Outsourcing Is In

More machine builders than you think are doing it

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May 2003, cover imageThere was a time when many industrial machine builders had nearly everything they needed to build machines in house: designers, mechanical engineers, electrical engineers, programmers, technicians, and production facilities for precision machining, mechanical fabrication, making wiring harnesses and control panels, and assembling and testing complete machines.

These industrial OEMs also often were capable of installing new machines all by themselves at the customer plants, integrating them into the customer's assembly line or manufacturing system.

Very little was ever farmed out to external suppliers. Production of castings and printed circuit boards probably were sent out, and machine builders bought standard limit switches, components, and CNC controls off the shelf, but they designed and built just about everything else.

Then came today's troubled times and new machine performance criteria. Modern times came with layoffs, pullbacks, reorganizations, acquisitions, mergers, and all the other gut-wrenching realignments of the 1990s. By the mid-1990s, outsourcing had reared high its ugly head.

As you'll see, the outsourcing phenomenon bears watching. This article will bring you up to speed on the depth and breadth of what's happening throughout manufacturing in the U.S. Its impact on the machine building community is inevitable, the only question is degree and timing.

It Has Begun

"Outsourcing in the machine tool industry no longer covers the mere purchase of parts by OEMs," Woodruff Imberman, president of efficiency consultants Imberman and Deforest, said back in 1998. "It includes the purchase of design and product assemblies, product testing, inspection, and sometimes even sales and customer service. OEMs ask suppliers to provide logistics and materials supply, services covering technology, material requirements planning, procurement, inventory monitoring, accumulation, and replenishment." And so it began.

 

We turned the corner into the 21st Century, and many industrial OEMs left behind the old way of building machines. Some laid off key personnel and divested themselves of expertise and capabilities that were outside their core business of making machines.

Simultaneously, control systems changed. Over the past few years, they've gone from being an industrial machine builder's simple, custom-made dedicated controller, to name-brand CNCs and PLCs, and now to open architecture, PC-based controls, and industrial networks. Just as machine builders were losing some of their in-house control expertise, the entire control scene got more complicated.

"During downsizing, many companies began looking to outsource their control systems expertise," explains Herb Johanson, marketing manager at system integrator Concept Systems. "They cannot afford to staff a group with the same knowledge base that you can get from a good integration company."

So now, instead of being self-sufficient, some machine builders are starting to become dependent on outsourcing and collaboration with suppliers in similar fashion to other industries, it appears. Market researcher IDC says 20% of the electronics manufacturing market now goes to contract manufacturers. It expects that share to reach 27% by 2006, according Kevin Kane, program manager for IDC's Contract Manufacturing Services.

The 2003 AMR Research/National Manufacturing Week trade show survey of global manufacturing trends shows that 17% of design work and 17% of maintenance currently are being outsourced. "It's still a do-it-yourself market," says the study. "Third-party and automation vendors need to convince companies outsourcing is worth it."

From what we've been hearing, fewer and fewer companies need much convincing any more.

Outsourcing Everything

All kinds of companies are outsourcing everything from aftermarket maintenance to information technology (IT). Gary Blankenmeyer, vice president of Bosch Rexroth (boschrexroth.com), says maintenance is the second most-effective business function to outsource, led only by transportation.

 

"We see a small but growing number of plants using machinery built by our OEM customers outsourcing maintenance extensively," says Blankenmeyer. "Manufacturers in the automotive, machine tool, and semiconductor industries would rather focus on their own core competencies and outsource other activities." With such transactions firmly in place, how much of this after-sales support comes back to the industrial OEM as added revenue streams or added cost is the question. Right now, it's a mixed bag of answers.

"We frequently use outsourcing in combination with our inhouse staff in the development phase of our projects," says Don Kinley, chief engineer at Eaton Leonard, a manufacturer of tube forming automation in Vista, Calif. "Under these circumstances, the required system behavior, performance requirements and development guidelines can be defined and documented to the outsource firm up front. The outsourced deliverables can then be measured against these requirements and there are fewer surprises during the integration and test phases of the project."

"Outsourcing is no longer relegated to just non-core functions," says John Borden, leader of First Tuesday Atlanta, a business organization in Atlanta that sponsored an outsourcing roundtable in April. "Organizations are rapidly outsourcing mission-critical and core operations, such as research and development, customer care, and manufacturing."

One significant trend in the AMR/NMW study is the large number of companies that are building or acquiring manufacturing plants in China and Mexico. China now accounts for nearly 5% of world exports, says The Economist.

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