the successful management of offshore development & manufacturing projects

The Successful Management of Offshore Development &

Manufacturing Projects

Developed byMartin Wartenberg

for

UCSD EPSE

September 24, 2012

Martin Wartenberg for UCSD EPSE 2

Workshop Topics

• Role of Management • What types of projects are most suitable for

outsourcing/off-shoring?• Which of the current business models is most

suitable for your organization and project?• Some consideration as to which Country to

select for your off-shoring venture.• Some Technical issues related to Global

Product development (Hardware or software)

In Scope

Workshop TopicsOut of Scope

• Discussion as to whether Outsourcing is a good or bad practice or political issues

• Detailed discussion regarding implementation and execution of Multi-Site projects

• Detailed discussion of managing complex technical product development


EPSE Industry Perspective

Commercial AerospaceMilitary AerospaceShip BuildingGovernment TelecomCommercial TelecomCommercial Product

Development (HW, SW & Mfg)

Pharmaceutical Development and Manufacturing

EPSE 2011 Graduating Class

Inputs in Appendix

Outsourcing & Off-Shoring Have Been Around For a Long

Time!• The Swiss Guards (US

& other Security firms in Iraq and Iran)

• Hessian Soldiers

• Food Services

• Security Services

• Personal Items

* Cleaning

* Gardening service

* House Cleaning

* Child Care


Definitions• Process or Product Outsourcing (Design,

Manufacturing) The transfer of management and execution of an

entire business process to an external service provider, including technology, people, and process. In engaging BPO services, clients are buying access to executed business processes and business outcomes from their BPO providers.

The delegation of one or more intensive business processes to an external provider that owns, administrates and manages the selected processes that are based on defined and measurable performance metrics. (Gartner)

The transfer of a function previously performed (or considered to be performed) in-house to an outside provider.

•

More Definitions•

• Near shore Sourcing: sourcing services from geographies within close proximity to the location in which the services are consumed or contracted.

• Offshore Sourcing: sourcing services from geographies at a considerable distance from the location in which the services are consumed or contracted.

• Global sourcing: a corporate sourcing strategy that identifies and leverages those human resources and assets, regardless of geographic location, most appropriate for meeting the organization’s needs, often coming from both near shore and offshore locations.

• Insourcing: sourcing services internally as opposed to through a third-party provider. Often provided in a centralized shared services environment.

• Global Product Development for complex engineered systems

Martin Wartenberg 8

Roles and Responsibilities

• Executive Management (C Level) Strategic cost, marketing and technical issues

• Middle Management (D Level) Convert strategic objectives into tactical

approaches and methods

• Line Management (M and S Levels) Carry out and execute on the strategies and

objectives developed


Questions to C Level Executives

• What are the business reasons?

• Do you understand the outsourcing process?

• Do you know what the impact will be on the organization?

• Do you understand your own operation and the costs involved?

• Do you fully understand the economics of the outsourcing?

• Will you be able to downsize to realize the cost savings? (if applicable)

• Who will lead the effort and be responsible?

• Have you figured out how you will manage the outsourced

service for the future?• Have you thought through the global risks

(Earthquakes, Tsunami’s, wars, political unrest)


Risk Management: Intellectual Property

• IP Risk: the greatest barrier to improved international business

• Recent study: Software Piracy is rampant around the globe*• 30-40% in India, Vietnam and China (2nd shift products)• 80-90% in Russia, Ukraine and Bulgaria

• R&D may want your services but Corporate Attorney says No due to IP risks• References (current and reputable)• Honest communications throughout…

• The Need for Consortia and New Legislation

*Gartner report quoted in CIO.com


What types of projects are most suitable for outsourcing/off-

shoring?• Software - Development

(IT, System, sub-sets)

• Designs (System & Subsystem, Component, ASIC, Circuit, etc.)

• Business Processes

• Manufacturing – Continual Flow not Job-Shop

• Help Desk, call centers, • Pharma R&D / Low cost

production

• Clinical Trials


Key Items for Consideration

• Relationship to the organizations core competencies and competitive advantage

• Ease of specifying the necessary design services – what we learned from Mfg

• Potential for changes and iterations due to external factors

• Local availability of key resources• Relationship of product or service needs to the

three project variables of cost, schedule & performance

• Is it safer to build to print or build to spec.?


Steps for Implementation

• Determine and articulate why you are out-sourcing- Charter document like any project

• Identify and get inputs from key stakeholders

• Select the functions/projects to be out-sourced

• Bench mark current costs and parameters for performance

• Prepare a business case for the outsource efforts


What Countries or Regions Can I Choose From?

• India Dubai• China Poland• Malaysia Czech Rep.• Mexico Brazil• Philippines Chile• Fiji Argentina• Hawaii Quebec • Russia• Eastern Europe• Israel• Egypt• Argentina • Canada• Ireland• Singapore

It Depends on ??

See Appendix for Kearney Index


Things to Consider in your Selection!

• Proximity• Importance of Proximity • Language• Availability of

Infrastructure• Cultural differences• Availability of best

practices (i.e.: CMMI ISO, ANSI, or other standards)

• Stability and Safety• Protection of IP Project Management and

Development Best Practices


Outsourcing Plan1. Document objectives2. Options/Alternative analysis3. Define the scope and boundaries of services4. Prepare and validate service requirements5. Identify potential sources and determine their

qualifications6. Involve appropriate level of management in the review and

selection process7. Communicate with all personnel likely to be effected by

the decision and selection8. Short-list potential suppliers and prepare a definitive

request for proposal (RFP)9. Evaluate suppliers proposals and make a selection10. Identify the internal outsource project management team11. Negotiate the contract and agree on the service level and

other key methodologies12. Manage the transition and the contract

Successful IT Outsourcing - Sparrow


Contracting Methods• Firm Fixed Price (FFP)• FFP Incentive• Cost Reimbursable• Cost Reimbursable – fee negotiable• Time and Materials (T & M)• Fixed Price – Award Fee• Body Shop – Negotiate • Others Considerations – Liquidated

damage clauses, personnel assignments, etc.


Contract Determination• Find a Contract Administrator is has

experience in the specific country• Depends on how well you know the

specifications• Depends on how well you know the vendor• Depends on how you will handle changes• If you are going into China or Vietnam, it

doesn’t really matter (current issue)• Other factors to consider? • The type and wording of your contract is

absolutely critical

Simple Total Cost

Recurring Costs:Purchase PriceLogistics CostsAdministrative CostsOn site Labor

Source Charlie Barnhart & Associates LLC

Non-Recurring Costs:Qualifying CostsNew Product IntroductionQuality or Reliability IssuesWarranty RequirementsTravel RequirementsInitiatives such as Lean or 6 Sigma

Comprehensive Total CostPrevious Slide Plus – Factors to

Accommodate:

Geography of SupplierEngineering Change ActivityLot SizeProduct MixProduct ComplexityLead-TimeFlexibilityComplianceCost of MoneyRequired Inventory

True Total Cost of Global Sourcing

From the USA (Manufacturing)

Mexico Add 21%

Eastern Europe Add 25 %

SE Asia Add 21 %

China Add 19 %

Source Charlie Barnhart & Associates LLC (revised for 2011)

“These are estimated costs based on additions including both legal and quasi legal issues, re-work, transportation, etc.

Global Product Strategies

Local and International Environment

Competitive Situation

Firm’s Internal

Situation

Customer Needs &Price

Elasticity

ProductStrategies

A Testable Framework of Product Adaptation

Entry Scope

Export Sales Goal for the Venture

Firms InternationalExperience

Technology Orientation of

IndustryProduct Uniqueness

Cultural Specificityof Product

Type of Product

Similarity of LegalRegulations

Competitiveness OfExport Market

Product Familiarity OfExport Customers

Product Adaptation- Upon Entry- After EntryPromotion AdaptationPositioningPackaging/Labeling

Product Adaptation - Upon Entry - After Entry

Promotion Adaptation - Positioning - Packaging/Labeling - Promotional Approachh

COMPANYEXPORT MARKET

Product and Industry

Source: S.T. Cavusgil, Shaoming Zou, and G.M. Naidu. “ Product and Promotion Adaptation in Export Ventures: An Empirical Investigation,” Journal of International Business Studies 34, no7, (2010-,485).

Sourcing Location for Complex System Design

Make Offshore Buy Offshore Make Onshore Buy Onshore


Coo

rdin

atio

n

Req

uir

emen

t

Strategic Content and Value

Low

H

igh

Low High

Development Process for Complex Systems


• Component or task development

Systems Architecture Development

Systems Integration

Component or task development

ManufactureMaintenance and support

Intel Microprocessor Development

• Multiple “owned” locations

• Two main parts multiple cores supported by uncore

• All facilities validated to be able to do all designs using the same tools and methods

• Teams co-located at designed “home site” (drawn from all sites)

• Standard four stage methodology


Lead Design Specialty Sites• California – design productionization

• Oregon – Desktop series UP• Colorado – High-end UP design• Massachusetts – High end UP design• Israel – Mobile technology• Moscow – Under development – generic designs• Bangalore – Under development – Mobile

designs• San Diego & LA – Embedded software

(Windriver and Trillium Divisions)


Phase Development

• Phase 1 Global Architecture at Home Site

• Phase 2 Core Processor design – at many sites

• Phase 3 Chip Integration – Home Site

• Phase 4 Productionization and Manufacturing Preparation

• Manufacturing at many sites


Cessna Aircraft Division of Textron Industries

• Divided Mid size business jets and turbo prop utility aircraft into 6 sections and 7 Distributed Systems


Empennage

Tai

l con

e

Cabin

Cockpit

Wings

Engine PackageDistributed Systems1.Structure2.Avionics3.Electrical System4.Hydraulic System5.Flight Controls6.Pneumatics7.Fuel System

Design Approach• Cessna joined the Textron Global Technology Center in

Bangalore India• Part of the design center specialized in Cessna specific

technologies• Cessna Corporate remained responsible for over –all

systems design and integration • Detailed interface designs used to manage global vendor

supply chain – Interchangeable sections and distributed systems (very mixed results)

• All vendors/partners/divisions followed the Textron based 7 step New Product and Service Introduction (NPSI) design process

• Vendor and partner engineering teams co-located during the initial design and development activities


Honeywell-Aerospace Task Based Off-Shoring

• Task assigned to the Advanced Manufacturing Engineering Group

• Options included Local Current sites (Arizona and New Jersey), Medium cost sites close to local sites (Rural USA, Puerto Rico), Low cost distant locations including India, China, Vietnam


AME Decision Process Steps

Step 1: Create a full list of tasks that AME is responsible for carrying out – tasks that had to remain on-shore identified including tasks that should be co-located.

Step 2: Identified those tasks that required a lot of coordination and ranked based on complexity of tasks and likelihood of ambiguity

Step 3: For each task considered for outsourcing – team identified all labor costs including any extra coordination or travel or other ancillary extra costs

Step 4: For each potential location – rates and efficiency factors were applied (Not all locations are equal)

Step 5: An optimization model was created to balance all factors and determine recommended approaches and places



Marty’s Personal Recommendations

• If you are interested in only cost savings (35-50%) and have no strategic goals stick with top name Indian firms (WiPro, Infosys, etc.) If you understand your requirements well enough to spec. them well and don’t have many changes. In hardware go to established firms like Flextronics

• If you want to extend your firms capabilities and wish to save 10 to 20% in cost – try Canada and especially Quebec Province

• If its your first venture – try near shoring to Canada (Burnaby BC, Quebec and Toronto) or the Philippines or Puerto Rico

• Don’t outsource your competency ever• Plan on traveling to the ODC for regular reviews• Don’t plan on saving money in the first year of your out-

sourcing experience• If your IP is important to you, stay away from certain

countries that will steal your stuff


Hardware Lessons Learned at QSC Audio

• Large Manufacturing Company in Costa Mesa (High end Audio Eqpt.)

• Plants in U.S, China, Vietnam, Indonesia • Vendors in Europe, Malaysia, Korea & China• Does not do “build-to-print”• Requires build to spec with local QA and

testing• Only does business in China with

Taiwanese or Hong Kong owned business• Relationship established at the CEO level


Design Lessons Learned at Pulse Link

• Venture based Ultra Wide Band Products

• Complex ASIC’s subcontracted to a Russian Firm

• System Engineering subcontracted to consulting firm

• Product delays and loss of key technical edge


Lessons Learned at Wind River & Trillium (Now part of Intel)

• Medium sized Embedded Operating and Specialty software companies.

• Picked a reputable Indian Partner in WiPro• Build a pilot program for the first 5

developments for each company.• On-site WR & Trillium representative in

Bangalore and Lahore and a WiPro Rep in Alameda and Los Angeles

• Frequent reviews both in U.S and India• Relationships established at the working

level• Mutual respect and a continual cross-flow

of personnel


Hints for Future Implementation

• Mistake proof your design or build documentation – language, culture, ambiguity, etc. (Poka Yoke)

• Train out-source project or functional managers and make sure they are suitable (Communications, temperament, other sensitive issues)

• Be prepared to travel to site on a regular basis for both formal and informal reviews

• Be prepared to establish relationships outside of work

• Set-up good communications systems with sites and common tools

• And for all your sakes don’t completely rely on E-Mails or texting as your primary communication media

Any Questions?


The “Follow the Sun” approach is a myth in most cases – Did it work at Qualcomm?

Appendix Materials• Global Index

• EPSE 2011 Perspectives

• Alternatives to Outsourcing

• References



McKinsey Study from 2009 and reported by WiPro (India)

Gartner reports indicate that India is dropping from an 80% SW support market share to 58% by early 2012)

Updates through 2011 from interim Gartner reports

CanadaDubai

Czech

Poland

Quebec


Kearney Global Consulting Off-Shore

Attractiveness Index for Software1. India (90)-dropped to 82

2. China (72) reduced to 68 based on recent Quality Issues (CMMI)

3. Malaysia (70)4. Dubai (66)5. Czech Republic (60)6. Singapore (66)7. Philippines (60) to 668. Quebec Canada (54)9. Poland (50)10. Hungary (50)11. Canada (50)12. New Zealand (44)13. Chile (48)14. Brazil (52)15. Israel (56)16. Ireland (46)

Index is based on a combination of cost, depth and quality of software engineers, infrastructure and government support, stability, language skills, understanding of business practices and five other factors.


Kearney Global Consulting Off-Shore

Attractiveness Index for Manufacturing1. China (80)

2. Malaysia (74)3. Mexico (48) down a lot4. Bulgaria (68)5. Czech Republic (64)6. Singapore (64)7. Philippines (60) 8. Poland (56)9. Hungary (56)10. Canada (50)11. New Zealand (50)12. Chile (44)13. Brazil (46)14. Israel (46)15. Ireland (40)16. Vietnam (52) up a lot

Index is based on a combination of cost, depth and quality of workforce, infrastructure and government support, stability, language skills, understanding of business practices and five other factors.

Medium Technology

EPSE Class Inputs from 2008 through 2011

Examples of Doing Outsourcing/Off-shoring Right!

These are your inputs!

• Goodrich Aerostructures• Hughes• NASSCO• Illumina• Teledyne• ViaSat• BAE Systems• HP

Industry Perspective

Commercial AerospaceMilitary AerospaceShip BuildingGovernment TelecomCommercial TelecomCommercial Product

Development (HW, SW & Mfg)

Pharmaceutical Development and Manufacturing

EPSE 2011 Graduating Class

Software Development• HP experience (HP facility)– Expertise level of “off shore

partner” group (keep work level low and periodically “throw them a bone” (i.e.: a little more challenging work) Skill levels plus time zone issues

• Hughes experience – Issues with culture and quality of results (some good teams)

• BAE Experience – Specialized areas (Info security, etc.) on a sub system basis (Localized and isolated) Some issues with interdependencies

• Teledyne – Some problems with new development error rates but no worse than local design

Product Development & Build

• NASSCO – Mostly Good experience with some problems with turn-around times and lost damaged materials (Mexico & Korea) Have worked through most process issues

• Goodrich Aerostructures – Very good results – can be identified as a tight coordination and on-going work with outsource partners (globally) Have had to cancel contracts and do some hand holding

• Teledyne – Circuit boards, etc. – late delivery problems periodically

• Illumina – Some design, manufacturing – some culture issues but mostly going well.

Lessons Learned• Very similar to most industry problems• Design to spec. and define work early and

often• Check on work while in progress.• Provide hands-on assistance until they can

stand on their own• Take action when your not getting what you

want/need• Do it incrementally as you keep getting

better

Alternative to Outsourcing for Engineering/Programming

Projects• What are your technical and

scientific folks really doing?• Internal Productivity

improvements by actually using what their degrees are in!

• Provide lower cost technical support (Look at the Medical Model)

• Use Lean Six Sigma to improve the design and development process

• Really understand the impact off outsourcing on burden/OH rates and impact on other work.


Bring work home!


References• The Handbook of Global Outsourcing and Offsh

oring: 2nd Edition by Ilan Oshri, Julia Kotlarsky and Leslie P. Willcocks (Oct 25, 2011)

• Offshore Ready by S. Morstead, APQC Publication, 2007

• Web sources of outsourcing information 1. American Productivity and Quality Center –

www.apqc.org 2. The Out Sourcing Center –

www.outsourcing-research.com 3. CBS 60 Minute Video Presentation at

www.wipro.com/insights/cbsos.htm 4. Global Picture at http://www.cio.com/archive/071504/guide.html

http://www.amazon.com/Handbook-Global-Outsourcing-Offshoring-2nd/dp/0230293522/ref=sr_1_2?s=books&ie=UTF8&qid=1345321556&sr=1-2&keywords=Offshore+outsourcing

http://www.amazon.com/Handbook-Global-Outsourcing-Offshoring-2nd/dp/0230293522/ref=sr_1_2?s=books&ie=UTF8&qid=1345321556&sr=1-2&keywords=Offshore+outsourcing

http://www.amazon.com/Ilan-Oshri/e/B001HOGGME/ref=sr_ntt_srch_lnk_2?qid=1345321556&sr=1-2

http://www.apqc.org/

http://www.outsourcing-research.com/

http://www.wipro.com/insights/cbsos.htm

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