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Case Study #1 (SC): OEM Outsource Manufacturing to Shelter (Mexico) PDF Print E-mail
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Supply Chain Outsource Manufacturing to Shelter Operation (Mexico) - Medium Sized Telcom Original Equipment Manufacturer (OEM).

Lessons Illustrated

  • The Supply Chain Strategy should match the Company Strategy: The selection of an Outsource strategy should fit with the Company sales strategy.

  • Outsource products that are High Volume and Standardized:  Outsource High Volume, Standard products and keep Low Volume, Unstable demand products in-house.

  • Implementation of an Outsource Strategy requires a Cross-functional team: Quality, Delivery and Cost are all very important. A Cross-functional team focused on the success of an Outsource implementation will make the transition smoother than it would be if only purchasing were involved.

The Problem: In late 2003, faced with relentless price pressure and unpredictable demand from major customers, a mid-sized Telcom OEM evaluated outsourcing the assembly of its distribution panel product line to a Mexican shelter/contract manufacturer. 

The Telcom OEM evaluated the shelter based on these selected criteria 1) quality systems; 2) track record of flexibility in dealing with unpredictable demand; 3) good geographic proximity to the Company’s operations; 4) English language capability; 5) financial stability, and 6) process compatibility.    Many of the processes used to manufacture and assemble the panels were already in place at the Shelter, including SMT board production, sheet metal stamping and finishing operations, plastic injection molding, and a full wire and cable processing capability.

The Solution: The OEM set up a cross-functional team (Operations management, Planners, QA, manufacturing engineers, and logistics specialists from both companies) to plan and implement the transition.  Initially, Tooling and pre-kitted inventory was consigned to the Mexican shelter, and first article work orders were issued to provide feedback with respect to quality and workmanship expectations for all processes.  After a series of training sessions carried out at both the US and Mexican facilities, the Shelter quality quickly met or exceeded quality and workmanship expectations.

The initial products (panels) selected for outsourcing were those with relatively large and predictable demand, or whose BOM contained many common components and sub-assemblies.  This facilitated the planning of both the finished goods and material inventories, which could be managed with a simple “min/max” system, and reduced the risk of inventory obsolescence.  The OEM continued to manufacture and assemble the high mix, fast turnaround panels, and maintained all customer service functions, rendering the outsourcing decision essentially transparent to the OEM’s customer base.

Initially, only the final assembly process was carried out in the Shelter; all required materials, components, and sub-assemblies were pre-kitted and consigned to the Shelter by the OEM.  However, within several months, all cable sub-assemblies, the SMT alarm card, and all painted/screened sheet metal components were manufactured by the Shelter, with plans to add plastic injection components in the next stage. 

Unit cost savings for the panels exceeded 30%, even with the logistics costs factored in.  Quality has been outstanding, and delivery flexibility has enabled the OEM to reduce its fixed cost exposure and focus on design and delivery of new products.
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