Supply Chain Outsource Manufacturing to Shelter Operation (Mexico) - Medium Sized Telcom Original Equipment Manufacturer (OEM).
Lessons Illustrated
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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