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Brief overview: This case is an outsourcing case which requires the candidate to analyze the benefits and costs of outsourcing different business functions.
The Problem and Background
- Your client is a large producer of construction equipment with worldwide sales (e.g., cranes, earth-moving equipment).
- The client uses both internal and external engineers to do product design and engineering. Activities include: detailing, design, analysis, and modeling related to the client’s end products.
- You are called in to reduce the cost associated with outsourced engineering services.
Your task – 1
- What would be your original hypotheses for the client to reduce the spend of outsourced engineering services?
- Which strategies can the client use to reduce the expense related to outsourced engineering services?
- Supplier relationship development:
– Develop selected strategic partnerships/evaluate M&A opportunities
- Demand management/reduce the need for external spend:
– Understand the spend drivers for the need for external suppliers
- Service specification improvement:
– Reduce the number of specific service or skill levels
– Reduce the complexity of services required (e.g., standardize engineering requirements across plants)
– Substitute skill sets
- Insource/Outsource (“Make versus Buy” decision) engineering services
– Total cost analysis
- Volume concentration:
– Consolidate the number of suppliers
– Pool volumes
- Global sourcing:
– Expand the geographic supply base
– Move more work to lower cost countries (offshore)
- Best price evaluation:
– Negotiate rates or move more volume to lower-cost suppliers
– Understand total costs & develop "should cost" model
Your task – 2
We found out that the client purchased Engineering Services from 60+ suppliers, of which 20 suppliers constituted 80% of the spend
We decided to explore primarily leveraging engineering services providers in low-cost countries such as India and Eastern Europe, which we had deemed to be the most promising.
Let’s explore this offshoring opportunity a bit more in depth.
One of the key reasons for moving work offshore is obviously costs—lower wages. What other factors are the driving forces and obstacles for moving more work offshore?
- Driving forces (see below)
– Legal risks (intellectual property)
– Political risks (bad PR, political situation of LCC)
– Learning curve effects
– Cultural differences, time zone differences, and distance
Expected Analysis (task – 2)
The benefits of offshoring go beyond cost reduction…
- After we have established what the key driving forces and obstacles are for moving more work offshore, let’s explore the cost and savings side
- In 2012, the client’s facilities purchased 500,000 hours of engineering services from third-party suppliers, 10% of which was done offshore
- What would be the total savings for moving all the work offshore?
- Follow-up question: are there any other cost factors you would consider?
Additional data to be provided if probed:
- Onshore supplier rates are, on average, EUR 40 per hour
- The average billing rate of an engineering services supplier in India (assumed to be the best candidate) is EUR 15
– Additional time needed to (a) before work: package information and write statement of work, (b) during work: communicate, correct, (c) after work: correct and redo work:
* If supplier proposes Onsite Liaison: 20% today at EUR 40 => 500,000 x 20% x EUR 40 = EUR 4M
– Learning curve effects:
* Candidate should propose 2 learning curve effects:
For the supplier: engineering time in LCC supposed to be equal to that in the U.S. after a brief period of adjustment
For the client organization: additional time needed will come down to 10% => 500,000 x 10% x EUR 40 = EUR 2M
– Telecommunications: negligible
- Difficult to quantify:
– Poor quality of work due to a new supplier can lead to quality problems during assembly and lead to increased warranty costs
– How could this be quantified?
* E.g., warranty costs, number of defects, …