"We are totally dependent on our suppliers." [2]
Many of today's products are so complex that no single company has all the necessary knowledge about either the product or the required processes to completely design and manufacture them in-house. As a result most companies are dependent on others for crucial elements of their corporate well-being. Typically, however, companies have some choice as to whom they become dependent upon and for what sorts of skills and competences. That is, although few companies can "do it all," most have significant influence over the strategic choice of corporate identity and what businesses to be in. What is the range of choices they face? How are different companies making those choices? Can we make sense of the variety of decisions we can observe now in different industries or different parts of the world? What are the skills that companies must retain?
In this paper we address the challenge of making these choices rationally. We give examples in which similar companies, facing similar choices, select make/buy patterns in very different ways, resulting in very different patterns of interdependencies along companies' supply chains. These choices are not restricted to skills related to the product, but include choices related to key design and manufacturing issues. To make sense of these differences, we propose a framework that ties together the following engineering and management concepts into one coherent view:
An important purpose of this paper is to broaden the discussion of core competence, considering product competencies, design and manufacturing process competencies, business process competencies, and the dynamic instabilities of the set of capabilities that are perceived at any one time to be core. We also discuss widely observed differences in how various companies prioritize product and process competencies and we try to make sense of these observations. We distinguish two categories of dependency, each with advantages and risks that can be used to define key distinctions in firms' make/buy strategies and core competence investments. In addition, we develop a model of the potentially unstable dynamics of industry integration. Our ultimate goal is to convince readers that the main skills companies should retain transcend those directly involving product or process, and are in fact the skills that support the very process of choosing which skills to retain.
The state of our understanding of this issue does not permit pat answers. The options open to companies are not wholly comfortable, and it is not obvious what is the right thing to do in each case. The underlying technology of the product or its supporting design and manufacturing processes may dictate the choice, leaving the company without an alternative. Sometimes the available choices do not result in a stable situation but rather leave the company, indeed sometimes an entire industrial sector, in a constant state of flux, with leadership and financial viability cycling from firm to firm. We provide a model suggesting why these situations exist.
The views expressed in this paper are somewhat speculative, representing an attempt to put structure onto a wide variety of anecdotal observations and tie together strands of prior research. An important theoretical forerunner of the ideas presented here is that of the distinction between innovation in product architecture and that in product components [Ulrich], as well as the different kinds of corporate organization required in each case. [Henderson and Clark] This paper builds on these ideas but is more specific about certain aspects of the problem. In particular, we argue that the ability to manage product design and manufacture from the platform of the architecture is an important skill, and that this skill permits a firm to encompass the components and their manufacture in a consistent way.
The paper is structured as follows: Section 2 develops the concept of manufacturing infrastructure as an foundational business element and describes stark differences in the make/buy policies and strategic treatment of this element by seemingly similarly-situated firms. Section 3 reflects on the observations of section 2. Section 4 describes the product realization process in which the make/buy decision is often embedded. In Section 5, we discuss the concepts of product architecture and systems engineering to develop a context for making rational outsourcing decisions. Section 6 revisits the make-buy decision and develops a classification scheme to aid strategic sourcing decisions based on two concepts of dependency. Section 7 provides a framework for thinking about technology dependency. Section 8 gives a few examples illustrating the ideas of the previous sections. Section 9 discusses fundamental industry dynamics that render unstable the industry insourcing/outsourcing structures that firms attempt to construct. We present examples of this instability and a model to explain the cyclical behavior in such systems. Section 10 summarizes the main ideas in the paper and section 11 lists some open questions that need further research.
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1. This paper reflects many discussions with numerous of our MIT students, including Geoffrey Parker, Sharon Novak, Paul Gutwald, and Nitin Joglekar. This paper also reflects numerous domestic and international visits and research trips funded by MIT programs (Leaders for Manufacturing, International Motor Vehicle Program, Industrial Performance Center, Japan Program, International Center for Management of Technology), as well as by ONR. We are particularly indebted to contacts with companies and interns sponsored by MIT's Leaders for Manufacturing program and the International Motor Vehicle Program, and for financial support from ARPA and Wright Patterson Air Force Base.
2. Tracy O'Rourke, CEO, Varian Associates, in his Keynote Address to the 4th Agility Forum, March 7, 1995