The Effects of Outsourcing, Offshoring & Distributed Product Development Organizations

on the NPD process

Mojdeh JoharzadehMahan Sepehri

Sina TarighiPooyan Faizian

TerminologyDPD

&Coordination

DPD &

Transformation

DPD&

Search and

Selection

Survey

Terminology

Outsourcing :

Sourcing a project from organizations in other firms

Terminology

Offshoring:

Distributing projects across geographical boundaries

Terminology

DPD (Distributed Product Development):

All of the arrangements that rely on cross-organizational cooperation in NPD

• It also includes joint ventures and open-source networks

Terminology

Lead organization:The organization that appears as a hub to

organize other organizations.

Lead firm: The firm in which the lead organization resides.

Terminology

Joint venture:Develops when a small number of

organizations play the role of lead organization

Open source network:Develops when more than a small number of organizations act as lead organizations

Terminology

Suppliers : All organizations involved in DPD other than the

lead organization

Component:The portion of the product provided by a supplier

organization

Terminology

• Partial outsourcing:

when the lead organization executes some percentage of projects and outsources the

reminder

DPD & Coordination

• The coordination process:

ensures information flows, cooperation, and collaboration across the multiple actors in the

NPD process

Complexity of DPD Exceptions Interruptions

Need to

Interruption management

DPD & CoordinationWhy coordination is needed in DPD?

Most of organizational coordination mechanisms exist to manage the interruptions

DPD & Coordination Why coordination is needed in DPD?

Interruptions

One organization’s

task

An inferior component

Two or more organizations’

tasks

Inferior components

Undesirable interactions among the

components

Coordination is also mentioned as “Product Integration” in DPD to include cross-organizational problems as well as technical issues.

DPD & Coordination

• How DPD complicates product integration??– Number of organizations– Cultural dissimilarity– Geographical isolation

Number of involved

organizations

Number of organizational

barriers

Difficulty of product

integration

DPD & CoordinationNumber of Organizations

Extreme examples: open source networks, like Wikipedia

Successful cases have:o Tiered Structure

oro Modular Structure

DPD & CoordinationCultural Dissimilarity

• Degree of dissimilarity will increase when organizations are:– Separated by departmental, divisional or firm

boundaries– In dissimilar industries– Different in age, size or both– Have different national business cultures

DPD & Transformation

Transformation:Converting the final product concept into the

delivered product

DPD & TransformationCommunication failures in transformation

Most Product development communications still occurs largely through:

Physical meetings

Telephone calls

Electronic Mail

DPD & TransformationCommunication failures in transformation

Media richness: the bandwidth at which information can be

communicated without errorPhysical meetings

Telephone calls

Electronic Mail

DPD & TransformationCommunication failures in transformation

Forces that might attenuate communication would be those that encourage a substitution of physical meetings by telephone calls or telephone calls by e-mails:

Geographical distance: reducing the likelihood of physical meetings

Time zone difference: reducing the likelihood of telephone calls in favor of e-mails

Language differences: reducing the likelihood of other modes of communication in favor of e-mail

DPD & TransformationCommunication failures in transformation

In general Product development the primary means used by organizations to manage interruptions are hierarchies and incentives but in DPD it is more complicated:

Hierarchy: it will be much less effective as the level of the lowest ranking manager with authority over participants in both organizations, increases. in cases of outsourcing there will be no common management.

DPD & TransformationCommunication failures in transformation

Incentives: may help but designing incentives’ structure will

be complicated by the fact that the ultimate owners and objectives of the two

organizations will differ.

DPD & TransformationThe vicious cycle of interruptions

Unresolved interruptions can create a vicious cycle that interferes with the integration of

various suppliers’ components into a coherent final product.

DPD & TransformationThe vicious cycle of interruptions

DPD & TransformationImproving managerial coordination during transformation

Managerial “bandwidth” can be increased through:

supplier selection

Partitioning

Information Systems

DPD & TransformationImproving managerial coordination during transformation

supplier selectionImportant factors in selection of suppliers in DPD:

The alignment of long- and short-term objectivesCommitting in advance to price and quantity objectivesMutual ownership arrangement

DPD & TransformationImproving managerial coordination during transformation

supplier selectionImportant factors in selection of suppliers in DPD:

An extensive knowledge by the lead organization of the supplier’s capabilities and future technological roadmap facilitate product integrationPrevent lock-in to an inferior technology

DPD & TransformationImproving managerial coordination during transformation

PartitioningGoal: design the bundle of tasks assigned to each firm to be as self-contained as possible.Tool: Design Structure Matrices (DSMs) which map interdependencies between functions in a projectBenefits: minimizing the communication necessary between different organizations which necessarily reduce the number of miscommunications or other interruptions

DPD & TransformationImproving managerial coordination during transformation

Information Systems - benefits Aiding coordination directly by making information processing less costly Making the governance of the project more efficient Creating social conventions around which firms can coordinate their activities, thus limiting the need for a hierarchical authority to promote coordination.

DPD & TransformationImproving managerial coordination during transformation

Information SystemsB-2 “stealth” Bomber:An aircraft that was designed by four firms almost entirely by computer.The key information systems used in the project were:1- a common access database to manage part designs2- an advanced system to perform structural analysis

DPD Search & Selection

• In contrast to coordination and transformation, search is the process that identifies potential combinations of suppliers, technologies, and market opportunities that could potentially benefit the lead organization

• Selection chooses among these new combinations for projects that will be invested in

• We combine them together because many of the impacts of DPD upon these processes simultaneously span both processes.

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• Success of lead organizations comprises those difficult to imitate capabilities

• In house technology is one of them

• Keeping in house technological capabilities outside is undesirable (Depending on market conditions)

• Outsourcing component technology is especially beneficial

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Benefits of DPD to search & selectionAccess to technology

Cost & Quality

• A supplier may provide superior cost & quality than can be found in house

• It can be because of economies of scale, scope, market competition or geography

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Surge Capacity

• A lead organization may lack enough capacity in house to produce or deliver a component

• If development is bundled with delivery, it may be impractical to retain it in house and can outsource it to a supplier

• The ultimate effect of DPD is to allow potential projects and avoid being discarded because of inadequate in house capacity 33

Leveraging knowledge brokers

• Sometimes the range of technologies and capabilities is felt to be insufficient

• Specially if the firm is in an industry that is too inward-looking

• Involving a technological broker firm can be useful in this case

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Risks of DPD to search & selection

• One inevitable side effect of distributing control over portions of NPD among multiple organizations is conflict

• Briefly, hold-up costs occur when a supplier extracts extra rents from a lead organization because can not be easily replaced

• Sourcing to two or more suppliers can ameliorate this problem 35

Hold-up costs

Information leakage

• Another risk of DPD is that some vital information leak through a supplier (perhaps inadvertently)

• Leakage may improve the options available to the lead organization’s competitor during their search process

• Information leakage can be ameliorated with appropriate contract

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Loss of component expertise

• Another risk in the selection phase is that once a component is sourced outside, that organization’s capability to understand the technology deteriorate

• The effects of this are far reaching, influencing future search, selection and transformation process

• The other effect is that the reduced component expertise interferes with proper integration of the component into the product as a whole

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Case Study

OFFSHORE NEW PRODUCT DEVELOPMENT: SURVEY RESULTS

Kenneth L. Kraemer, Jason Dedrick, Debora DunkleUniversity of California, Irvine

February, 2009

http://pcic.merage.uci.edu/papers/2009/HardwareSurveyResults.pdf38

Survey Respondents

• US-Based Electronics manufacturers in 2008• Drivers, obstacles, performance & management

practices• Telephone survey, conducted by Abt SRBI• 423 Electronic manufacturer Companies

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Figure 1. Firms size of offshore versus non-offshore firms

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Figure 2. Percent of firms with offshore NPD by firm size

Figure 3. Modes of sourcing NPD

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Figure 4. Offshore drivers for NPD

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Figure 5. Obstacles to offshore NPD

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Figure 6. Locations of offshore NPD

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Figure 7. Proportion of in-house NPD activities done onshore and offshore

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Figure 8. Proportion of outsource NPD activities done onshore and offshore

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Figure 9. Cost savings from offshore NPD

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Figure 10. Impacts of offshore NPD on performance

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