Managing Outsourced Product Design: The Effectiveness of Alternative Integration Mechanisms

Abstract

Many firms have moved from outsourcing only manufacturing and staff support activities (e.g., janitorial services) to outsourcing more complex and central activities such as product and process development. Outsourcing these more complex, nuanced, and time-sensitive activities increases the difficulties of coordinating with suppliers. We examine the frequency with which firms use various interorganizational integration mechanisms and project coordination tools to coordinate outsourced product development. We further examine the impact of these mechanisms and tools on project performance. We report descriptive and some preliminary regression statistics from the first three years of a four-year multi-firm, multi-industry research project. These preliminary results suggest that nearly all firms employ personnel dedicated to managing the outsourcing relationship. However, firms also use other integration modalities concomitantly. Specifically, firms initially rely on ad hoc face-to-face communication rather than co-location to manage the interface with outsourcing partners. However, over time, firms move to co-location to manage relationships with non-domestic suppliers. Surprisingly, firms make relatively little use of either sophisticated information technology or modular product designs. We find that the effects of a single integration mechanism or tool can vary dramatically across different outcomes. For example, co-locating employees appears to improve product quality but are associated with poor schedule peformance. Given the frequency with which firms employ dedicated individuals to manage the interface, we also present some preliminary evidence on the skills and training of these individuals; this evidence suggests that (1) they have received little formal training in key skills and that firms rely solely on experiential learning to train these individuals and (2) for the training they have received, whether they received it from their university training or from company-sponsored initiatives may have differential effects on project outcomes.