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Eliminate Capital Drains with Outsourcing

Feb 25, 2008
Increasingly, organizations see many fixed assets and virtually all working capital as drags on performance rather than as strategic advantages. Why is that view taking over?

To understand that shift let's make a contrast between Henry Ford's day and the automobile industry now. When Mr. Ford started his breakthrough of the assembly line, there were few suppliers who could provide parts that would work interchangeably enough to permit an assembly line to function. If the part didn't fit, someone had to file it down, weld on something, or make other time-consuming alterations.

Meanwhile, the assembly line either had to shut down or send through cars that were missing lots of parts. Mr. Ford realized that he would have to supply himself to make the assembly line work. In its heyday, the Rouge plant in Michigan was a marvel of modern steel-, glass-, and parts-making methods. For the applications that Mr. Ford was addressing, the Rouge plant was usually the best in the world.

Today, many would instead tip their hats to Toyota for the vehicle production model to emulate. Toyota does whatever it can to avoid having fixed assets and working capital. In fact, Toyota doesn't have an assembly line at all.

Toyota knows that it can build a better vehicle by adapting itself more to the customer through its team assembly process. With this method, Toyota can primarily assemble cars from constantly shifting combinations of parts to fit custom orders rather than building lots of undifferentiated cars it hopes to sell.

As a result, Toyota needs smaller plants and less inventory, and has less money tied up in unsold vehicles. If the best way to manufacture vehicles advances to something else that requires different flexibility, Toyota will be more financially able to make the shift by having been sparing with its capital.

Some companies have taken this approach a step further and outsource all of their manufacturing. This practice is common, for instance, among those who develop electronic components and products.

Few such companies are large enough to master the complexities of best practices in semiconductor manufacturing or to learn how to set up state-of-the-art facilities in the lowest cost country. Contract manufacturers, by comparison, can put complementary products from different clients into the same facility, operate more efficiently from shared scale, and learn from many other facilities how to provide short-lived products.

Both the product's designer-marketer and the outsourcing manufacturer gain. Capital intensity is less for both, but the designer-marketer gains the most from this specialization. It's not unusual for a company that outsources its electronic production to only require one-third of the capital of an organization with the same level of sales that does its own manufacturing.

But it's not just manufacturers who can outsource; service providers have their own opportunities. If, for instance, a service company's information technology operations are outsourced, the outsourcing provider owns the facilities and the equipment and is paid for only after providing the services to the client. The outsourcing provider will probably be able to pool fixed assets in ways that will provide advantages to itself and its clients.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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