Outsourcing Strategies and Implications 2005

OUTSOURCING STRATEGIES AND IMPLICATIONSROBERTA J. DUFFYCAPS: CENTER FOR STRATEGIC SUPPLY RESEARCH

For many years, firms have used outsourcing as a method to reduce costs, contract

out non-core activities, and benefit from a partner’s expertise. In more recent years,

media have highlighted the abundance of this model and its effects. When determining

if outsourcing is appropriate, supply management professionals must exercise due

diligence in a formal manner, just as they do when choosing best practices. While

executives must consider many factors, core questions revolve around retaining control

of core competencies, protecting proprietary information, and assessing long-term

benefits. These and other issues were recently discussed at a CAPS Critical Issues

Partnership Event. Through discussion and case studies, the group shared experiences

and lessons learned.

WHY THE CONTINUAL EXAMINATION — AND SCRUTINY — OFO U T S O U R C I N G ? The reasons to take a formal, disciplined look at outsourcing are

varied. Like so many other sourcing and supply strategies, its fit and applicability will

differ for each firm or supply chain. However, here are common reasons for

investigating the topic.

The Potential Benefits of Outsourcing

Keep what’s core; outsource what is not. Is the firm currently managing activities

that are not part of its core competency? Is this another firm’s core competency and

can that firm manage the activity with more efficiency and expertise?

Realize cost reduction. If the activity is not a core competency, the goal is to find a

more cost-effective way to handle the task. Outsource providers might be better suited

to handle the burden of capital investments, updating technology, and leveraging

resources.

Optimize the time factor. Creating a true “24-hour” day is one benefit of outsourcing,

particularly to the Middle or Far East. Some engineering and design projects assigned

Critical Issues Report, October 2005; www.capsresearch.org

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Critical IssuesR E P O R T

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O C T O B E R 2 0 0 5 Hot Topics

in Today’s

Supply Chain

ManagementWhy the ContinualExamination — andS c rutiny — of1 O u t s o u rc i n g

W h e re DoesO u t s o u rcing Fit5 Into Strategy?

Case StudyHallmark: Weighing the6 D e c i s i o nC a re f u l l y

Case StudyRoyal PhilipsE l e c t ronics: Applying a9 Disciplined Pro c e s s

Case StudyMattel, Inc.:Extending Va l u e s1 2 to Outsourc e r s

Case StudyFluor: ExperiencingAll Aspects of1 4 O u t s o u rc i n g

MISSION STATEMENTCAPS contributes competit i v e

advantage to org a n i z a t i o n s

by delivering leading-edge re s e a rc h

globally to support continuous

change and bre a k t h rough perf o rm-

ance improvement in strategic

s o u rcing and supply.

at the end of the U.S. workday arrive in India at the beginning of its day and are

completed and returned the next U.S. morning.

Accommodate a materials-dependent environment. Firms facing rising commodity

prices must drive down operating costs, as they may be the only variables in play.

Finding an outsource partner that can operate more efficiently might be the answer.

Act as a result of mergers, acquisitions, or downsizing. A shift in organizational

structure may yield redundancies, allowing a company to consolidate some activities or

leverage its position in others.

Manage licensed goods. Some firms (e.g., toys, entertainment) face many of the

same challenges as do companies that sell licensing agreements for a brand or name.

The decision may not be whether to outsource, but how to select an outsourcer who

can properly manage the product.

What to Outsource

Firms can outsource anything—from manufacturing, to indirect spend areas, to

processes. Even those with a history of outsourcing one element may need a fresh

approach when examining the potential for another element. This can be especially

taxing if the area is quite diverse. For example, outsourcing the manufacturing at one

facility may seem relatively straightforward compared to outsourcing travel purchases,

which occur among all users and across many locations.

Always Addressing Continuous Improvement

Some firms have outsourced various functions but want to take a deeper dive and

measure the value of the model. This can involve assessing the performance of or the

value received from the provider versus an inhouse model.

This anecdotal evidence is complemented by current research from CAPS and A.T.

Kearney. In the 2004 study Outsourcing Strategically for Sustainable Competitive

Advantage, researchers discovered that the reasons to outsource fell into three main

categories: cost, competency focus, and revenue considerations. By far, the primary

drivers fell into the cost and competency areas, with “reduce operating costs,”

“reduce capital investment,” and “focus on core business” ranking the highest, cited

by more than 80 percent of respondents. Other top drivers were: “gain access to

technology not in company,” “increase flexibility and responsiveness,” and “turn fixed

costs into variable costs.”

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Just as there are many anticipated benefits from outsourcing, there are concerns to

consider. The executives at the CAPS Critical Issues event voiced the following

potential concerns.

Potential Concerns of Outsourcing

Balancing the trade-offs. The most prominent concern is how to balance

disadvantages that come with cost savings or efficiencies. These include operational

c o n c e rns, as when a company gives up direct control of goods or services; and

philosophical concerns, as when stakeholders react to outsourcing. The question

always comes back to whether the overall decision and outcomes are best for the

f i rm .

Cultural change. Outsourcing is an extremely sensitive issue, which can cause an

emotional reaction in managers, employees, and communities. Sometimes an element

is outsourced because resources just aren’t available within a firm, but often

outsourcing displaces workers or closes facilities.

Going overseas. Some firms have been relatively comfortable outsourcing activities to

domestic or local suppliers, but find it more difficult to embrace outsourcing overseas,

particularly in the face of negative reaction.

Proprietary issues. Most companies generally will not hand over proprietary

information. They walk a fine line, however, if the process works indirectly with

proprietary information, or if outsourcing may hinder the development of new

information.

Execution. Beyond the actual decision to outsource, there are general concerns that

the execution of that strategy will yield the benefits anticipated.

Balancing values. In addition to reconciling a company’s own beliefs and values about

outsourcing, there is a need to determine if the outsource partner shares a firm’s

values and will exhibit the same business practices, social responsibility, or company

culture. This is particularly important if the outsource partner will work directly with

customers.

Lasting benefits. Many make the decision to outsource to reap the benefits of low-

cost operations in another region of the world. However, as economics and

demographics change, the cost of labor might rise. Is the investment and move to

another region worth it given the longer-term outlook?

Again, these reasons are exemplified formally in the CAPS/A.T. Kearney study. Nearly

75 percent of the respondents shared the concerns listed first; a third of them shared

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Some firms have

been relatively

comfortable

outsourcing activities

to domestic or local

suppliers, but find it

more difficult to

embrace outsourcing

overseas, particularly

in the face of negative

reaction.


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the concerns listed later. Reasons to not outsource an activity are as follows: “loss of

control,” “activities not outsourced are core,” “protection of intellectual property,”

“company policy/philosophy,” “inadequate business case,” “dependency on supplier,”

and “labor/community reaction.”

The topic of “offshoring” was touched upon directly in the anecdotal research and

indirectly in the scholarly research. Offshoring occurs when a company outsources to a

supplier overseas or in a separate country. (Moving to a supplier in a contiguous

country is considered nearshore outsourcing.)

After hearing all the buzz during the 2004 presidential election, a layperson might

assume that outsourcing, or more specifically “offshoring,” is a relatively new

phenomenon, a business model that suddenly caused shifts in the U.S. economy. Of

course, this is not the case. In that same year, the Institute for Supply Management™

issued this position statement on the topic:

Outsourcing overseas is not a new phenomenon. Business entities have been

offshoring for decades with the exodus of jobs making shoes, electronics and toys

to developing countries. In addition to “offshoring,” for many years businesses

have been shifting work from one location to another in the United States to lower

costs of operation.

For some industries and businesses, offshoring is inevitable and will benefit both

the business entity and consumers by increasing efficiency, increasing return on

investment (ROI), and lowering costs. To remain competitive and sometimes to

survive, some businesses must outsource overseas (offshoring) or face closing

their doors. For other business entities or situations, offshoring may not be the

best decision to meet the overall strategic goals.

Regardless of how well-rooted the outsourcing or offshoring decision, firms must deal

with the very real emotional aspects of the decision.

It All Comes Down to One Question

The decision of whether to outsource a particular activity will vary for each firm and

each situation. The above factors are all considerations. However, generally speaking,

the decision boils down to one question: is it right for the company? Will the value that

is achieved through an outsourcing model ultimately benefit the firm or help it to

achieve its goals? Yes, it may be a difficult and emotional decision, particularly if a firm

must layoff employees or close a facility, but is it necessary in order to curb costs so

the firm can operate in the black? Are near-term changes required for long-term

viability? In some instances, this requires “thinking in terms of the company versus

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Regardless of how

well rooted the

outsourcing or

offshoring decision,

firms must deal with

the very real

emotional aspects of

the decision.


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just an individual.” CEOs and other key personnel may be forced to explain why they

made certain decisions. They can convince their skeptics by showing how a decision to

outsource will add value to the firm.

It’s important to note that the above question may yield a decision to not outsource,

even if a company had been heading in that direction. When determining “what is best

for the company” consider: What is it that gives the company a competitive

advantage? If that competitive advantage is price, and outsourcing will translate to

lower costs, perhaps it is the best route. However, if a firm’s competitive advantage is

responsiveness to market demands and an outsourcing model will lengthen lead-times

(albeit at a lower cost), a firm might give up its competitive advantage. The analysis

must work both ways and executives must welcome the opportunity to subjectively

weigh outsourcing implications.

WHERE DOES OUTSOURCING FIT INTO STRATEGY? Most supply

management executives agree that outsourcing is a strategy that complements a larger

business model. Unless an organization is specifically designed as a “virtual” firm, in

which all processes were outsourced from the beginning, it is probably just one

component of a firm’s business strategy.

Many participants said an important first step is to determine the size of the spend.

How can a firm know if an outsourcer will add value to an internal process if the

internal process isn’t properly defined? Additionally, monitoring the performance of

the outsourcer is possible only if a firm knows the requirements. Furthermore, if

improvements or cost savings are expected from the outsourcer, the customer must

know what is reasonable in the market. Outsourcing might find a spot in a firm’s

overall strategy after a category has been deemed appropriate for “leverage” or

“business simplification” — at any rate, after strategic cost strategies have been

flushed out.

Here is an example of a strategic process and outsourcing’s role:

1. Develop commodity/article group strategies.

2. Establish and leverage a world-class supply base.

3. Develop and manage supplier relationships.

4. Integrate suppliers into new product/process development process.

5. Integrate suppliers into the order realization process.

6. Cultivate supplier development and quality management.

7. Manage costs strategically across the supply chain.

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If improvements or

cost savings are

expected from the

outsourcer, the

customer must know

what is reasonable in

the market.


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The decision to insource or outsource comes at the beginning or end of this process,

depending on the vantage point. If an activity is inhouse, executives would go through

the seven steps. If they determine the in-house activity does not add value to the

spend, outsourcing may be appropriate. Or, once a firm understands the scope of the

spend, it can prudently decide on an outsource partner.

To ensure that these strategic processes are accomplished, one major corporation has

identified strategic enablers for purchasing/supply chain world-class excellence. They

are illustrated in the chart below.

CASE STUDYHALLMARK: WEIGHING THE DECISION CAREFULLY

Hallmark is a 95-year-old privately owned enterprise in the personal expression

industry, most commonly known for its greeting cards, though the family of companies

includes Hallmark Entertainment, Hallmark Flowers, Binney & Smith, and The Picture

People, among others. Hallmark has 18,000 employees worldwide, with operations in

more than 100 countries, dealing in 30 languages. Revenues in 2004 were $4.4 billion,

and its share of the U.S. greeting card market is greater than 50 percent.

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Source: Philips

Purchasing/Supply Chain World-Class Excellence

DeployGlobalizationEstablish Globally

Integrated and AlignedPurchasing and Supply

Chain Strategies and Plans

DevelopOrganization and

Teaming Strategies

Develop Purchasingand Supply Chain

Measures

Develop andImplement Enabling

IS/It Systems

Establish HumanResource Development

and Training

In order to leverage spend, the procurement function at Hallmark is centralized, and

since 2001 it has operated under a shared services model. There is a procurement

council to accommodate all the different businesses. The firm has learned that

procurement’s early involvement yields the best results. And while there was some

initial expected resistance to the shared services model, results have exceeded

expectations.

The next step was to continue determining how procurement could make even more

of a difference in terms of products and services and bring sustained business value.

A resource alignment task force was put together. While outsourcing would seem like

a natural model to consider for most firms, Hallmark’s longstanding practice has been

to handle personnel changes in manufacturing operations through attrition or

redeployment rather than layoffs, when possible.

Through some external benchmarking, Hallmark used three questions to help it analyze

the core competency question and the potential for outsourcing/offshoring:

• If you were starting your company today, is your area a function that you would

do yourself?

• Are you so good at the function that someone else would pay you to do it?

• Is the next president of your company coming from that department?

As one would expect, when discussing what is “core” with various parts of the

organization, each function believes what it does is critical and core. When presented

with the challenge of optimizing resources and given the choices of 1) business

simplification through cross-functional work; 2) working for process improvements by

eliminating waste, etc.; or 3) outsourcing, most gravitate toward the process

improvements, as it seems like the “easiest” to tackle.

However, there was some precedent for the third option at Hallmark. As early as the

1940s, a decision was made to rely on an outsource partner for most domestic

lithography. Beginning in the 1960s, there was some offshoring, including graphics for

children’s books and the manufacturing of some ornaments and gift items. Over the

years, the functions outsourced have spanned from temporary labor, legal services, and

vending, to more expansive areas such as travel services, call centers, distribution, and

lab services.

At various times in its history, Hallmark has managed operations in Japan, Korea,

Taiwan, Indonesia, Malaysia, Singapore, Columbia, and the Philippines. Infrastructure,

political stability, the richness of the supply base, and a region’s banking system can all

affect Hallmark’s decision of whether to stay in a region.

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As one would expect,

when discussing what

is “core” with various

parts of the

organization, each

function believes

what it does is critical

and core.


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To illustrate how the outsourcing decision is considered, one can look at some of

Hallmark’s manufacturing processes and the firm’s need to drive down costs. Hallmark

has several domestic manufacturing facilities, many fairly close to the Missouri

headquarters.

Interestingly, due to its long history of continuous improvement and expertise in the

field (more than 60 percent of workers have more than 25 years of service), Hallmark

found that in some cases, it was the low-cost option for a given process. There were

some opportunities, however.

Handwork (stitching, three-dimensional elements, etc.) on some greeting cards can be

extremely labor-intensive. While consumer trends for cards with handwork were

growing, the price points could not. A facility in Mexico proved able to do the

handwork with lower total landed costs. However, there was some concern that cycle

time would be an issue, so the decision was made to keep some of the handwork

(approximately 40 percent) local.

This multi-pronged strategy works because of variable conditions available with the

Mexican supplier, including a stable community and the ability to provide employees

with a clean, safe environment.

In order to make the transition, Hallmark kept its corporate beliefs and values foremost

as a guide. This meant open communication with employees and a very gradual

transition. Domestic workers who previously worked on handwork were either

retrained, placed in other positions, or opted for retirement, thus avoiding layoffs.

One reason that Hallmark feels it has been successful with outsourcing is the fact that

procurement hasn’t been the outright champion of the decision. It has been the

business leaders who ultimately have to be on board, in agreement, and passionate

with the idea. In the case of the Mexico facility, manufacturing played a key role in the

decision. Procurement certainly advises, consults, and helps to ensure a methodical

decision process, but it can’t be responsible for the “heavy lifting” in terms of

advocating the idea. Through a great deal of trial and error, the procurement

department has clarified its role.

Because the company is privately held, the approach taken to outsourcing is highly

dependent on the owners and their priorities. Whereas a public corporation’s board of

directors might be more driven by the financial statements, in Hallmark’s case, the

owning family’s first priority is the impact on employees. This means not only a

disciplined assessment about the implications, it also means that any changes aren’t

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One reason that

Hallmark feels it has

been successful with

outsourcing is the fact

that procurement

hasn’t been the

outright champion of

the decision.


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done suddenly, but rolled out smoothly. The result might be a “slower” process than in

other firms, but it ensures that it’s being done “right.”

CASE STUDYR O YAL PHILIPS ELECTRONICS: APPLYING A DISCIPLINED PROCESS

Royal Philips Electronics is one of the world’s largest global electronics companies,

with a multinational workforce of 160,900 employees in more than 60 countries.

Headquartered in Amsterdam, The Netherlands, the firm has products and services

related to healthcare (including medical systems), technology (including

semiconductors), and lifestyle (including lighting, domestics appliances, and consumer

electronics).

The purchasing organization has a global spend of 23 billion, supporting 30.3 billion

in sales. There are global and regional commodity teams that address particular

materials. For example, in the area for lamps, there are teams for soft glass, spare

parts, electronic components, etc. The entire global sourcing process (deployed for

nearly 10 years) is very process-driven. There are survey tools, self-audits, roadmaps

for improvement, and third-party audits.

As might be expected, there is also a formalized process for insourcing/outsourcing

decisions and implementation. The process consists of five basic stages:

I. Business planning

II. Reorganize and prepare

III. Formal approval

IV. Execute and implement

V. Post-evaluation

The chart on page 10 details some of the elements in each phase.

To illustrate how these steps are used, Philips details the outsourcing process as it

relates to one manufacturing component: a particular set of wires that are welded

together and used in lamp production.

The wires are used in three different platforms of manufacturing and as such, require

three different machines. The quality of the wires can directly affect the quality of the

lamp; there are also workability quality issues, such as ensuring that the wires are the

correct dimensions, that they’re not damaged, etc. This commodity has a low dollar

value, but can create high consequential costs if the wires are delivered late. The

expected savings are relatively low, and innovation around design is required whenever

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new lamps are concepted. There are four main plants that use this product; these will

be most affected by the outsourcing decision.

I. Business Analysis

At this stage, there will be market research, a SWOT analysis, benchmarking,

determination of the business case, and the creation of plans to reorganize. In Philips

case, because it was currently manufacturing the welded wire product, it had great in-

depth knowledge of the materials prices and a supplier’s potential costs.

This stage also includes a discussion about sharing the proprietary information. In its

current processes, Philips was manufacturing the wire to such a high quality that its

processes were considered core and proprietary. However, it was determined that

ultimately, the wire would be just as beneficial to the final consumer if it weren’t quite

as high of quality. Therefore, was there a way to outsource the wire, share some

processes (though not those that resulted in the highest quality), and be able to realize

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Insourcing/Outsourcing Process Overview

Continual Monitoring and Performance Measurement

I II III IV VBusiness g Reorganize g Formal g Execute & g PostPlanning & Prepare Approval Implement Evaluation

• Businessanalysis

• Business case• Define strategy• Define

reorganizationplan

• Developdetailed projectplan

• Gather relevantinformation

• Definealternatives

• Calculatealternatives

• Prepare detailedbudget

• Developproposedimplementationplan

• Projectmotivation

• Utilization of“@investor”lotus notesdatabase

• Local andhigher level ofmanagementdecisions andauthorizations

• Compliancewith investmentprocedures

• Utilization of“@investor”lotus notesdatabase

• Defineimplementationplan

PROJECT MANAGEMENT• Traditional

projectmanagementsteps

OUTSOURCING• Identify second

source• Qualify second

source• Collate and

monitor savingsversus plan

• Projectevaluation(projectmanagement)

• Project post-calculation(financialmonitoring)

• Post-reorganizationreview

Source: Philips

the benefits of a lower-cost option? In this way, the “core” competency of the higher-

quality process wouldn’t be compromised yet the requirements for these particular

lamps would still be met.

When doing the SWOT analysis at this stage, Philips points out that it’s important to

think in terms of the entire situation, not just the single component or supplier. So, in

general, consider whether a majority of suppliers in this market are expanding into

low-cost regions, as opposed to assessing whether the chosen supplier is moving that

direction.

Defining the business case for outsourcing requires specific statements to be clear. An

example of a problem statement would be: We are not cost-competitive in this market.

The scope statement will detail which products, which regions, etc. are going to be

shifted. The project plan contains a detailed timeline.

II. Reorganize and prepare

At this point, Philips uses a team and says it’s key to motivate the team, even using a

creative name other than “reorganization project.” The parties involved know the

magnitude of what they’re proposing to do, but they must be excited in order to make

it succeed. Supplier intelligence reports and financial calculations are completed at this

stage. Calculations include purchasing savings, implementation costs, organizational

restructuring impact, cash flow analysis, and asset sales. It also includes a target for

payback.

Some team members will be those ultimately affected by the outsourcing shift. As

such, there is likely to be anxiety. The best advice is to just be honest upfront in order

to quelch rumors. One strategy used at Philips is to move people throughout the

company on a regular basis, to various facilities and projects. In this type of

environment, a later move due to outsourcing does not seem as drastic.

III. Formal approval

This is a strict approval process, with all the necessary documentation and compliant

with board directives. In addition to those standard people who must approve the

proposal, other relevant parties might be invited as well.

IV. Execute and implement

This phase is heavily dependent on project management skills, with timelines and

responsibilities defined. There may be an aspect of asset management. For example,

Philips might have equipment that it can sell to the new supplier. Not only does this

generate cash flow, but it helps to develop the supply base capabilities. At this stage,

there is also a responsibility to identify and qualify second sources.

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When doing the

SWOT analysis,

Philips points out that

it’s important to think

in terms of the entire

situation, not just the

single component or

supplier. So, in

general, consider

whether a majority of

suppliers in this

market are expanding

into low-cost regions,

as opposed to

assessing whether

the chosen supplier is

moving that direction.


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V. Post evaluation

Post evaluation requires more financial monitoring, particularly tracking the projected

savings from phase II to actuals. A firm would definitely want to track the process at

least until the return on investment is realized, but at some point, tracking the savings

gained from outsourcing, compared to what would have been is of little value.

Continually tracking the outsource provider for improvement and savings compared to

market is reasonable.

In summary, in the Philips example, the firm realized a supply base reduction, going

from 20 suppliers down to two in one facility. It also saw a 27 percent price reduction

for the welded wires, and decreased lead times for one of the wire components from

six weeks to three weeks. Longer-term wins included the cash generated from

equipment sales, complexity reduction, and more cost-competitive lamps.

CASE STUDYM ATTEL, INC.: EXTENDING VALUES TO OUTSOURCERS

Mattel, Inc. is one of the world’s premiere toy enterprises, designing, manufacturing,

and marketing such brands as Barbie, Matchbox, Fisher Price, American Girl, and

Sesame Street. Headquartered in El Segundo, California, the company has

approximately 25,000 employees in 42 countries and had 2004 revenues of $5.1 billion.

The company has worldwide operations, which encompass global procurement, global

logistics, finance, and worldwide quality assurance. Within the quality assurance area is

a global sustainability group whose mission is to “promote and protect our brands by

balancing people, planet, and profit.” The global sustainability group oversees three

tiers that manufacture Mattel products:

• Those facilities fully owned and operated by Mattel around the world.

• Supplier locations in various regions of the world.

• Licensee facilities: 600 licensees operating 3,000 factories in 30 countries.

All three tiers require efficient management and expertise, but second and third tiers

specifically relate to outsourcing, as the facilities are not owned or operated by Mattel.

One aspect of outsourcing that Mattel exemplifies is the need for a brand to be

protected, even across the outsourcing relationship. Consumers who recognize and

trust a brand name do not make the distinction between the original company and any

portion of its supply chain. Anything having to do with a Mattel brand is going to reflect

on Mattel, even if it is work performed by an outsourcer.

To ensure that Mattel’s reputation and values are embodied in its outsource partners

and in those manufacturing locations owned by Mattel, the firm created Global

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A firm would

definitely want to

track the process at

least until the return

on investment is

realized, but at some

point, tracking the

savings gained from

outsourcing,

compared to what

would have been is of

little value.


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Manufacturing Principles (GMP) in 1997. The idea came after a national news program

did an exposé about workers in an underdeveloped region manufacturing Barbie

clothes. It is now the cornerstone for how Mattel treats people around the world,

rolled out to all those entities that manufacture its branded products.

The GMP program checklist consists of 12 parts covering the following categories:

management systems, wages and working hours, age requirements, forced labor,

discrimination, freedom of association, living conditions (dorms and canteens),

workplace safety, health, emergency planning, environmental protection, and customs.

While each checklist is based on a standard template, there are country-specific

variations.

The questions (up to 115 of them) are critiqued by the following terms: those areas for

which Mattel has zero tolerance, areas considered highly critical, critical, major, and

minor. An example of a zero-tolerance question is: Is each employee at the facility

employed of his or her own free will? A highly critical question is: Are all deductions

from gross wages allowed under the labor law regulations? Even though the questions

will be standard for each country, what is considered “standard” or “acceptable” will

vary from country to country. For example, standard working hours per week vary

around the world. In some cases, Mattel’s own standards exceed what is considered

locally acceptable: the International Labor Organization sets 14 as the minimum

working age; Mattel’s standard is 16.

Compliance with the program is determined through an index system. Facilities are

graded on critical, major, and minor questions, with responses weighted accordingly.

Zero tolerance and highly critical findings are simply numbered and incorporated into

the overall index. The index then determines how frequently the manufacturer is

monitored; obviously those who don’t improve could be terminated.

An important aspect of the compliance program is to have the results audited by an

independent party outside of the GMP. (In some cases, the independent group is part

of Mattel; sometimes it is a third party.) This transparency not only ensures objective

results, it also helps foster the corporate culture and promote the GMP mission. The

factories around the world also embrace the whole idea. One manager in Indonesia

wanted this Mattel experience to be a bridge for workers to strive for higher standards

in future jobs as well. Finally, the audit has internal benefits as well. One major

audience is existing employees throughout the corporation who can take pride in

working for a firm that has such a strong focus on social responsibility.

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An important aspect

of the compliance

program is to have

the results audited by

an independent party

outside of the GMP.


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CASE STUDYFLUOR: EXPERIENCING ALL ASPECTS OF OUTSOURCING

Fluor is a publicly owned engineering, procurement, construction, and maintenance

company with more than 37,000 employees worldwide and 2004 revenues of $9.4

billion. It is active in 75 countries and serves customers in industries such as:

chemicals and petrochemicals, commercial and institutional, government services, life

sciences, manufacturing, mining and minerals, microelectronics, oil and gas, power,

telecommunications, and transportation. Much of Fluor’s work is project-based.

The procurement effort is center-led, as the company’s goal is to present “one face” to

the supply base. For example, the centralized team manages 140 different supplier

relationship agreements for repetitive purchases, even though the users may be quite

diverse in terms of geography and division.

Fluor has an interesting perspective on outsourcing. It has used outsourcing for some

aspects of its own internal operations, but also considers outsourcing when it is

fulfilling services for customers. Furthermore, Fluor itself is often hired as an outsource

partner for other firms. From this unique vantage point, the firm has developed

significant experiences and learned many lessons related to outsourcing.

Some of the services that Fluor outsources are:

• Human resource functions

• IT

• Security

• Facility services

• Food services

• Records management

• Travel

It has also work-shared engineering design functions for the past 15 years in countries

such as Poland, India, and the Philippines.

The IT function is one example where Fluor gained valuable experience in terms of

outsourcing. In the late 1980s and early 1990s, some smaller IT contracts were in

place for mainframe hosting and operations. Later, other contracts were outsourced for

other functions, such as server administration, security, and wide-area networks, etc.

However, these contracts were fragmented and not centralized. Even if Fluor had

wanted to do one contract for all IT services, it was difficult to even define the scope

of that requirement.

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In 1998, Fluor repatriated the outsourced IT functions mentioned above in order to

ascertain “what was there.” This shift allowed the firm to formally analyze the

outsourcing decision. In 1999, two separate contracts were awarded (for $12 million

and $55 million) for some services, and in 2003, another, worth at least $315 million

(over seven years) was awarded for more.

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Outsourcing Strategies and Implications 2005

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