Outsourcing Transition Risk

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Outsourcing Transition Risk

• Matthew Douglas, VP Operations (Andrew)
• Bennett West, Cort Jacoby, Giri Varadarajan
  (Deloitte)

Date Nov 14th 2006
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Today, we will address the topic of Contract
Manufacturing (CM) Outsourcing Transition Risks
through our experiences at Andrew
Product Lines
Business Units
CM outsourcing is a complex process presenting
several transition risks. It is important to
develop mitigation strategies prior to
outsourcing to minimize any negative financial
or customer impact.
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Andrew, a 2 B global manufacturer of
telecommunications infrastructure equipment, has
grown two-fold mainly through acquisitions over
the last three years
Key Customers
Products
Key Highlights

• Founded in 1937, Andrew employs 10,000 people
  with operations in N. America, S. America,
  Europe, Africa Asia Pacific
• Global leader in Wireless Communications
  Infrastructure
• Ranked 1/2 in each major product group

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Andrews Base Station Subsystems Group does
business in a very challenging market
Customers

• Competition
• Intense price competition
• Continued consolidation is likely
• Customers are also competitors
• Implications to BSSG Mfg
• Regional, scalable, flexible supply chain as a
  competitive differentiator

• Customers
• Very large and consolidating
• Strong buyer power
• Implications to BSSG Mfg
• Must be
• Low cost
• Global
• Flexible

Competition
BSSG Marketplace
Supplier

• Suppliers
• BSSG products are built using thousands of
  components and several hundred suppliers
• Raw material prices are increasing (Copper,
  Aluminum, Silver, etc.,)
• Implications to BSSG mfg
• Simplify the supply chain and focus
• Strategic Sourcing Partnerships

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The Legacy BSSG Supply Chain was a Spaghetti
Chart of Complexity and the need for speed was
paramount Manufacturing Outsourcing is our
solution.
Old Supply Chain
Future Regional Outsourced Supply Chain
Americas
EMEA
APAC
Outsourcing Rationale

• Self funded exit from high cost, highly labor
  regulated country to improve gross margin cash
  flow
• Simplified supply chain
• Variable pricing model directly ties
  manufacturing costs to volatile sales demand
• Supply chain scalability flexibility
• Enables Andrew to focus on product innovation,
  cost reduction, and customer relationships

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Outsourced Manufacturing Introduces Several
Transition Risks

• Product Fulfillment
• Description
• Day 1 Flip the Switch production transfer to
  EMS Partner
• Sample risks
• IT handoff failures
• Confidential knowledge transfer
• Supplier order book transfer

• Labor Disruption
• Description
• Internal labor strike or sabotage
• Sample risks
• Production shutdown
• Order fulfillment stoppages
• Physical violence/ product sabotage

• Business Case Realization
• Description
• Realize outsourcing benefits within anticipated
  timeline
• Sample risks
• Due diligence issues
• Expat and severance costs
• Capital equipment estimates
• Every bus case assumption is a risk!

• Customer Relations
• Description
• Alleviate customer apprehensions to minimize
  forecast surge drops
• Sample risks
• Site disqualification
• Forecast drops/surges
• Credibility/reputation risk

Transition risks typically manifests either as a
schedule delay or bad cost estimate
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Understanding Key Risks And Implementing
Mitigation Strategies Is Critical To A Successful
Outsourcing Transition
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Risks And Sample Mitigation Strategies Contd
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Manufacturing Outsourcing Lessons Learned
Impact
Lessons Learned

• Outline success criteria and get team alignment
  check commitment regularly
• Understand countrys cultural nuances to
  customize mitigation strategies
• Get Customs/VAT compliance expertise from local
  tax and logistics SMEs
• Resources, Resources, Resources right resources
  minimize transition risks
• Strong program management infrastructure to
  manage a cross-functional effort of simultaneous
  transitions in multiple continents/countries.
  Communication and coordination are essential!

Time

• Confidentiality, Confidentiality, Confidentiality
  critical to mitigate labor disruption
• Evaluate Sarbane-Oxley regulations especially FAS
  146 implications to understand what can be
  classified as one time restructuring costs
• Understand Freight Vs Labor tradeoff when
  allocating production to factories
• Contract manufacturing is a marriage understand
  CM partners profitability criteria and
  communicate openly to avoid surprise divorce
• Involve cross functional leadership to gain 360
  alignment on business case

Benefit