Summary by Anamaris Gonzalez
Master of Accountancy Program
University of South Florida, Fall 2004
Japanese Management Main Page | JIT
Main Page | Outsourcing Main Page
In this article the authors talk about the relevance of cosourcing in a manufacturing environment where Just-In-Time is present. Although cosourcing is currently not widely used in the manufacturing industry, they say that a company would greatly benefit from having their employees work with supplier’s employees. In doing so they would have a way to cut costs, maximize internal capacity by taking advantage of another company’s specialized skills and still maintain control. This can be an important factor to consider in a company that is expanding rapidly.
Just In Time (JIT) comes from Japan and is possible because of Keiretsu Networks, an affiliation of companies that follow a supply chain hierarchy. Competition between buyers and sellers is out of the question, and suppliers follow the buyer’s demands. Within Keiretsu there is little concern about possible control issues that may arise because of supplier closeness. On the other hand, JIT companies that are not within a Keiretsu network need to figure out how to be able to work closely with suppliers without giving up control. If they had the option of cosourcing, it could help them avoid the control vs. closeness issue.
There are a series of controls essential to JIT that make it difficult for a company within a Keiretsu to deal in a collaborative relationship with a company that is not part of the Keiretsu. If they were to collaborate, certain issues such as timeliness, consistency and cost may be compromised. Deliveries in JIT are key in order to meet customer demands. If control over purchasing or inventory is lost, delivery timeliness will most likely be affected. The methods referred to as JIT II and VM1 outsource the functions of purchasing and inventory management. Some buyers voice concerns that in these situations relying on third party outsourcers might be risky since they may not see the need to respond quickly to manufacturer’s needs.
The authors state that with cosourcing, response time can actually be minimized because the manufacturer’s ability to respond will be enhanced by the use of the partner’s resources. To illustrate this they talk about the arrangement that A.T. Kearney and EDS have. In this case, EDS manages Kearney ’s information technology resources. The companies work together in order to ensure that strategy, operations and technology are integrated. The vice president of A.T. Kearney explains that one organization alone can not do everything within the time frame allotted by the marketplace. For Kearney there are some important factors to consider:
Cosourcing allows the needed expertise and competencies to work together and make changes
in a timely manner.
Cosourcing allows you to bring everything together, therefore facilitating change.
Cosourcing is also used in the banking and technology sectors. By providing reciprocal services in remote locations, banks are able to save costs and get the task done quicker. An example is given of two banks in Canada that provide document processing services for each other at their respective primary locations. This is more efficient since maintaining only one document-processing center reduces costs and avoids transit. JIT would benefit from a relationship such as this one. In cases where the supplier is not geographically close to the manufacturing company, this arrangement would work. For example, two JIT manufacturers could agree to manufacture subassemblies for each other because suppliers for the parts are far from one company but close to another.
An illustration is given for reciprocal cosourcing in manufacturing. 3D Labs and Texas Instruments engaged in an agreement to share technology that they had developed. Had the companies been required to develop the technology on their own, the process of bringing the products to market would have taken longer and effort, as well as cost, would have been duplicated. Also, by working together they achieve better quality.
Quality is an important part of the JIT philosophy and most companies that use it have a strong quality program. In order to keep up with the complexity within the manufacturing environment, many companies turn to expert advice outside the company, thus loosing a significant degree of control. When a process is outsourced, the person qualified to perform that function may be terminated leaving no one within the organization capable of performing the task. If a company uses cosourcing instead, for achieving quality, the results would probably be better. The manufacturer would benefit from the supplier’s expertise, the employees would learn from it by developing an understanding of the new technology and control over quality will not be lost. Another advantage presented is that because there are more resources available, it is easier for both parties to solve mutual difficulties.
In a JIT manufacturing plant the integration of tasks is essential. A flexible workforce that’s cross-trained in various tasks helps to expedite production in order to meet customer orders. If one of the tasks within the production would be outsourced, the company would not have the ability to complete it through cooperative labor. Another problem with outsourcing is that if a company has been performing a process for a while, there exists a certain amount of knowledge that has not been documented. This makes it difficult to pass on the knowledge especially for workers whose jobs will be eliminated. With cosourcing, companies would not have this problem. Employees and contract workers would work side by side and the company would benefit. In order to have cross-trained personnel, a manufacturing company incurs training costs on the job and outside the job. Doing this training through cosourcing would improve results by exposing the staff to new methods and techniques while spreading the costs over multiple parties.
Cosourcing not only gives a manufacturing company the opportunity to benefit from a supplier’s expertise, it also provides them with an opportunity to get tasks done at a significantly lower cost. Complex operations require greater worker competencies and equipment among other things. A cosourcing supplier has typically already made a capital investment in tools and equipment and has a better understanding of the technology. They might require a premium from the manufacturer for providing them with this but the cost would definitely be much lower than it would be if the manufacturer acquired everything on their own.
Just in time companies are encouraged by the authors to consider the alternative of cosourcing. The authors point out that because of the philosophy behind JIT, working collaboratively with a supplier will lead to successfully achieving company objectives. Even non-keiretsu companies would greatly benefit from such arrangements without the fear of loosing control.
The following table provides a brief summary of the ideas in this article.
| JIT Control Threats and the Cosourcing Solution* | ||
| JIT Control Threats | Cosourcing Benefits Related to JIT | |
| Timeliness | Related to delivery, schedule changes, design changes, customer needs, and requirements for simultaneous efforts. | Involves specialized technologies and expertise, and facilitates simultaneous achievement of objectives within a limited timescale. |
| Quality | Related to loss of in-house knowledge, and quality of inputs, outputs and activities. | Facilitates sharing knowledge, opportunities for learning and training in-house on new technology, achieving specialization with limited costs, and increased resources to address any issue. |
| Consistency | Related to operational consistency and the integration of activities. | Prevents loss of undocumented knowledge that occurs with outsourcing, increases achieving strategic goals through interaction of buyer and supplier on process changes. |
| Cost | Relates to cost control of the purchasing function, life-cycle costs, the capital investments needed, capacity utilization, and company size. | Emphasis on lowest cost supplier arrangement (not the lowest price), leads to supplier's capital investment in specialized equipment, maximizes value-added activity with minimum in-house staff, provides joint funding, cost sharing, and combined purchasing power. |
| * Adapted from Clinton & Del Vecchio Exhibits 1 and 2, pp. 32 and 36. | ||
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Related summaries:
Borthick, A. F., P. L. Bowen, and M. C. Sullivan. 1998. Controlling JIT II: Making the system monitor itself. Journal of Cost Management (July/August): 33-41. (Summary).
Carr, L. P. and C. D. Ittner. 1992. Measuring the cost of ownership. Journal of Cost Management (Fall): 42-51. (Summary).
Clinton, B. D. and S. C. Del Vecchio. 2002. Cosourcing in manufacturing. Journal of Cost Management (September/October): 5-12. (Summary).
Clyman, J. 2004. Business IT: Rent or buy? Many companies are outsourcing IT duties to third parties and reaping benefits. PC Magazine (October 19): 129-132, 134, 136, 138. (Note).
Dyer, J. H. 1996. How Chrysler created an American keiretsu. Harvard Business Review (July-August): 42-43, 46-47, 50-56. (Summary).
Karmarkar, U. 2004. Will you survive the services revolution? Harvard Business Review (June): 100-107. (Summary).
Kee, R. 1998. Integrating ABC and the theory of constraints to evaluate outsourcing decisions. Journal of Cost Management (January/February): 24-36. (Summary).
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Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web. Johnson Broms Graphics Notes
Martin, J. R. Not dated. Supply chain arrangements. Management And Accounting Web. Supplier Arrangements Summary
Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. Lean Accounting
Widener, S. K. and F. H. Selto. 1999. Management control systems and boundaries of the firm: Why do firms outsource internal auditing activities? Journal of Management Accounting Research (11): 45-73. (Summary).