Benefits of Partnering on Production
Updated: September 14, 2004
If you're feeling the double heat of increasingly demanding customers and nimble competitors, you're not alone. Partnering on production is one way to fight back. Jesper Momme reveals the DOs and DON'Ts of working with a production partner.
Momme has published Ph.D. research on outsourcing production, and he's put that research to practice for Aalborg Industries, a Danish producer of marine and industrial boilers that uses strategic production partnerships around the world to remain competitive. We asked Momme some questions about the principles behind moving production processes to an out-of-house partner.
Is Partnering on Production a Trend?
A decade ago, the smart money was on diversification. But when customers continued to demand more sophisticated products at ever-lower prices, a lot of companies found that the products and the processes became too complex for them to handle. Today, the trend is shifting toward focusing on core competencies. Companies are selling off non-core businesses and handing over some non-core processes to partners. Research from the United States and Denmark shows that outsourcing has doubled in the past year.
Why Do Companies Partner on Production?
A strategic partner allows you to focus on what you do best. Take [hi-fi manufacturer] Bang & Olufsen for example. They outsource the production of picture tubes to [electronics manufacturer] Philips. Philips provides the technical competence in this one area of production and that allows Bang & Olufsen to concentrate on their core competence, which is providing a unique design.
How Do You Get the Most Out of Partners?
Research has shown that a production partners level of motivation is directly related to the level of responsibility they're given. There's been a tendency in Western Europe to source from a number of suppliers and play them off against each other. But it has to be a win/win arrangement for it to work. You have to make sure the partner has a vested interest, for example, by doing joint development, sharing the financial risk or allowing them to specialize in certain items.
Can a Strategic Partnership Increase Operational Competitiveness?
Yes, three of the most common ways have to do with lead-time, production, and costs. You can reduce lead-time with a partner that is physically closer to customers. You can increase production volume and efficiency with a partner that has greater capacity and larger performance incentives. And you can lower costs with partners in low-wage countries.
What Should You Watch Out For?
You need to give your partners responsibility for the partnership to succeed, but you also need flexibility and control. Many companies don't consider all the things that can happen. Market demand can change. The supplier you're partnering with can become a threat to your business. Or the return on investment might not live up to your objectives. At some point in time, you need to reevaluate whether you should switch suppliers or in-source production again. That's why it's important to have a contract for a given period of time that specifies things like price and time and expected reliability of delivery, design responsibility, and shared benefits.
You should also be aware of hidden costs. For example, if you're handing over production processes that you formerly did in-house, there will typically be a learning curve involved. In the Far East, many companies relocate technical experts to the partner company to help them get up to speed faster. I don't think you see that often in the West. Sometimes they even hand over personnel permanently if the partner company is local.
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