Operations and Supply Chain Management The Core

GLOBAL SOURCING AND PROCUREMENT chapter 13 437
A Framework for Structuring Supplier Relationships
exhibit 13.5
Coordination characteristics
Investment in strategic assets
characteristics
Intellectual property
characteristics
DO NOT OUTSOURCE
Coordination and interfaces are not well defined.
The information and coordination is specific to
each job.
Technology is immature and there is a need for
“expert” knowledge obtained by experience.
Significant investments in highly specialized
assets are needed. The investments cannot be
easily recovered if the relationship terminates.
Long-term investments in specialized R&D, and
lengthy learning curves.
Weak intellectual property protection. Easy-toimitate
technology when access is given.
OUTSOURCE
Standardized interfaces, required
information is highly codified and
standardized (prices, quantities, delivery
schedules, etc.).
Assets are commonly available from a large
number of potential suppliers.
Strong intellectual property protection
Difficult-to-imitate technology
An activity can be evaluated using the following characteristics: required coordination,
strategic control, and intellectual property. Required coordination refers to how difficult it
is to ensure that the activity will integrate well with the overall process. Uncertain activities
that require much back-and-forth exchange of information should not be outsourced,
whereas activities that are well understood and highly standardized can easily move to
business partners who specialize in the activity. Strategic control refers to the degree of
loss that would be incurred if the relationship with the partner were severed. There could be
many types of losses that would be important to consider, including specialized facilities,
knowledge of major customer relationships, and investment in research and development.
A final consideration is the potential loss of intellectual property through the partnership.
Intel is an excellent example of a company that recognized the importance of this type
of decision framework in the mid-1980s. During the early 1980s, Intel found itself being
squeezed out of the market for the memory chips it had invented by Japanese competitors
such as Hitachi, Fujitsu, and NEC. These companies had developed stronger capabilities
to develop and rapidly scale up complex semiconductor manufacturing processes.
It was clear by 1985 that a major Intel competency was its ability to design complex
integrated circuits, not in manufacturing or developing processes for more standardized
chips. As a result, faced with growing financial losses, Intel was forced to exit the memory
chip market.
Learning a lesson from the memory market, Intel shifted its focus to the market for
microprocessors, which it had invented in the late 1960s. To keep from repeating the mistake
with memory chips, Intel felt it was essential to develop strong capabilities in process
development and manufacturing. A pure “core competency” strategy would have suggested
that Intel focus on the design of microprocessors and use outside partners to manufacture
them. Given the close connection between semiconductor product development and process
development, however, relying on outside parties for manufacturing would likely have
created costs in terms of longer development lead times. Throughout the late-1980s, Intel
invested heavily in building world-class capabilities in process development and manufacturing.
These capabilities are one of the chief reasons it has been able to maintain approximately
90 percent of the personal computer microprocessor market, despite the ability of
competitors like AMD to “clone” Intel designs relatively quickly. Expanding its capabilities
beyond its original core capability of product design has been a critical ingredient in
Intel’s sustained success.