When firms face a “make-or-buy” decision, it means that they have to choose whether to insource a particular production process or service or to outsource it to a third party. The word “insourcing” stems from the union of the words “inside resource using” and indicates the “use of internal labor, personnel and resources to supply the operational needs of the enterprise”.
A firm can decide either to insource –i.e. to produce in-house- a production process or a service from the beginning or to take in-house a previously external or outsourced production process or service. For example, in 2009 Volkswagen AG decided to focus more on and to increase by yearly 10% its own production of automobile components. In order to realize this, Volkswagen AG decided to insource human capital in the engineering, production, prototyping and toolmaking fields. Outsourcing is the use of external suppliers as a source of finished products or services.
Let’s have a look at how outsourcing works in a modern environment with a world class manufacturer – Volkswagen (VW) Volkswagen’s bus & truck plant in Resende, Brazil, is a virtual plant. VW has completely outsourced manufacturing to a team of carefully selected suppliers – partners in a radical experiment in production operations. At Resende, VW is transferred from manufacturer to general contractor, overseeing assembly operations performed by seven German, US, Brazilian & Japanese component suppliers, with no one VW employee turning a screw.
Only 200 of the total 100 Resende workers are actual VW employees. When designing the plant, VW asked suppliers to bid for the opportunity to own one of the seven major modules required to build a car, such as axles and brakes and engine transmission. Suppliers have invested $ 50 million to build equipment & stock held areas. VW’s contract with suppliers is for 10-15 year periods with the condition that suppliers must achieve specified cost & performance targets & maintaining cutting edge technology.
The plant is divided into seven zones, demarcated by yellow floor strips. Within the boundaries of its zone, each supplier assembles its component from sub components supplied from 400 minor suppliers In parallel with subcomponents assembly, final assembly occurs as the chassis (the vehicle platform) passes through the zones and each company adds its respective component module until the finished VW rolls off the line. Each vehicle is monitored by a single VW master craftsman and he’s assigned to track any default vehicles and solve them on the spot. Suppliers are paid for each completed vehicle that passes the final inspection.
Despite representing seven different companies, the suppliers operate as a highly integrated team, wearing the same uniforms and receiving the same pay. The assembly line is highly cross functional, with representatives from each supplier meeting each morning to plan the day’s production and each evening to address the issues they had. Each Supplier has visibility of the entire production process, which stimulates ideas for simplification, streamlining and product and process changes. The specialization and superior component knowledge of each supplier combined with the close interaction among suppliers improves quality & efficiency.
Co-location of the major components and final assemblies improves production flow and compresses total assembly time. It also simplifies logistics and reduces manual handling, productions control, manufacturing engineering and co-ordination cost. Although the plan remains in start up mode, preliminary results look promising. Resende employs 800 manufacturing workers compared to the 2,500 employed at the older VW plant. The time to assemble a truck has been reduced from 52 hours to 35 hours. These improvements have enabled VW to earn a 19% share in the Brazilian truck market and a 23% share in Bus market.
Where the fleet operation has been outsourced under contract hire with maintenance, or uses an external agency to manage the maintenance, these should be doing exactly the same kind of analysis for their own purposes. One thing that is important is to ensure that reports on key aspects of the underlying data about the fleet maintenance performance should be fully available to the fleet operator on demand. This is particularly important as one part of the audit trail of maintenance, making sure that vehicles are being serviced and kept fully roadworthy.
Something like half of all fleet vehicles have their maintenance controlled through an outside agency – either within a contract hire arrangement, or through some form of “fleet management” contract. Fleets in the UK have easy access to a wide choice of service providers, and so should be able to source a highly professional, ethical and safe service on a cost-effective basis.
The big difference between the two types of maintenance outsourcing lies in where the cost risk lies. Under a contract hire agreement, the external specialist will make their own projection of the amount of maintenance spend likely to be needed to keep the car or van on the road, for the full period and mileage of the contract. This sum is then “fixed”, and is usually charged in equal amounts across the full period of the agreement.
Fleet maintenance management gives the same service – but without any cost guarantee from the supplier. Instead, they use their professional expertise to manage each maintenance event as it arises. So far as costing is concerned, the fleet customer is recharged for every maintenance item as it is incurred, together with a fixed management fee for doing the work and maintaining the records. Under this system, it is normal for the costings on a new vehicle to be very low, but get progressively higher month on month as the vehicle ages.
These different outsourcing arrangements are valuable, because they put the onus on some of the highly technical issues on to maintenance controllers who are trained to handle it properly. This saves the fleet manager dealing with high volumes of relatively low value work – and avoids the need to understand the mechanical intricacies of today’s cars and vans.