How to Integrate an Outsourced Product for an Operations Management Project

Outsourcing a product for an operation managements project is much like smashing Humpty Dumpty. After its components have been scattered to dozens of suppliers all over the world, all the king’s men may have a very difficult job putting Humpty Dumpty back together again. Still, it can be done.

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  • Incentives: Einstein said that physics models should be as simple as possible, but no simpler. Research suggests that incentives should follow the same formula. When incentives become overly complicated, they tend not to achieve their goals because they’re difficult to properly spell out beforehand to cover all situations, they’re prone to gaming and abuse, and they promote a contractual relationship as opposed to one based on trust and goodwill.

    You don’t want to only reward what’s easy to measure. Firms often incentivize suppliers based on cost. One way to save money is to shave on quality, which is hard to measure until the warranties and recalls come in. Also, resist the temptation to nickel-and-dime suppliers. If you shave every possible cent from your suppliers, don’t be surprised if they take that out of the product in some way.

  • Specifications: Specifying what you actually want from your outsourced product, component, or service is surprisingly hard. Some of this difficulty is due to language and cultural assumptions. For example, an oil services project manager related the following story:

    “We make oil service equipment that involves miles of wires, as we put fiber optic cables down oil and gas wells. I was speaking with a client engineer in Malaysia on the phone. He asked me whether we had ‘monkey-proofed’ our equipment. We had big, colored, ergonomic buttons, user-friendly menus, and what not. It would be pretty hard to mess up the measurements. So I said, ‘Sure, we’ve monkey-proofed it.’”

    “Fast-forward six months and we’re in the jungle. Everywhere I look, there are hundreds of monkeys swinging on our wires and chewing on them. What our client really wanted was equipment that wasn’t foolproof but literally monkey-proofed.”

    One thing that research suggests helps in these situations is to explain not only what you want done but also why you want it done. This enables the supplier to figure out how to achieve your goals and make appropriate trade-offs.

  • Modes of communication: Remember the 60/30/10 principle. Some researchers argue that your body language conveys about 60 percent of your meaning, your tone conveys another 30 percent, and your actual words convey only 10 percent. Therefore, you should use the phone whenever possible if you have a tricky misunderstanding to resolve. If you can set up a good-quality video conference, that’s even better.

    However, if the video’s resolution is poor, don’t bother; it will just confuse the participants. A side effect of this principle is that you is likely to do a lot of traveling to bridge the information gap because many things can be communicated much more effectively in person than over a phone, much less an e-mail.

  • Governance: Make sure that you set up the governance issues to resolve any disagreements upfront. The last thing you want to do is negotiate both the disagreement and the resolution mechanism for that disagreement at the same time.

    Related to this, one interesting recent research finding is that assigning some of the purchasing department’s traditional functions for acquisition, negotiation, and quality assurance to the project managers responsible for the outsourced project can be beneficial for the project. However, this is only true if there are different first languages between your firm and the supplier.

  • Co-located personnel: Many firms co-locate personnel from their firm at the supplier or vice-versa. Studies have shown that these personnel are quite helpful when there’s either a big time-zone difference between the lead firm and supplier, probably because it reduces the time-lag issue, or a difference in first languages between personnel at the lead firm and the supplier, probably because the 60/30/10 principle is particularly important when bridging languages.

    However, don’t co-locate just to co-locate. Co-location seems to actually be counterproductive if there’s no time-zone or first-language difference because it inserts another layer of management without any of the benefits of time-zone or language bridging.

  • Supply chain integrators: These are the personnel that manage the outsourced project for your firm. Several things are helpful here. One is to realize that these are essentially middle managers because they’re effectively managing potentially hundreds of people at a supplier. So using a rookie engineer with raw people skills to save on personnel costs isn’t a good idea.

    In fact, this job is even more difficult than a typical middle manager’s job because of the need to be persuasive at a long distance while bridging all the language and cultural gaps involved. Simply put, managing by walking around may work very well in a firm that makes everything in house, but it doesn’t work in an outsourced environment.

    Your best bet are middle managers from vertically integrated firms that have experience in all the major aspects of the industry. If you can’t find such managers, people with hybrid backgrounds in business and engineering in college tend to do particularly well in these positions, probably because hybrid backgrounds tend to emphasize the following skills, which are essential to managing outsourced projects:

    • Decision-making: Backgrounds in systems engineering (which teaches how to evaluate the business benefits of engineering trade-offs) are quite beneficial. So is experience in business case evaluation.

    • Project management: Both the hard skills (cost and timing estimation, and risk identification and mitigation) and soft skills (communication, persuasion, and negotiation) are quite important.

    • Domain knowledge: The personnel can benefit from a broad (but not necessarily deep) knowledge of operations management (obviously!), product development (if appropriate), finance/budgeting, and information technology.

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