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What Happens When You Outsource Too Much?

In industry after industry, managers have taken deliberate steps to separate their value chains and shift
important activities and functions to outside suppliers. But what happens when companies become too
dependent on outside suppliers and cede them too much control when they lack the same degree of
understanding and awareness about how important product or service elements fit together and what's
necessary? How can they go about reestablishing critical internal levers?

These questions arose during a multiyear research project examining supply strategy relating to new product development at a major European automotive company. In the late 1980s, the company--the authors call it Alpha--had direct supply relationships with more than 3,000 suppliers, most of them small companies that were involved in component production. In the early 1990s, however, management began shifting increasing amounts of design and engineering work to suppliers--a trend that was hastened by the proliferation of electronics in cars. By the mid-1990s, Alpha began to outsource the design of complete systems, such as dashboards, seats and safety systems.

Alpha management hoped to increase flexibility, reduce lead times and cut development costs while improving product quality. But as the internal engineering teams got smaller and less up to date on the specific design and technical issues, problems emerged with integrating systems and making decisions about trade-offs.

The article examines the difference between integrating physical systems and integrating the performance of such systems. The authors found that successful new product development depends on three main factors: component-specific knowledge; learning by doing; and technological renewal. Modular product architecture may make good sense for dealing with physical integration, but it is not adequate for resolving issues of performance.
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