Thursday, October 25, 2007

Feedback on the undervaluation of cycle times in offshore outsourcingdecisions

I received the following feedback by email (tim AT timlovelock DOT net) on my opinion-post regarding the undervaluation of cycle times in offshore outsourcing decisions:
Good piece, as far as it goes.

Uh-oh... ;-)
For instance, you might expand on the effect the long cycle time has on the ability of the manufacturer to implement "changes" or respond to a customer's request for expedite or change that they want implemented.


I don't know how important it is to quote a 5% year over year labor reduction...perhaps a more general approximation of labor savings or even just mentioning that there are some short lived labor savings (labor being less than 10% of the cost of most products might also be mentioned). You make a good point about trading off labor savings for reduced ability to serve the customer might not be in a company's best interests.

Also, developing a model to address the ideas in your last paragraph might be interesting...or...I imagine someone already has and, if so, it might be good to find out and possibly incorporate it into the argument.

That's what you get when your father is a retired electronics manufacturing CEO with domestic (US) and global contract manufacturing experience. :-)

Key points from his feedback:

  1. Labor is less than 10% of product cost. If you had any production/operations management classes in college, you know this to be true. As products grow more complex and require more automated manufacturing tools, direct labor goes down even more, but indirect labor may go up as these tools require skilled engineers to set up and maintain the programs and equipment.

  2. The effects of increased cycle time on the ability to respond to customer changes: While many electronics manufacturers have an objective to reduce manufacturing batch sizes to the smallest quantity possible, intercontinental shipping of most products is more cost-efficient as batch size goes up. This means the entire supply chain is holding more inventory, especially more finished goods, so engineering changes can't be incorporated, a direct "violation" of Lean principles.

  3. A model that incorporates the cost of cycle time in offshore outsourcing: It would be intriguing to develop this, but I have to believe one already exists. Can anyone point me in the right direction? If not, I might take a stab at this (with a little help... ahem...).

Anyone else have any thoughts?

I'm actually getting into this discussion a bit and doing some research (what can I say, I'm a geek when it comes to SCM and competitive advantage), so I'll have a few more posts on this subject, I'm sure.

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