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Successful Outsourcing Strategies
Feature: 3/1/2006



Working in the textile industry for fourteen years I have experienced at first-hand the marked increase in outsourcing of the manufacturing function.

Labour traditionally represents a significant cost in manufacturing and more UK firms are outsourcing production to countries with large amounts of skilled low cost labour, such as Turkey, Morocco, India, Sri Lanka and China as it represents a tangible means to make substantial savings. For example the annual salary for a US factory worker is approximately $26,000 while in China they earn just $800 (Julie King, director-e Successfully Trading with China seminar, 2005).

While the potential savings are evident, is the pursuit of lower cost manufacturing a viable and sustainable reason for outsourcing or will it contribute to industrial decline in the UK?

I recently investigated the key drivers and outcomes of this dynamic trend and evaluated the strategic implications of outsourcing against established management theory. With the extensive sourcing choices available following the January 2005 quota removal, it is vitally important that UK textile firms identify and successfully implement the relevant strategies for deciding what, how and where to outsource in today’s highly competitive market.

The following report provides an overview of the industry case study findings, offering guidelines for managers facing outsourcing decisions and implications for the UK industry as a whole.

Research findings
A number of Midlands-based textile firms were interviewed for the case study and represented a range of positions on the outsourcing continuum (Figure 1), from highly integrated to fully outsourced firms.

Figure 1: The outsourcing continuum




Full IntegrationTapered IntegrationQuasi-Integration/OutsourcingFull Outsourcing (Non-Integration)
All of particular input or output transferred in-house to sister business unit.Some portion of firm's requirement for an input or output is supplied in-house or sold in-house. Rely on external suppliers for some activities.Fewer transfers performed in-house but external transfers under some form of firm control through joint venture, franchise etc.No internal transfers to in-house sister units. Use of independent external suppliers for majority of inputs and outputs.
Full firm ownership.Majority of firm is under direct ownership. Only certain activities outsourced on contract basis.Firm does not own all of the adjacent business units. Forms co-operative arrangements with external suppliers.Firm directly owns only a limited proportion of the business. Relies on external suppliers to provide inputs, processes and outputs. More 'arms length' supplier relationships.
Firm is engaged in many vertical stages, both backward to raw materials and forward to consumer outlets.Firm relies on external suppliers for some vertical stages.Firm is engaged in few vertically related activities.Firm is engaged in no vertically related activities.


Post quota removal UK textile firms have unrestricted access to vast numbers of overseas suppliers and manufacturers, and a variety of outsourcing forms are available from direct sourcing to ownership (Figure 2).

However the reduced costs associated with using cheaper providers, especially on an order-by-order basis will increase a firm’s vulnerability.

Figure 2: Forms of outsourcing


Source: UK Trade & Investment (2005)
Key: JV – Joint Venture, WOFE – Wholly Owned Foreign Enterprise

Successful strategies require a balance between cost and risk, and potential cost reduction should be integrated with the following key criteria when deciding whether to outsource manufacturing:

  • Firm sector/product
  • Product demand
  • Specific skills/capabilities
  • Size of firm and financial resources
  • Potential changes in the competitive environment


Recommendations
1) Firms producing core/functional products should outsource to lower-cost but reliable overseas manufacturers. Longer lead times mean that proximity to market is a less important consideration, and core products also have more limited value and require lower skill levels. Therefore retaining this kind of manufacturing in the UK is both economically and strategically unfeasible.

2) Firms producing fashion/technical products should retain/integrate manufacturing or outsource to suppliers in close proximity to the UK. Design, innovation and ability to respond to changing consumer demand are key and firm-specific skills more important as products will be more complex.

3) Invested manufacture in low-cost countries represents a long-term, committed strategy and consequently is more appropriate to larger firms with greater availability of resources and who produce goods with reliable demand. If demand is more uncertain cost and risk can be shared via strategic alliances.

4) Direct outsourcing represents the most cost-efficient approach for smaller textile firms with limited resources. Its flexibility allows quicker response to changes in the competitive environment. Firms producing core products should consider
co-operative agreements with similar firms to gain the cost savings of volume overseas orders.

5) Supply chain management is key to gain the full benefits of outsourcing and overcome operational problems/hidden costs. It can reduce both risk and cost associated with contract outsourcing, as shown in Figure 3.

Firms lacking supply chain management skills should acquire them via agents, but reassess their role as their own experience develops.

Figure 3: The impact of supply chain management on outsourcing


Source: UK Trade & Investment (2005)
Key: JV – Joint Venture, WOFE – Wholly Owned Foreign Enterprise

In today’s dynamic and highly complex industry it is important to remember that ‘one size does not fit all’ and avoid following a bandwagon trend. Firms should implement a strategy that is appropriate and unique to them, and to maintain long-term success adapt the chosen strategy in response to changes in the competitive environment.

Implications for the UK textile industry
For the first time since 1959, the UK textile industry faces the challenge of a domestic market with unrestricted competition from major WTO developing countries (DTI, 2005). The ‘make-or-buy’ decision has therefore never been so relevant or potentially difficult, and will have a serious impact on the future of this industry.

With increased overseas competition UK manufacturing can no longer feasibly compete on cost. Therefore innovation – i.e. technical and design expertise – needs to form the basis of the industry’s competitive advantage, focusing on the extensive, long-established skills that have evolved from manufacturing rather than trying to retain mass textile production in the UK.

However, as Figure 4 illustrates, experience of manufacturing processes creates the skills that drive innovation.

Figure 4: The link between manufacturing and innovation



Therefore some form of UK manufacturing needs to survive in order to prevent the erosion of these vitally important skills. This emphasises the importance of recognising and protecting firm-specific expertise and the impact that outsourcing strategies can have on the entire industry.

Ten years ago the Department of Trade and Industry (DTI) recognised that ‘innovation is essential for competitiveness’ (www.archive.official-documents.co.uk). Its advice for encouraging and exploiting innovation is even more valid in today’s highly competitive market and supports the protection of UK skills and expertise:

  • Spreading ‘best practice’ within firms
  • Facilitating co-operation between organisations
  • Collaboration between academics, research facilities and firms
  • Encouraging a supply of people with the right skills
  • Access to the widest possible range of technology and know-how


Alison Ashby is commercial manager for New Island Clothing, a division of Quantum Clothing, which was established in 2000. In turn, Quantum is a member of the Stevensons group, founded in 1865 as a dyeing and finishing company.
Author: Alison Ashby
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