Safeguarding the Promise of Production Outsourcing

Today’s product companies (original equipment manufacturers, or OEMs) increasingly outsource production, especially when the activities are asset intensive or require process technologies characterized by rapid innovation. When such an OEM also outsources the procurement of the required materials, especially to the party providing the production services, the OEM risks unpleasant surprises, such as unauthorized part or supplier substitutions, overbilling, mistreatment of the supply base, and the loss of the OEM’s procurement leverage. Based on supply chain audits and interviews in numerous industries, we propose and analyze strategies for preventing these outcomes when outsourcing production. We recommend that OEMs carefully consider the underlying means, motives, and opportunities of the service providers when deciding which activities to outsource and how to establish effective business controls. Firms such as Hewlett-Packard, Motorola, and Dell have implemented these ideas.