of internal customers of the parts being considered. This team will perform the item-specific outsourcing analysis (steps A-E) and report results to the Outsourcing Steering Committee that will complete the process of actually making and implementing the decision. The PIT will also train new team members when necessary and make recommendations for improvement to the outsourcing decision process. One key issue to watch out for is over-familiarity with the candidate products being considered. PIT members gathering data and building models who are too familiar with the process and products being considered will likely have difficulty in conducting a proper study. When you know the process and product well, it is too easy to cut corners and make assumptions, thereby missing important issues, cost factors, or other information. The Steering Committee should consider bringing in outside support to the process if there is a possibility the PIT cannot maintain the necessary emotional and intellectual distance.
2-4
Analyze Process + Associated Processes B Define Candidate Product Families A Evaluate Potential Substitutes C
Outsource Determine Supplier Capabilities & Develop Ranking Criteria D Outsourcing Analysis and Recommendations E G Outsourcing Decision F Internal
3-1
(B)
(C)
3.1.1
11
12
Note that throughout this Guidebook, part is used as the generic term for piece parts, assemblies, subsystems, or systems. The process applies regardless of the level of complexity of the individual items that make up the part category or family under consideration. Switchboard picture courtesy of Point 8 Power, Inc.
3-2
3.1.2
3.1.3
3-3
units that make it up. AD units can be broken down further, but much of the rest is purchased (switches, breakers, meters, etc.) and the remaining parts are routine but design specific (e.g., the size of the bus). Some of these components currently manufactured at Newport News or some of the manufacturing processes (such as plating) could be outsourced individually, while the overall switchboard manufacture is kept internal. However, considering whether to do that is only worthwhile doing after determining whether overall switchboard manufacture should be kept in house or outsourced. Panels are smaller and simpler units that provide local control capabilities on a ship. The basic manufacturing process is the same for as for switchboards, but on a considerably smaller scale. They have the same types of purchased parts included in them as well.
3-4
Lesson Learned:
Be sure to capture the full range of activities up front. Because of the way the switchboard shop part family was described to the PIT, the focus for much of the cost generating process was strictly on switchboards. As we looked into Newport Newss labor costs associated with switchboards (section 3.2.2 Activity B.2), we realized that the shop in question also was responsible for a whole collection of components known as panels. These use the same basic construction as switchboards and, though individually much smaller, there are many more of them. For an aircraft carrier, there are 54 low voltage switchboards (about 150 AD units), but many times more panels. If the switchboard shop were to be closed, then panels would have to be outsourced as well. Because panels are so different in scale from switchboards, we had to go through a separate costing process for panels. While this was not a problem intellectually, the late realization that panels were a significant issue introduced a substantial delay in the outsourcing analysis process while we waited for that information. The reason the problem came about was that the common name used for the shop was switchboard shop, so the focus of the initial data gathering was on switchboards. The panel aspect was missed at first simply because of the shop name.
3.1.4
3-5
(A)
(D)
3-6
3.2.1
See Appendix C
13
Greaver has a whole chapter that discusses when to bring in outside help. See footnote 9, page 1-3.
3-7
data of this sort, the process needs internal staff who can collect data (or have data collected) and do a check on the data for accuracy and completeness. A neutral party will probably not have the necessary clout to get responses. The members of the PIT and, especially, the Outsourcing Steering Committee should be able to come up with the other kinds of data. Because the goal of this process is to determine whether work should be sent outside, the implication is a potential loss of jobs (though reassignments may prevent layoffs). The interviewers therefore need to recognize the effect of self-interest and loyalty to friends and co-workers on the interviewees responses. If the interviewees know outsourcing is the likely goal, then they may conceal information. Careful interviewing is important, both in the set of questions asked and in the way responses are interpreted. If the discussion is about topics outside of outsourcing, such as cost, quality, or schedule, then all sorts of information are likely to come out. There is a serious ethical problem in misrepresenting a request for information, but information legitimately gathered for another purpose can often be useful for the outsourcing analysis.
Inspect motor
Rewind motor
Pot motor
Bake motor
Reassemble motor
Reassemble motor/pump
3-8
Lessons Learned:
1. Talk to the right people. No one can have a complete picture of something as complex as a shipbuilding operation. Not surprisingly, therefore, the general understanding of what people do does not always capture their actual functions. Accordingly, to develop the process map requires talking to people who do the work in each part of the organization. 2. Consider carefully when to talk to internal stakeholders for the part family. It is important to talk to stakeholders of the part family being considered for outsourcing. However, you need to be careful choosing when in the outsourcing analysis process you talk to them. You can include the internal stakeholder too early or too late depending on the situation. In the Newport News case, one stakeholder was not initially supportive of the idea of outsourcing. We attempted to include this stakeholder early in the process. We did not yet have the data which indicated that outsourcing appears to be advantageous and we did not yet have examples of suppliers who could meet our needs. This caused the stakeholder to resist the outsourcing analysis. Once the analysis was nearing completion, the data showed outsourcing to be promising, and we had very capable potential suppliers identified, the stakeholder was brought back in. This proved to be much more successful. Having seen that there are potential benefits from outsourcing, he provided excellent insight and asked very good questions about the potential supplier relationship. Other stakeholders of the motor shop, on the other hand, considered outsourcing a likely option from the start and provided substantial, useful information early in the process. The lesson, therefore, is: consider the point of view of each stakeholder carefully and include that stakeholder only at the appropriate time. Consider the complexity of the product to be outsourced (more complex, include stakeholder earlier), and understand the stakeholders needs. If this stage of the process is too early for a particular stakeholder, possible alternate times would be as a part of section 3.2.3 Activity B.3 (supplier requirements), section 3.4.3 Activity D.3 (develop supplier criteria), section 3.4.4 Activity D.4 (inquiry RFQ), section 3.5.1 Activity E.1 (program impact), or section 3.5.2 Activity E.2 (final cost analysis). If it is possible to do so without resulting in substantial problems, it is best to get input before sending out the inquiry RFQ. You want as rich a set of requirements as possible as part of the inquiry RFQ. In general, the less satisfied the stakeholder is with the current situation, the earlier you should bring them into the process. 3. Be ready for opposition to outsourcing. Personal sensitivities and loyalties reinforce one another to dynamically oppose outsourcing. They are very easy to trigger, and their connections are not always obvious. People can be very sensitive about job security, sometimes to the level of paranoia. Anyone you talk to may immediately assume that his job is in jeopardy or that the scope of his job will change dramatically. Incorrect understandings and rumors can result. An individual, who just knows its not the right thing may disrupt the analysis by deliberately spreading rumors that the decision has already been made. This is difficult to prevent, but the best way may well be to be completely open about what you are doing, telling everyone clearly what the issues are and how they will be addressed.
3-9
3.2.2
See Appendices D and E for more detailed information on cost factors and how to determine them. For actual labor costs, information on the resources required to support the part family should be collected while gathering the data for the process map. That is, those interviewed need to be asked not only to describe the process, but also to describe how much labor time they spend on each step in the process for the members of the candidate part family. If appropriate, they should estimate how many other people of the same or subordinate types are required to do the work for that part family. The information gathered in this fashion can be compared to company-standard estimates for the work being done. The benefit of directly asking for time spent is that it captures time spent working that is not associated with a specific ship or job. If equipment is involved in the manufacturing process, the cost of operating that equipment is a part of the relevant activities. Equipment costs include tooling, energy use, depreciation, and maintenance. If equipment is old and fully depreciated, then the
3-10
likely cost of replacement or upgraded equipment also should be included. Also counted is the cost of building space, which includes depreciation, maintenance, and energy for heating, cooling and lighting. Only with an honest estimate of actual cost can a legitimate comparison to outside costs be made. Templates to help with the cost analysis are provided on the Altarum website14. An example cost factor analysis is given in Appendix E. Extra costs can result from the need to expand capabilities if current capacity is not adequate to do the expected work. Expansion costs include recruiting and training additional workers as well as from adding equipment and even expanding space. Expansion hiring costs can be substantial if you need a number of people. Even just maintaining a constant workforce can involve hiring costs if there is any amount of employee turnover.
Lesson Learned:
Be thorough in identifying costs. There are many possible sources of cost associated with a part under consideration for outsourcing, including and beyond the list presented above. The more identifiable cost sources you can bring into consideration, the more accurate your internal cost picture will be. Every real cost source you neglect to include in the calculations reduces the likelihood that you will outsource a part.
3.2.3
14
3-11
valves, engines) to just manufacturing the desired part according to the customers design (e.g., custom forgings, castings, and machined parts). The characteristics of the part family will lead to the best level of supplier responsibility. The previous outsourcing decision process activities will have generated a substantial understanding of the internal activities and costs that are undertaken to manufacture the candidate part family. Most of the requirements on a supplier should be captured from that work. If you have not yet spoken to the customer(s) of the internal manufacturing activity, this may be the time to do so. This requires interviewing internal customers (and external, if any), those that receive the candidate part family from the manufacturing activity being considered for outsourcing. The purpose is to learn what the customers critical issues are and what effect outsourcing the work might have on them.
(A)
(D)
The purpose of this step is to determine whether a candidate part family (or individual part) has a likely set of suitable commercial/internal substitutes available. If so, then accurately describe the alternatives and obtain customer approval for substitute part, whether Navy or commercial. This activity assumes an Assembly level evaluation for potential substitutes. The biggest costs savings come from replacing a custom part with an off-the-shelf alternative, but generally any reuse helps because of reduced tooling and fixturing costs and the reduced number of part numbers being tracked and managed.
3-12
Additional savings come from the need to keep fewer spares on hand, if the part is one for which spares are kept in stock.
(B)
(C)
(E)
3.4.1
3-13
3.4.2
Lesson Learned:
Watch for additional requirements It is highly likely that, in the course of visiting the potential suppliers and talking to their references, further requirements and ways to compare the various firms will arise. Those elements should be captured. For example, in the motor repair supplier visits, one of them touted their equipment calibration program. We realized that was something we should be asking all of them.
3-14
3.4.3
Activity D.3: Develop Criteria and Data for Ranking Potential Suppliers
The PIT should create criteria for ranking suppliers using a combination of metrics taken from their ability to meet the requirements identified in Activity B.3, the following categories and others as needed: Financial stability Onsite audit of processes Competency/reliability Long term partnership potential Supplier categorization model Total cost Design/engineering capability Manufacturing capacity/capability Quality controls Customer service Warehousing capacity/capability Installation capability/capacity Information Technology Testing capability Geographic location(s) Ability to meet special requirements
The specifics of each of these categories will depend on the particular part family being considered. The details will come from the previous steps.
3.4.4
3-15
benefits of this is that the increased costs from inefficiencies are made visible, where they might be hidden internally. Note that when calculating the total cost of outsourcing, you need to add in the costs of labor and purchased services that will be needed in that scenario. Typical costs will include the time of purchasing people, engineering time (how much depending on whether your engineering staff retain full design responsibility or step back into a design approval role). You may also have transportation costs and other non-labor costs to assess. The key idea is not to miss real costs that will be incurred if you outsource the part family. The cost factor analysis template found on the Altarum website has spreadsheets to capture the internal costs that go with an outsourced product.
Lessons Learned:
1. Watch for expediting costs. One cost element that was overlooked in the inquiry RFQ process was the effect of expediting on costs from the supplier. The inquiry RFQ was sent to the motor shops without asking for the effect of expedited orders on the requested costs. This meant that the cost quotes returned from the vendors in response to the inquiry RFQ did not include that aspect, which lowered the apparent cost of their quotes. 2. Supplier quotes may vary significantly. The four suppliers who submitted switchboard inquiry quotes varied widely in their prices. The least expensive cost was less than half the most expensive. The other two were very close together and roughly in the middle between the other two. The quotes all included non-recurring engineering costs as well. The obvious question was the validity of the outliers at both ends and what to do about them. For completeness, we decided to include all levels in the analysis, but base the outsourcing recommendations on the middle numbers. We had similar variations in the motor shop quotes, although not quite as dramatic.
3-16
3.4.5
See Appendix H
3.4.6
3-17
The portion of orders or releases that will likely be unplanned or urgent and the extra cost of dealing with them The suppliers responsibilities (delivery options, special instructions, testing, warehousing, engineering, design, etc.) Other factors that will influence the cost or delivery and how often those factors are likely to be encountered.
In general, the higher the frequency and volume of interaction and work, the less contracting content you want to be part of the individual transactions. Whatever contracting mechanism is chosen, the cycle time for processing each part or product through the purchasing process needs to be fast enough to meet everyday ordering needs. Determine the technical support required. Depending on the nature of the product or service being considered, the level of technical support can vary widely. Elements of technical support include: Frequency of Engineering Change Notices15 Frequency of technical questions Complexity of drawings or other product and technical data Change management Ability to diagnose problems and recommend fixes or alternatives
15
Called by many names (e.g., engineering change orders, engineering change notices), engineering changes are the formal design changes that are processed after a design has been released as complete.
3-18
(D)
E.1
(F)
3.5.1
3-19
the process, which often causes people to overestimate the market value of their equipment. Disposal of facilities. You need to determine whether you need the space formerly used by your facility for another purpose. If the space was leased, then you can potentially end the lease or renegotiate the amount of space you need. If you own the space, then you can move other activities into it, lease the space out to another company (perhaps the supplier taking over the newly outsourced work), demolish the building outright and use the grounds for some other purpose, or, especially if the facility is separate from or on the periphery of your facility, you can sell the property.
3.5.2
3-20
3.5.3
3-21
In situations 1 and 2, the decision is obvious and should be implemented, preferably without delay to both minimize disruption and positively confirm the decision. In any of the other three situations, however, the best long-term course of action is not necessarily clear. In those situations, you may want to consider an incremental trial, providing limited work to the most promising supplier(s) to see if they are (or can become) capable of delivering acceptable and cost-effective work. Remember that at this point, strategic issues should not be part of the discussion. Those should have been sorted out in the foundation tasks (Section 2) before the candidate part family was put forward for the outsourcing process. Strategic issues should be outside the scope of the PIT anyway.
3.5.4
3-22
(E )
M ake (H )
(F)
3.7.1
3-23
Determine when to stop routing material through the shop Determine raw materials that feed the shop and reduce requirements accordingly
The transition plan is probably the most variable of the steps described in this document. For example, supplier relationships will be very dependent on the product under consideration.
3.7.2
3.7.3
3-24
foreman, the release needed to bring the supplier to pick up a motor is handled by him or one of the electrical shops planners. As Newport News was putting the transition plan in place, an emergency motor repair job came up and was used as a first opportunity. This was where the cost issue of expedited repairs became obvious. Outside of that issue, the repair itself went very well. Because of its greater resources, the supplier was able to complete the job faster than Newport News could have, even with the emergent work that was discovered on opening and inspecting the motor. The work was carefully overseen by Newport News staff, who were quite satisfied with the suppliers work.
Lessons Learned:
1. There will be a learning curve. During the early stages of outsourcing, some of the details of the relationship and how requirements are actually to be implemented will need to be worked out. For example, Newport News has different load testing requirements than the supplier had seen from other customers. Even though the contract language correctly described the requirement, the supplier did not recognize the significance of it. Another example is that the supplier does not have the complete set of couplers needed to attach motors to the dynamometer for load testing. They are still working out who will pay for what and when the supplier can borrow couplers that Newport News has. Unfortunately, such situations rarely result in lower prices from the supplier. 2. The cost analysis of the motor shop done for this outsourcing analysis was designed to capture the actual costs of operating the motor shop. The DCAAapproved costing approach used by most shipyards to charge the Navy for its work is based on a much different approach: billing the customer based on overhead charged against direct labor where the overhead rate is based on a much larger part of the company. Such billing systems, while approved by the customer and by definition therefore appropriate for that purpose, do not show the real costs of a specific type of work. Therefore, work that actually costs more than the overhead rate covers is subsidized by work that costs less. While the shipyard does not get rich on this situation, neither does the customer end up with the best possible overall price. Further, effectively documenting the cost advantage of outsourcing in practice is very difficult, because the internal costs are documented at the rate charged to the customer rather than the actual costs. This is a further problem when budgets have to be shifted from in-house labor to external purchases. The rates for the conversion often lead to the appearance of the outsourced cost being higher than the work it is replacing, even though the cost factor analysis shows otherwise.
3-25
(F)
3.8.1
3.8.2
3-26
4-1
issues are and how they will be addressed. Of course, the past history of management/staff relations will affect how well that will work. E. Be thorough in identifying costs. There are many possible cost factors associated with a part under consideration for outsourcing, including and beyond the list presented in Appendix D. The more cost factors you can bring into consideration, both for making the part family and for outsourcing the part family, the more accurate your cost picture will be. Every valid cost factor you neglect to include in the calculations incorrectly skews the economic argument for or against outsourcing. F. Watch for additional requirements. It is highly likely that as the outsourcing analysis proceeds, additional requirements and ways to compare the various supplier firms will be identified. Such requirements can show up in almost any conversation, including in the course of visiting the potential suppliers and talking to their references. Make sure that all involved in the project are on the lookout for requirements. G. Watch for expediting and other non-standard costs. To get accurate quote information from vendors, you need to ensure that the work they are quoting accurately reflects reality. If you commonly have to expedite 20% of your work on the part family due to end customer changes, then the potential suppliers need to build their quotes with that in mind. H. Supplier quotes can vary significantly. In both the switchboard and motor pilots, the inquiry quotes that came in from the vendors varied substantially. You can develop a set of cost comparisons, such as best and worst case comparisons. If the worst case still supports outsourcing, then that makes outsourcing a likely approach. We did this for the motor shop pilot. You can also use other factors to help determine which quotes are the best to use, such as an estimate of how well you believe each supplier really understands your companys needs. I. Watch for unnecessary or exaggerated requirements. People often exaggerate requirements or add unnecessary requirements into the mix. A good example is setting a due date that is actually earlier than needed and that causes expedited work. When this is done on a regular basis, it skews peoples perceptions of what is really required. It can also be done in with the specific intent of misleading people, either in general or in a particular case. Either way, all requirements should be considered skeptically, especially early in the outsourcing analysis process. There may also be ways to eliminate or address requirements outside the outsourcing process. Billing systems are not equal to cost factor analysis for management purposes. Typical labor-plus-overhead-rate approaches to costing rarely lead to accurate information on a local level within a company. Such billing systems, while approved by the customer and by definition therefore appropriate for that purpose, do not show the real costs of a specific type of work. Therefore, work that actually costs more than the overhead rate covers is subsidized by work that costs less. While the shipyard does not get rich on this situation, neither does the customer end up with the best possible overall price. When determining whether to outsource a part family, you need to know what the costs of making the part family really are.
J.
4-2
Appendix A
Selected Definitions
Depending on your background, some of the concepts discussed in this Guidebook may be unfamiliar. Rather than provide some kind of detailed tutorial and take up a lot of pages, we provide below a brief description of some of the major concepts. Cost Factor Analysis Examining the actual costs involved in doing some kind of work. Cost factors include direct labor, management labor, supporting labor, materials, equipment costs, utilities, depreciation, facilities, and so on. This is a management approach (as opposed to an accounting approach) that explicitly avoids the use of standard labor plus overhead calculations. The intent is to forecast what it will actually cost the company to do the work. Cost factor analysis has essentially nothing to do with what the customer will be billed for the work. Core Competence A core competence is a capability that must be maintained internally to provide a unique and defensible position in the market. All other capabilities are considered to be candidates for outsourcing. Rationalization Rationalization takes an undifferentiated set of suppliers and categorizes them so that the shipyard has guidelines for working with each type. Develop New Suppliers & Relationships This is where a shipyard finds new suppliers or helps an existing company develop a capability to act as a supplier to them. An example would be if a shipyard wanted a steel distributor to provide steel that was primed, but the distributor lacked this capability. The shipyard might assist the distributor to develop a capability in priming. Customer-Supplier Teams These are teams are used to solve problems, develop designs, eliminate waste, and create joint technology roadmaps. Supplier Continuous Improvement and Training Providing assistance to supplier to improve their processes. New Supplier Responsibilities Suppliers augment their traditional business with other activities such as program management, product design, assembly and integration, testing, packaging, and shipping. Integration with Customer Planning and Scheduling This involves tying the supplier and customer schedule and processes together, showing the effect of the suppliers schedule and process on the customers and vice versa. Frame Agreement A type of long-term agreement to provide material for a fixed price or to provide material based on some framework that will determine a fair price. Similar types of agreements may be called long-term agreements.
A-1
Strategic Alliance Characterized by behaviors such as mutual marketing or development, or technology transfer between the partners. Strategic alliances may include explicit or tacit agreements that the supplier will get the business if the customer firm does. Such agreements normally remain in place as long as the supplier firm continues to maintain standards of performance appropriate to the business context. Consolidated Purchasing Consolidating multiple purchases of different items from one supplier into something like a single master purchase agreement. Lowest Total Cost Selection Everything involved in supplier selection and management, in receipt and installation of the suppliers product, and support of the end item after delivery that involves the suppliers product represents a cost that should be added to the suppliers product cost to arrive at the total cost associated with that supplier. Competing suppliers are ranked on the basis of total cost, and the one showing the lowest total is selected. Sometimes the term Best Value is used for this practice, but many prefer lowest total cost because in has more quantitative connotations. Supplier Managed Inventory The supplier is responsible for making sure that the customers inventory is kept up to certain minimal levels without individual orders from the customer. Metrics There are two types of metrics that must be used to provide feedback to the outsourcing decision making process. The first is changes in cost and on-time delivery that result from the use of the new supplier. The second is an assessment of how the changes in internal processes have affected total ship cost and delivery.
A-2
Appendix B
Process Responsibilities
Table B-1 (next page) presents a typical division of responsibility across the various activities that make up the outsourcing decision process documented in this Guidebook. In general, tasks not led by the Executive Staff or Outsourcing Steering Committee are performed by the Process Implementation Team (PIT). Within the PIT, different functions will take the lead for different tasks as shown in the table. However, all PIT tasks should be considered team tasks, with joint responsibility for their successful completion.
B-1
Functional Areas
Executive Staff
Cost Engineering
Assembly
Activity
(Foundation)
Set strategic direction and funding Determine core competencies & objectives Develop list of candidates for consideration Appoint process implementation team
L S R L S S S S S S S R S S S S S S S S S S L S R S S S L S S S
L S S S S S S L S S S L S S L S S L S S L S S S S L S S S L S L S S L S S S S S L S S L S S S S S S S S S S S
A.1 Initiate outsourcing decision process A.2 Identify product/process categories A.3 Identify sub-components of items/parts/products A.4 By part family, determine origin and volume of work B.1 Develop process map for each part family B.2 Perform internal manufacturing cost analysis B.3 Document requirements for suppliers C Evaluate potential substitutes D.1 Identify appropriate suppliers D.2 Investigate suppliers capabilities D.3 Develop criteria and data for ranking suppliers D.4 Perform inquiry RFQ process D.5 Rank potential suppliers D.6 Determine supplier relationship E.1 Determine program impact E.2 Perform final cost analysis E.3 Make recommendation to steering committee E.4 Steering Committee review F Outsourcing decision G Implement make decision H Implement outsource decision
R
S S L S S
R S S S S S S S S L S S S S
L S S S S S S S R L S S S S S S S S S S R L L S R L L S S S S S S S S S S S S S
S S L S
KEY:
B-2
Customer
Programs
Contracts
Facilities
Planning
Finance
Quality
Trades
Environmental
Manufacturing
Engineering
Legal
HR
Appendix C
Data Gathering
The following are interview questions to be used to gather information during the outsourcing decision process. They cover the following two types of interview: Data gathering interviews (Activities B.1 & B.2) Reference checking (Activity D.2)
The additional text in italics after most of the questions in these interviews is probing information, follow-up or more specific questions as well as suggestions or ideas to get interviewees thinking should they find it otherwise difficult. The goal is not to lead the interviewee, but to help them understand the type of information you seek. The italicized text between the square brackets [] contains notes to the reader on considerations necessary to adapt the content to a specific purpose.
Individual Context
1. Name: 2. Title: 3. Phone: 4. Email: 5. Briefly describe your job, i.e., what are your responsibilities? How long have you been in this position? How long have you been with this company? 6. Describe how your piece of the organization fits into the larger organizational structure. Where do you fit in the organization - to whom do you report and who reports to you? 7. What is the number of employees in your group? How many people work with you?
C-1
8. What are the different types of products you work on in this shop?? What work do you do related to either switchboards or electric motor repair?
Process Model
9. What are the primary activities that go on in design? What do you do every day? 10. What % of time do you spend on each activity? 11. What types of supplies are consumed supporting each activity? 12. What types of equipment are used for each activity? 13. What do you see as the driver(s) for each activity? What are the key things that affect each activity? 14. Can you give us any suggestions for improving any activities? The following is a follow-up to the content asked during the activity model questions about the process. 15. What are the different roles and responsibilities during the process? How do you distinguish between the roles? Who does what?
C-2
How are these decisions made on your own, by committee? What is your role in these decisions? What criteria are used to choose whether to outsource instead of make? Do those reasons (criteria) make sense to you? Should some be dropped or others added? If so, what are they?
20. How complete is engineering information when the work goes to the shop? Does the shop have to do work to gather or generate information or does the shop have all the information it needs when the time comes to do the work? 21. Do you believe a typical supplier could work with the same information received by your internal shop? Would more work have to be done by your company for a supplier to do a typical job?
24. How did you measure the performance of your suppliers in these roles? 25. What was the informal relationship like with these suppliers? 26. What portion (percentage) of purchased items require you to do additional work to support an outside supplier over the internal shop? What is the nature of this additional work? 27. Did you use any electronic commerce technologies with your suppliers? 28. Did you exchange any product data with those suppliers? How? 29. How do your suppliers communicate with your organization during various phases of a project? Who was responsible for the communication? What communication media were used? What direction did it go? What was communicated? Who often did communication take place? Where did meetings usually take place?
C-3
Expedited Work
30. What portion (percentage) of the work you do has to be expedited? Requiring dropping other work to address, substantial unscheduled overtime, or bringing in extra design staff for a short period. 31. What portion of purchased items require expedited or additional effort by Newport News staff? 32. What are the typical causes of expedited design work? Unplanned work? Unexpected schedule changes? 33. What are the typical causes of expedited manufacturing work? Internally made parts? Parts purchased from a supplier? Unplanned work? Unexpected schedule changes?
Culture
We want to ask a few questions about the culture in your company. The reason we are asking is that we have found that cultural differences between customer and supplier can be a source of tension and misunderstanding between the two companies. We hope that by learning a little about your culture and that of your suppliers we can learn about whether there is some type of mismatch, and if it is indeed important. 34. What do you believe the core values are here? Whats important? What behavior gets people promoted/noticed? What is the quickest way to a promotion What behavior is frowned upon?
35. Do most people here prefer to work alone, or in teams? Why? 36. Do people generally have a high amount of confidence and trust in each other here? Between management and workers? Between peers? Across functions? 37. What is the general view of risk taking here? Do people spend much time worrying about what others will say or do if they make a mistake? 38. How would you describe the general view of suppliers here? Are they viewed as partners, as leeches who want to take our jobs away? 39. How do people feel about buying products or services that are currently done outsourcing work thats currently in the shipyard? A terrible thing all around Sad for a few people, but necessary for the good of the company Great itll make the shipyard grow again
C-4
Wrap Up
40. Is there anything that cant be done today, but if it could be done, would radically change the way outsourcing decisions are made? 41. Are there any areas that we haven't covered that you think would be useful for this project?
Prime Contact
1. Company name: 2. Respondents name(s): 3. Title: 4. Phone #: 5. email:
Current Work
6. What kind of work does _______ do for you currently? What kind of equipment do they work on? On-site vs. in-shop? 7. How long have they been doing work for you? 8. How much work do they do? What % of your current work do they perform? 9. How would you characterize the quality of their work? How often do you have to reject or send back something theyve done? 10. How has the work they do for you changed over time? Has it increased, decreased, changed in character? 11. Does Supplier Name do work for you at your site? What kind of work? 12. Do they store anything for you? Delayed work in progress, spares?
C-5
Scheduling
13. How much of the work they do for you is short notice, quick turnaround? (i.e., situations where fast response is critical) 14. How well have they responded to high priority, emergency situations? 15. Does your work load for Supplier Name vary a lot or is it generally consistent? If varies, how well does vendor handle the variation?
Business Relationships
19. What kind of business relationship do you have with Supplier Name? Do you have long-term formal agreements (service contracts, blanket orders, etc.)? Is it strictly a P.O. per motor relationship? Do you put your work out for bids? If there isnt a formal long-term agreement, is there an implied agreement that you will source a substantial part of your motor repair work with them? 20. Does Supplier Name supply all materials for the work they do for you? Or do you, as customer, supply materials for them to use? 21. Do they deliver as promised, both in terms of what and when? How often are they late or otherwise unresponsive.
Wrap Up
22. Whats the most important reason you choose Supplier Name to do work for you? 23. Is there anything weve missed regarding your relationship with Supplier Name? 24. Is there anything youd like to ask us?
C-6
Appendix D
The key to determining the actual cost of making a part internally is to capture all the costs that would change if the work were outsourced. Several cost factors (types of costs) tend to be forgotten, even though they are significant. Your goal as you do the cost factor analysis is to be complete. This appendix provides more detailed guidance on cost factors and how to capture the necessary data. Appendix E provides an example cost factor analysis that demonstrates many of the cost factors described below. For the most reliable cost factor analysis, capture all the costs to the best of your ability. It is better to determine a particular cost factor is relatively unimportant based on a good estimate of its cost rather than a gut feeling.
Understanding the manufacturing process flow is important to capturing all the labor costs. In all cases, the intent is to capture what portion of each persons time is spent on the part family in question. For shop floor personnel, it may be all their time, though it may not (especially in supporting areas). For management, as you move up the management hierarchy the portion of time identifiable as spent on the specific part family will be less and less. Effectively, you are identifying the time that will become available if the part family is no longer made internally. The best way to determine how much time each type of person spends on the part family is to ask each of them directly as part of the process and cost data gathering. We have found that asking someone what someone else does tends to be inaccurate, often substantially so. If shop floor personnel are off limits due to labor relation issues, then you will have to rely on the foremen for estimates. Of course, not all the labor costs go away when parts are outsourced. Purchasing personnel are clearly still involved, though perhaps at higher or lower levels, depending on the specific situation. Internal engineering staff may continue to do the design work on the part family or they may shift to an oversight and approval role. The former may require an increase in level of effort, the latter will likely lead to a reduction.
D-1
Accordingly, when calculating the full cost of outsourcing to compare to making the part family, these internal costs need to be included in the overall cost comparison. In addition to the direct labor costs associated with making (or outsourcing) the part, the costs of hiring can be substantial. Unless the turnover rate among the people involved in making the part family is very low, maintaining the necessary personnel costs money. The costs of hiring new personnel include recruitment, training, and the lower productivity of new hires. If outsourcing reduces the number of people that must be brought into the company over time, that cost needs to be captured. If keeping the work inside requires increasing the number of personnel, then the hiring costs are even more significant.
Services related to product creation and preparation, such as plating, machining, heat treating, painting, and testing Material handling, including transportation of parts to and from externally contracted operations (including entirely outsourced parts) as well as internal movement to and from storage facilities or other shops, to and from the ship, and within the shop. Utilities for all production areas involved in making the part family Electricity for manufacturing equipment, heating, cooling, and lighting Natural gas for manufacturing equipment and heating
How significant each cost is depends on the nature of the part family. For example, in some cases the purchased material costs are a major part of the overall cost, in other cases they are insignificant. Until each cost factor is carefully researched and calculated, however, the significance can be difficult to predict. Capturing the cost of most of these items is usually straightforward in concept, although actually gathering the information may require a fair amount of effort. Past purchasing records are a key source of the necessary information, though adjustments for inflation or other price changes may need to be added. As with labor, you may need to determine what portions of the cost apply to the candidate part family from some consolidated cost data. A good example is electricity costs. Unless you have one or more dedicated electric meters for the areas where you do the work, the cost of electricity may be very difficult to calculate. You may need to work
D-2
backwards from the equipment ratings and how much they are used. For example, you can figure out the amount of electricity used in lighting by counting the number of light bulbs and multiplying by the energy use per bulb (e.g., typical four-foot fluorescents use 40 watts) and by the hours per day they are on. For a machine tool, you would need to work from the hours it runs times the power it draws. The overall electrical cost can be constructed by adding up all the individual contributions and multiplying by the cost per kilowatt-hour. Needless to say, this may take some time to do, but it is not conceptually difficult. Other purchased items that may have to be apportioned, such as consumables or raw materials. If such items are used by more than one shop but are purchased in bulk quantities that feed all users, then you will have to estimate the portion that is used in the manufacture of the specific part family. This may be as simple as asking the relevant forklift operator how many barrels of cleaning fluid he delivers to a particular shop each month. From items that are stocked in some central warehouse, there are often internal requisitions that can show how much was drawn by a given shop. The key idea is that there is usually either a paper trail or some small group of people who can give a good estimate of the cost.
D-3
Environmental costs Any costs of mitigating or correcting environmental problems or disposing of hazardous wastes related to the part family needs to be captured as one or more cost factors. A good example of environmental costs is plating, which generates substantial toxic waste with significant disposal costs. Outsourcing plating eliminates the ongoing cost of chemical disposal, which generally includes substantial documentation and tracking costs. Taxes Most companies have to pay some form of tax such as property tax that can be reduced by outsourcing work
D-4
Appendix E
As described in Section 3.2.2 (page 3-10), to properly understand the cost of making a part family internally requires considering every type of cost that your company incurs in the course of making the part. In particular, it means ignoring the traditional labor plus overhead approach to costing. The cost factor analysis approach we describe is intended to help you capture the actual costs associated with making the part family. The following pages show an example cost factor analysis. To keep from losing the forest in the trees, the example is an artificial analysis of the cost of making ships bells and their mounting frames. The tables all are from an Excel workbook. A template version of the workbook is available on the Altarum website. The template provides a starting point for you to do your own cost factor analysis. The example cost factor analysis is laid out in the tables on the next few pages (Table E-1 Table E-5) and include: Labor required to make bells Other direct costs required to make bells Labor required to purchase bells Other direct costs required to purchase bells Comparison of the cost of the make option versus the outsource option
The last of these tables shows that for this imaginary situation, the buy option is the best choice from a cost perspective.
E-1
E-2
Bell-maker 2.0 2 $ $ 23.80 49,504 $ $ 32.20 66,976 $ $ 35.00 72,800 $ $ 28.00 58,240 $ $ 49.00 101,920 $ $ 35.00 72,800 1.0 5 1.0 4 2.0 3 1.0 6 1.0 4 Bell foreman General Foreman Materials buyer Manufacturing Engineer Production manager Human resource manager $ $ 1.50 1.50 1.00 2.50 2.00 2.50 2.00 1.00 1.00 1.50 0.67 0.30 0.50 0.30 0.10 15.0 1 20.25 42,120 0.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 63,180.00 63,180.00 42,120.00 105,300.00 84,240.00 105,300.00 84,240.00 42,120.00 42,120.00 631,800.00 631,800.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 74,256.00 24,752.00 99,008.00 74,256.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 44,873.92 22,102.08 66,976.00 44,873.92 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 21,840.00 50,960.00 72,800.00 21,840.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.50 0.00 0.33 0.00 0.70 0.00 1.20 0.00 29,120.00 17,472.00 69,888.00 116,480.00 46,592.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.90 0.00 10,192.00 91,728.00 101,920.00 10,192.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.15 0.85 0.00 10,920.00 61,880.00 72,800.00 10,920.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total 63,180.00 63,180.00 42,120.00 105,300.00 84,240.00 105,300.00 84,240.00 42,120.00 42,120.00 74,256.00 55,065.92 21,840.00 29,120.00 17,472.00 10,920.00 321,310.08 1,161,784.00 840,473.92
Number of People: Salary category: Hourly Wage Rate: Annual Wage Rate: Task, Activity, or Process Retrieve raw materials Cut to shape Form parts Cast bells Load fixture Weld parts Clean parts Stack parts Transport parts In-shop supervision Out of shop supervision Engineering support Raw material's purchase Consumables purchase Bell personnel HR management All other activities Unallocated time: Cost Calculations Retrieve raw materials Cut to shape Form parts Cast bells Load fixture Weld parts Clean parts Stack parts Transport parts In-shop supervision Out of shop supervision Engineering support Raw material's purchase Consumables purchase Bell personnel HR management All other activities Total cost per category: Total labor cost:
$ $ $
E-3
$ $ $
E-4
Appendix F
When gathering data from potential suppliers for a given outsourcing analysis, it is very important to actually visit the suppliers sites. The visual impressions gained from the visits and the chance to talk to multiple people face to face are important to the validity of the data. The following is the interview form the project team used to interview potential motor suppliers in Activity D. Because it is built from the issues that were raised in the course of the internal data gathering, it provides better information than if we were to give only a generic form. Many of the questions will be applicable in a wide variety of situations, however. We include explanatory notes in italics that explain the purpose and goals of the different sections.
Interview Introduction
Provide a basic explanation of what you are doing to the supplier you are interviewing. Northrop Grumman Newport News is considering shifting some or all of the motor, generator, and electromagnet repair and rebuild work done within Newport News to outside suppliers. As a part of the decision process, Newport News is looking at the capabilities and costs of potential suppliers. To that end, we have a series of issues to raise and a set of questions that need to be answered.
Basic Characteristics
Describe the basic characteristics of the parts or work you are considering for outsourcing. Newport News has four kinds of rebuilds: Navy ship overhauls, Navy repair work, commercial ship work, and internal plant equipment (e.g., motors for cranes). A large percentage of internal work is extremely high priority. Cranes being out of service can cause very costly delays in Newport News work schedules. These motors require immediate turn-around. Although only a small part of the overall workload, Navy repair work is also very high priority. This is work being done on equipment off an operational ship. While fast turn-around is required, Navy approval processes for work outside the original scope of work authority can cause delays. The bulk of the motor/generator rebuild work comes from regular Navy ship overhauls. Such overhauls typically take about two years. Over the course of that time, the motor/generator repair work rises to a peak then falls off. Much of the motor work is routine, with plenty of time to accomplish it. However, a substantial amount of the work becomes high priority for a variety of reasons. This makes load leveling in a motor shop difficult.
Basic Questions
The following questions should be based on issues you know about. The questions should be designed as much as possible to avoid sure we can do that answers. This first set of questions is to establish basic operating parameters for the supplier. Its a chance for you to both get useful information and to get them comfortable answering questions. Current work What is the current distribution of your work? How much is defense related? How much is marine?
F-1
Newport News work Do you currently do work for Newport News? What kind of work? Scheduling How long does it take you to respond to a high priority request for work? Navy requirements How much work have you done for the Navy? How much other defense work? Do you have people with security clearances on your work staff? What MIL standards are you familiar with? Commercial ship work What kind of experience do you have doing repair and rework for commercial ships? Capabilities Besides basic motor rebuild work, what other kind of work do you do? Do you have any special capabilities? Off-site work What kinds of work do you do at offsite locations to support your customers? Do you have a safety program for off-site work? Storage facilities How many motors (average size 150 HP) can you store in process? Cyclical work How steady is your current work load? How many motors do you work per month? How do you handle ups and downs?
F-2
them and overhauling the pump while the motor shop overhauls the motor. Once the separate overhauls are complete, the motor and pump are reassembled and tested. Pump testing facilities will be considered a plus at a motor rebuild supplier. If pump testing is not part of the suppliers facility: Do you have a recommended course of action? Often the Navy requires pumps be sent back to the pump manufacturer for rebuild, with Newport News responsible for rebuilding the electric motor and sending it to the pump manufacturer for test as an assembly. Can you support that? Non-motor work Are you qualified to do other, non-motor work (generators, transformers, electromagnets)? While the quantity of this work is much less than the motor rebuilds, Newport News still needs to have it done. It includes both internal and Navy work. On-ship support Are you able to supply on-ship support services (perhaps on short notice)? Such work includes motor maintenance (e.g., slip ring and commutator work), troubleshooting problems, disassembly of large units, and taking critical measurements. Can you provide such services on short notice? Do you have a Newport News approved safety program? Do you have appropriate staff with security clearances already? Are their other security issues? Special services and capabilities Can you provide other support services such as degreasing, baking large items, cleaning, or sandblasting of parts other than motors? The Newport News motor shop currently supplies these services to other parts of the yard, though they are a small part of the overall shop work. Storage Can you provide storage for a large number of motors? Motors have to be stored for two major reasons: delays in Navy repair approvals and the natural flow of ship overhaul work (needing to remove motors early that won't be reinstalled until late in the overhaul process). A motor shop can expect to have to store 200 or more motors at one time at the peak of a ship overhaul, many at least partially disassembled, waiting for Navy repair approval. Cyclical nature of work Can you support the ebb and flow of work over a typical two-year cycle? Gaps between ship overhauls can be 6 months or more, with work building from the start of an overhaul to a peak in the middle and then fading away again. This is likely to get worse in the future. More and more motors are being used on new ships. Therefore the peak work loads will increase as these ships are overhauled. Material Will you furnish both planned and contingent materials for overhaul work? Or will it be necessary for Newport News to provide materials? Financial Status Will you provide certified financial statements and a credit report? If we are to enter into long-term agreements with you, we need to be confident that you are in good fiscal shape. Labor Status Is your shop unionized? If so, when does the current union contract end? How have labor relations been in your company the past five years?
Cost
This is simply preparing the way for the inquiry RFQ that you will send out later. We will describe a set of motors needing repair that characterize our typical work load. We request that you bid on these motors as if you would actually do them under the work environment described in the
F-3
questions above (highly variable schedule, substantial storage requirements, frequent need for expedited work, etc.). These quotes should be realistic, not low-balled to get the work. If Newport News chooses to purchase motor rebuild services, it will choose the company that best meets its needs described above rather than the lowest price. Explain how you will meet the needs if you get the work. What services will you provide?
F-4
Appendix G
Table G-1 is the supplier comparison sheet developed for the Newport News Motor Shop pilot. After interviewing each supplier, we filled in the cells of the table with the appropriate information. Note the inclusion of the internal shop as a comparison. When filled, the table actually ran to seven pages (with the leftmost column half as wide and the content columns wider).
G-1
Item
Prime Contact Motor Size and quantity Pump overhaul & testing Engineering capabilities Key technologies in house Other Capabilities Current work Newport News work Cyclical nature of work Scheduling, delivery, & reliability Navy requirements Customer site work capability & cost structure (could be onboard ship) Storage facilities ISO 9000 certification Measurement capability Warranty coverage Other quality issues Customer relations (long-term relations) Labor Material Transportation of Motors e-commerce capabilities Other Comments
Motor Supplier 1
Motor Supplier 2
Motor Supplier 3
Motor Supplier 4
G-2
Appendix H
Comparing potential suppliers is often done in a rather ad hoc manner. Without some kind of tool driving the analysis, subjective judgments based on incomplete information are likely to dominate. The results of decisions made in such circumstances are often not the best. The concept behind supplier rating sheets is that, although comparing suppliers inevitably has a subjective element, the less subjectivity and the greater the depth and consistency of the data gathering, the better. In any comparative supplier analysis, certain capabilities and characteristics will be required. Beyond the requirements are the discriminators, the capabilities and characteristics that differentiate qualified suppliers from each other. So, when creating a supplier rating sheet, there are two major sections, the requirements and the discriminators.
H.1 Requirements
The requirements are the minimum set of capabilities that a supplier must have to even be considered as a possible source for a given part or service. In this context, evaluating whether a supplier meets the requirements is a simple yes/no situation whether the supplier meets each of the minimum requirements. Naturally, when evaluating a supplier, the requirements should be evaluated first. If they are not met, then there is no reason to continue. If no supplier meets all the requirements, then the question that must be asked is whether those requirements are realistic and reasonable. They may not be, if people in the right places are trying to prevent outsourcing. One of the checks is whether the internal shop actually effectively meets those requirements. Another is whether the requirement is there because the internal shop works that way, even if it not necessary. If the requirements do turn out to be valid and no supplier can meet them, then outsourcing is effectively not an option. On the other hand one or more suppliers can exceed the minimums on a given requirement. If that happens, the extra capabilities may become discriminators. Example requirements are: Minimum acceptable production volume Minimum acceptable part size Maximum acceptable lead time Ability to meet Mil-specs Ability to put personnel on customer site
H-1
H.2 Discriminators
As the name implies, discriminators are those characteristics that distinguish one supplier from another. Discriminators provide the information on which a company bases its supplier selection decision. The approach presented here is to: Generate the list of discriminators Determine a rating system for each discriminator Determine a weight for each For each potential supplier and each discriminator, evaluate the rating value Calculate the overall rating as the sum of the weighted ratings
A convenient way to approach this is to rate the company for each discriminator on a 1-5 scale, with the end values of the scale given as part of the rating chart. Giving each discriminator a weighting factor allows variation in the importance of the discriminator. The resulting supplier rating is then equal to the sum of all rating values multiplied by their respective weighting factors. More formally, the overall rating score for a given supplier can be expressed by:
R = ri wi
i =1
where:
R = the overall comparative rating score ri = the ith rating value wi = the ith weighting value
This overall rating value then becomes a way to rank the potential suppliers. A higher score identifies the supplier that better meets your needs. Example discriminators include: Quality ratings by third party organizations Longevity of the business Manufacturing capabilities beyond the minimum requirements Customer relations Stability of work force Portion of their business your company would provide Supporting services provided
The rest of this appendix provides an example rating sheet developed for the Newport News motor shop example.
H-2
Minimum Required Full range, 1-500 HP Full range, 1-500 HP on call capability 200 motors procures all on call
Cost Structure
The expectation is that any motor repair/rebuild shop will be competitive with both competing shops and with realistic Newport Newss internal shop costs. While supplier decisions will not be made based on cost alone, it will be a strong factor in the decision making process. The above table of capabilities will be at least as significant in the supplier selection process.
Discriminators
The capabilities in the table on the next page, while not fundamentally required, will be considered in making any decisions regarding purchasing of external motor repair and rebuild work. They are each to be rated on a 1-5 scale, with the end values of the scale given in the table. The resulting supplier rating is equal to the sum of all rating values multiplied by their respective weighting factors.
H-3
Capability Technical capability Primary work Rebuild quantity/ capacity Overflow capacity Pump overhaul Engineering capabilities Key technologies in house Other Capabilities Experience Time in business Categories of work Navy work Newport News work Financial stability Labor Stability Availability Scheduling Cyclical nature of work Timeliness of delivery Reliability of delivery
Base Measurement
Preferred Value/Trend more better more better Yes more better more better N/A more better more better more better more better less better enough best
Weight (1-10) 5 8 5 5
Average motors/month Motors per month at other sites yes/no level of engineering from none to complete all/some/none (text comments) years quantity & history quantity & history good/bad Annual percentage of employee turnover Adequate labor on hand or readily available as measured by how long it takes to fill position Variation in work load over time Variation in delivery consistency of delivery
100/month 50/month none none none N/A 0 years 0% 0% Chapter 11 50% 60 days to fill opening 25% variation over year average miss ideal date by more than 1 month unpredictable delivery
500/month 300/month All pumps on Navy ships complete all N/A 10 years 50% 50% Profitable > 10 years 10% 10 days to fill opening 5% variation over year average miss ideal date by less than 2 days delivery always the same relation to idea date
3 9 4 3 6 4
2 10 9
H-4
Capability Surge capacity Quality Quality certification Measurement capability Calibration program Warranty coverage Warranty length Other quality issues Special requirements Cost structure for on-site work Ability to expedite work Other factors Customer relations e-commerce capabilities Intangibles & other factors
Base Measurement Number of unscheduled motors the organization can handle within a given time frame yes/no (ISO 9000 or other recognized quality certification) Excellent/good/adequate/inadequate/unacce ptable frequency, internal vs external what covered months (text comments) How costs are determined for work at customer site (on ship) time of response Existence and success, especially of longterm relationships none/limited/comprehensive (text statement)
Preferred Value/Trend more motors in less time yes is best excellent is best best regular, external broader better longer better N/A clearly defined and reasonable total cost best lower better more better more better N/A
1 No surge capacity
5 Can overhaul 20 large motors within 5 days ISO 9000 certified full set of measurement equipment external calibration, no less than annual all parts & labor 2 years N/A clear, reasonable cost structure 2 day average response Variety of longterm contract and partnerships CAD, EDI, email, Internet N/A
Weight (1-10) 8
not certified no verifiable measurement no calibration program none none N/A ad hoc cost structure unable to expedite no long-term relationships none N/A
5 8 7 2 1 6 10 5 7
H-5
H-6