Strategic outsourcing — how far can it go?
A common misunderstanding of outsourcing conjures up images of companies breaking out formerly integrated production functions to discrete, highly specialized partners, each operating in an isolated environment to maximize efficiency and minimize cost.
In some cases, this is true: Outsourcing suppliers often specialize in one area of production, such as design or final assembly. But some small- to mid-size suppliers find that by vertically integrating themselves, and gaining experience with the full production process, they can be of even greater service to companies that look to them for their know-how.
Opening doors
Art Rutledge is president of Fawn Electronics, a Timonium, Md.-based electronics manufacturing company that provides a full range of services—from printed circuit board assembly to wire harness fabrication to enclosure design and packaging. Rutledge says this multifarious background has given Fawn opportunities with many customers. “Vertical integration opens a lot of doors and provides access to customers and products that we certainly wouldn’t have otherwise,” he explains.
Fawn has separate electronics and plastics divisions, allowing them to develop deep expertise in both areas. “Fifty percent of our business, we're just cranking out board assemblies for our customers,” he said, but, “We try to really emphasize the skills we've got in the mechanical design area, be it plastics or even metal, and that type of integration of the product to kind of look for customers at a higher level than just board [assembly].”
Smaller companies hoping to benefit from outsourcing contracts like Fawn aren’t the only ones that recognize the value of vertical integration with regards to outsourcing. In an interview with Machine Design, Roland Bent, senior vice president of marketing and development for Germany-based Phoenix Contact GmbH &Co., said companies should focus on developing expertise in all phases of production in-house to maintain process and quality control. He said there is a fine line between outsourcing strategically and giving away too much control. “Companies that do this are playing a dangerous game,” he said. “My company takes the exact opposite approach: vertical integration, something that is out of style right now. We think that if you want to offer a quality product, you have to be able to control the design production, and the logistics. Vertical integration is the best way to do this and maintain competence in designing and producing products.” Bent said Phoenix outsources some things, like molding tools, while continuing similar work in-house, as a way to benchmark and fine-tune its own processes.
Rutledge and Bob Wilkins, Fawn’s plastics division’s vice president of tooling, in 2006 wrote a joint article for Medical Product Outsourcing magazine in which they cited the example of a large manufacturer that contacted Fawn to help it fix problems with a medical device. The original design team had done a good job with the electronics of the component, but had not chosen the right plastic for part of the enclosure. Recognizing that the electronics weren’t the problem, Fawn was able to use its expertise in plastics to diagnose the problem.
In another case, Rutledge said Fawn was able to help a client cut costs on an operator’s panel by simplifying the arrangement and printing process for the buttons—a plastics issue—then redesigning the circuit board to remove excess interconnecting wires, reduce the number of resistors and develop a custom LCD screen—taking advantage of their electronics experience.
“We’re just basically calling on expertise that existed within the company, understanding the application well that the customer had, what we could do with tooling changes along with some of the manufacturing process changes, at the same time knowing he was very cost-conscious,” he says.
Fawn’s experience with plastics and enclosure design is valuable because it gives the company an opportunity to cut costs in a potentially troublesome area. “It’s understanding enough that you don’t design a part that can’t be molded,” Rutledge says. A plastic part may be designed well for use in the final product, he says, but actually producing the part could be prohibitively expensive, because its mold is so complex. The key is recognizing this early. “You might be able to do something just a little different in the look or design or a fit of the part, and it may get rid of that [complex mold] and be much less expensive,” Rutledge says.
This type of knowledge of plastics, within a company that Rutledge himself describes primarily as an electronics manufacturer, comes from knowledge of the entire production process. “It’s just many years of experience in molding, molding design engineers and toolmakers on staff who can look at all this, who understand what you do with a mold for certain materials, what materials are best under certain circumstances,” he says. Fawn doesn’t actively market this portion of the business. “What we really want to do is use that expertise in order to bring in additional work,” he says. “It’s kind of an adjunct to the manufacturing.”
Ironically, small companies that can benefit from large companies looking to outsource parts of their production can do so by becoming more vertically integrated themselves.
