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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