Accenture Academy Blog

Maybe we can still learn from the animal kingdom. In Africa, there is an ant that captures termites and forces them to do the dirty job that the ants avoid—chewing plants and turning them into digestible pulp. The ant—instead of doing this uncomfortable job of chewing and digesting—now only has to consume the regurgitated meal provided by its outsourcer, the termite. The problem is this:  if the termite dies, so does the ant because the ant has forgotten how to independently chew and digest plants.

I share this fable with you because I was part of the bozo team that lost the TV business in the U.S. In 1972, one of my first jobs in industry was a part of a team representing a consortium of the top-five U.S. TV manufacturers. We were tasked to open up a Far East buying office. We selected a low-cost city—Tokyo—as our headquarters. We also developed a relatively unknown-at-the-time Japanese manufacturer—Panasonic. Panasonic, like the termite, did all of our dirty work. Panasonic grew from a piece part provider into a components provider, then a provider of subassemblies, then major assemblies, and finally, the finished product. Eventually, Panasonic started manufacturing and selling TVs in the U.S. directly under the Panasonic brand name. In the 70s, we were not concerned, rationalizing that no one would actually buy Japanese-made TV sets. After all, their quality was terrible. The label “Made in Japan” was an indicator of low-quality junk. Yet Panasonic was selling TV sets that had more features, were better quality, didn’t need repairs annually, and cost less than a U.S.-manufactured TV set. The rest, as they say, is history.

So all those who have wisely outsourced their messy production problems to low-cost countries, are you concerned? Do you know the difference between outsourcing and abdication? Do you know the impact of the supplier’s performance (and the supplier’s supplier’s performance)? Are you concerned that the terms of sale for production in many countries requires you to submit all of your technical and production intellectual properties? Is it possible that you are developing your replacement competitor?

Honestly, if your “termites die,” are you capable of reinstituting your production facilities? Is your skilled labor still readily available? Do you still know how to make your products?

I suggest you revisit your initial value decisions to outsource your critical production and parts sourcing to low-cost countries; then, prioritize and quantify the risk inherent in those decisions. I suggest you recalculate your total cost of ownership (TCO) and put a financial numerical value on the risk of becoming compromised or obsolete by your managerial decisions. I suggest you review the attached TCO Sanity Checklist to help determine the real cost of global manufacturing and sourcing. Based on actual experienced cost factors, the checklist starts with the Current Case cost to manufacture and source domestically and then supplements that cost if certain negative risk factors would occur—the Worst Case. By requiring the buyer to estimate the Most Likely Case, it might challenge conventional thinking that low-cost-country manufacturing and sourcing is actually low cost!

Are you an ant or a termite? It might be of value to know which you are and if you have forgotten how to chew. Survival of the fittest is applicable to all members of the animal kingdom, including humans and their institutions.

TCO Sanity Checklist (Pro-Rata Projections)

A number of major global companies have developed a TCO Sanity Checklist based on their experiences. The second column is the TCO costs that they experienced with current domestic suppliers—that is the Current Case. The fourth column is the actual TCO cost they experienced with a mix of global replacement suppliers when significant problems occurred—that is, the Worst Case, where everything went wrong. This gives them the lowest cost estimate and the highest cost estimate projections. It is expressed as a pro-rata projection that is based on initial current costs of $100 per unit of manufacture or purchase; thus, the Worst Case cost of $197.22 is $97.22 of additional costs incurred. The challenge is to develop the estimate of what the Most Likely Case cost would be given your analysis of your situation. This gives a realistic projection of anticipated costs and the significant cost factors that impact TCO.


Added to this initial operational, supply, and logistics estimate of TCO is the anticipated additional costs that might be incurred if certain political, cultural, and environmental risk factors occur.

Finally, the cost projections must include an estimate of the developmental cost.

 
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    By Kohei Fukuda Kohei Fukuda on Wednesday, September 30, 2015 at 10:22 AM
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