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Outsourcing Transition Risk

Outsourcing Transition Risk. Matthew Douglas, VP Operations (Andrew) Bennett West, Cort Jacoby, Giri Varadarajan (Deloitte). Date: Nov 14th 2006. Today, we will address the topic of Contract Manufacturing (CM) Outsourcing Transition Risks through our experiences at Andrew. Product Lines.

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Outsourcing Transition Risk

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  1. Outsourcing Transition Risk Matthew Douglas, VP Operations (Andrew) Bennett West, Cort Jacoby, Giri Varadarajan (Deloitte) • Date: Nov 14th 2006

  2. Today, we will address the topic of Contract Manufacturing (CM) Outsourcing Transition Risks through our experiences at Andrew Product Lines Business Units CM outsourcing is a complex process presenting several transition risks. It is important to develop mitigation strategies prior to outsourcing to minimize any negative financial or customer impact.

  3. Andrew, a $2 B global manufacturer of telecommunications infrastructure equipment, has grown two-fold mainly through acquisitions over the last three years Key Customers: Products Key Highlights • Founded in 1937, Andrew employs 10,000+ people with operations in N. America, S. America, Europe, Africa & Asia Pacific • Global leader in Wireless Communications Infrastructure • Ranked #1/#2 in each major product group

  4. Andrew’s Base Station Subsystems Group does business in a very challenging market Customers • Competition • Intense price competition • Continued consolidation is likely • Customers are also competitors • Implications to BSSG Mfg • Regional, scalable, & flexible supply chain as a competitive differentiator • Customers • Very large and consolidating • Strong “buyer power” • Implications to BSSG Mfg • Must be: • Low cost • Global • Flexible Competition BSSG Marketplace Supplier • Suppliers • BSSG products are built using thousands of components and several hundred suppliers • Raw material prices are increasing (Copper, Aluminum, Silver, etc.,) • Implications to BSSG mfg: • Simplify the supply chain and focus • Strategic Sourcing Partnerships

  5. EMEA Americas APAC The Legacy BSSG Supply Chain was a “Spaghetti Chart” of Complexity and the need for speed was paramount – Manufacturing Outsourcing is our solution. Future Regional Outsourced Supply Chain Old Supply Chain Americas EMEA APAC Outsourcing Rationale • Self funded exit from high cost, highly labor regulated country to improve gross margin & cash flow • Simplified supply chain • Variable pricing model directly ties manufacturing costs to volatile sales demand • Supply chain scalability & flexibility • Enables Andrew to focus on product innovation, cost reduction, and customer relationships

  6. Outsourced Manufacturing Introduces Several Transition Risks • Product Fulfillment • Description: • Day 1 “Flip the Switch” production transfer to EMS Partner • Sample risks: • IT handoff failures • “Confidential” knowledge transfer • Supplier order book transfer • Labor Disruption • Description: • Internal labor strike or sabotage • Sample risks: • Production shutdown • Order fulfillment stoppages • Physical violence/ product sabotage • Business Case Realization • Description: • Realize outsourcing benefits within anticipated timeline • Sample risks: • Due diligence issues • Expat and severance costs • Capital equipment estimates • Every bus case assumption is a risk! • Customer Relations • Description: • Alleviate customer apprehensions to minimize forecast surge & drops • Sample risks: • Site disqualification • Forecast drops/surges • Credibility/reputation risk Transition risks typically manifests either as a schedule delay or bad cost estimate

  7. Understanding Key Risks And Implementing Mitigation Strategies Is Critical To A Successful Outsourcing Transition

  8. Risks And Sample Mitigation Strategies Contd…

  9. Manufacturing Outsourcing Lessons Learned Impact Lessons Learned • Outline success criteria and get team alignment; check commitment regularly • Understand country’s cultural nuances to customize mitigation strategies • Get Customs/VAT compliance expertise from local tax and logistics SME’s • Resources, Resources, Resources – right resources minimize transition risks • Strong program management infrastructure to manage a cross-functional effort of simultaneous transitions in multiple continents/countries. Communication and coordination are essential! Time • Confidentiality, Confidentiality, Confidentiality – critical to mitigate labor disruption • Evaluate Sarbane-Oxley regulations especially FAS 146 implications to understand what can be classified as one time restructuring costs • Understand Freight Vs Labor tradeoff when allocating production to factories • Contract manufacturing is a marriage – understand CM partners profitability criteria and communicate openly to avoid surprise divorce • Involve cross functional leadership to gain 360° alignment on business case $ Benefit

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