An intriguing article in CPO Agenda entitled “The return of make or buy” looks at the perennial question of whether it is better to manufacture all parts, components and materials in-house or whether the thinking of the last decade still holds true that everything should be outsourced that is not core competency. Of course, that phrase can be defined in any number of ways and often looks different depending on the industry in question. Steel makers, for example, have been vertically integrating into iron ore mining since the latter years of the last decade as the big three iron ore suppliers evolved to take a dominant position in the supply and pricing of iron ore. Prior to that the new wave of competition, Asian steel mills had relied almost totally on the seaborne iron ore market for supplies, but in the last few years both Asian and European players (like Corus) and global players (like ArcelorMittal) have been investing heavily in new mines and buying into existing junior miners to secure supply. Security of supply has become of paramount importance for any industry facing raw material supply issues, such as parts of the metals industry, of late.
In the article, Uwe Schulte, a former head of global procurement at Unilever and now owner of the Prosolvo consultancy, gives three examples of when a company might want to maintain its production facilities in-house:
- where ensuring capacity ahead of competitors would otherwise come at an unfeasibly high price;
- where there is the threat of a leakage of knowledge, particularly where this know-how is unpatented;
- or, where the price-forming mechanism is not under their control, as with steel mills and iron ore. “If there’s high variability in demand and supply you’d probably want to own the assets, he is quoted as saying.
The financial crisis of 2008 has thrown some new dynamics into the mix, which for some companies have changed the desirability of outsourcing key products. Firstly, volumes are down for many industries; think of auto manufacturing in the US. Many auto suppliers have struggled to adjust to the reduced volumes post-2008 and there has been a rationalization in the supply base. Some OEMs in such situations are faced with making this decision: do we step in and rescue a key supplier, or let them go and seek new supply options? The article states results from a survey by CPO Agenda in November last year, which revealed that 9 percent of CPOs had been forced to invest capital in a supplier’s business during the downturn to help ensure their survival, while 3.6 percent had acquired a failing and/or strategic supplier.
Secondly, although firms are well capitalized after good profits during the last decade, new capital can be difficult to secure and investing in internal manufacturing sometimes comes second to cash flow considerations.
Thirdly, the supply base has suffered capacity reductions, making previously secure supply chains vulnerable to supply shortages — the European aluminum large bar and plate markets are a case in point. A combination of capacity closures in established markets like the UK and more buoyant domestic markets in producers’ home markets, like Russia, have conspired to result in a very tight physical market this year in Europe. While it is impractical for OEMs to buy extrusion or rolling mills, we have seen OEMs developing strategic relationships which have resulted in investment and technology transfers in return for exclusive or guaranteed supply relationships such as Boeing’s collaboration with Russia’s titanium producer VSMPO.
How much further this process has to run remains to be seen and certainly the effect is greater for some industries than others, but at least the one-way traffic of outsource manufacturing to emerging markets is showing a return flow in the new normal we are living through and where supply-chain specialists have never had such a crucial role in manufacturers’ range of competencies as they do today.