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Michael Balle

Michael Ballé: Think of outsourced value in terms of capability and capacity

By Michael Balle, co-author of The Gold Mine and The Lean Manager - Last updated: Friday, November 29, 2013 - Save & Share - Leave a comment

One company I know manufactures high-tech equipment with fairly sophisticated human-machine interface screens. One day, we were with the CEO in the local Apple store wondering how come we used a piece of kit worth twenty times an iPad with less functionality.

As the CEO followed that thought, he also discovered there existed an open-sourced interface software that served as a standard for human-machine interface in the industry. The company had been so wrapped up in building its own no one had ever noticed.

So, definitely, yes, outsourcing makes a lot of sense for any module not part of your core capability that a specialist supplier can provide, this is the essential basis of division of labor. Specialists will also be more likely to keep up with technical evolutions (though not necessarily technological revolutions) and your company will benefit – if, and only if, you can establish the right kind of relationship with your supplier.

In the same company we were looking into value engineering for a part of the machine. When in doubt, I’ll start value engineering with value analysis of the product in existing mass production conditions. In this case, the CEO had no idea because the entire module was outsourced and the supplier wasn’t forthcoming with how he assembled the part. Attempts to get the supplier to open up on his production methods were seen (not unreasonably) as attempts to understand and lower his price, so he resisted. As a result, the CEO had the entire module built in house and discovered that engineering had lost control of many specific engineering points by not assembling within the company.

The second aspect of lean outsourcing is outsourcing capacity, not capability. As volumes go up and down, our internal operations may not have the volume capacity, which a supplier can happily handle. However, in many core cases, we need to hang on to the capability, if only to understand what the supplier is doing and be able to help if they run into trouble. In practice this means doing a few modules for ourselves and outsourcing the bulk to outside partners.

Lean outsourcing is indeed about understanding value: value in terms of what is core to our offering (and often proprietary) and what could be, in the end, open-sourced. Then value in terms of capability (value engineering from production value analysis) and what is capacity, which can easily be outsourced.

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