The Challenge of Outsourced Purchasing

In a recent blogpost in EBN (Online Community for Global Supply Chain Professionals), the Community Editor Barbara Jorgensen is discussing the conflicts between outsourcing and staying in control. As Jorgensen says, “One of the classic conflicts in outsourcing is how much control an OEM cedes to its subcontracting partners.”

In a narrow relationship, an OEM may outsource only its manufacturing and keep design, purchasing, and other decisions in-house. In a more encompassing relationship, an OEM may outsource everything, including design.”

ODM model

This original design manufacturing (ODM) model gives a lot of latitude to the subcontractor, which provides services ranging from design to after-sales support. But situations arise in which an OEM steps back in. According to DigiTimes, Dell is facing such a situation:

Dell reportedly will gradually retrieve its component purchasing rights from upstream ODMs in the second half of 2011 as the company is not satisfied with its ODMs for not providing clear quotes due to the ODMs receiving most of their component supplies from their own subsidiaries, according to a Chinese-language Apple Daily report.

Confidential component pricing

OEMs have been struggling with the outsourcing of purchasing for awhile. Companies such as Motorola and Hewlett-Packard have, in the past, kept their component pricing confidential from their contract manufacturers. OEMs derive a competitive edge from negotiating preferential pricing relationships directly with suppliers. OEMs could lose that edge if contract manufacturers negotiate their own preferential pricing and share those benefits across their customer bases.

Another wrinkle has been added as EMS companies have become more vertically integrated. Companies like Foxconn parent Hon Hai manufacture components as well as provide manufacturing services. There’s a huge cost advantage here, but there are also problems. These problems are not limited to ODM relationships though – component pricing is a hot button no matter who is in charge.

SCM according to Apple, Dell, Cisco, HP and Motorola

Apple, Dell, Cisco, HP, and Motorola have each, in their turn, set the standard for Supply Chain Management. It’s unclear if the in-house procurement trend is shifting. The issue is control and how much or how little an OEM wants to have. The right balance in an outsourced purchasing relationship continues to be a moving target…

Read the full article from Barbara Jorgensen in EBNonline »