LOGISTICS SOLUTIONS ISSUE 4 2004 /26 1 INTRODUCTION: Ireland, as with other Western European manufacturing countries, is currently experiencing a change in the way customers and suppliers relate. Manufacturing is becoming increasingly demand driven where the customer specifies their need and suppliers do their utmost to deliver a solution. In addition to this, as pointed out in a review by Forfás 1 into innovation networks in Ireland, there is overwhelming evidence internationally that the principle sources of a firm’s competitive advantages increasingly lie outside the firm itself. Increasingly, firms that traditionally manufactured their own products are outsourcing production and instead focusing on product design, development, and marketing. Thus, the use of contract (or outsourced) manufacturing is becoming more important and is growing significantly in a range of industries, including electronics, pharmaceuticals, medical devices, automotive, and food and beverage production. As a consequence, companies need to focus on precise areas where they currently have or can gain competitive advantage and strengths that will enable them to participate successfully in an advancing global marketplace. 2 MANUFACTURING’S MOVE TO OUTSOURCING? Outsourcing takes place when an organization transfers the ownership of a business process to a supplier. The degree of transfer of control is the defining characteristic of outsourcing: the buyer does not instruct the supplier how to perform their tasks in detail, but instead, focuses on communicating what services it wants to buy; it leaves the process of providing these services to the outsource company. In the electronics industry, contract manufacturing grew at a compounded average growth rate of roughly 25% from 1989 to 1998 2 . Original Equipment Manufacturers 3 (OEMs) outsourced $75 billion to contract manufacturers 4 (CMs) in 2000, representing 10% of total electronics production. The bulk of electronics outsourcing is in computers (personal computers, workstations, peripherals) and communications (network and telecommunication equipment). Despite pessimism about the near term, the long-term growth rate for electronics contract manufacturing is projected to be 25% per year . In pharmaceuticals, outsourcing accounted for 20% of production in 1988. In 1998, the figure was 50-60%, and it is projected to grow to 60-70% by 2005 5 . As reported by the Aberdeen Group 7 , the need to reduce operating costs, improve return-on-invested-capital, and more quickly enter and exit markets have made manufacturing outsourcing a strategic staple in many industries, such as electronics, automotive, and durables. Because it delivers these benefits, the use of outsourced or contract manufacturing continues to grow. However, the successful use of contract manufacturers requires new strategies, processes, and supporting solutions to efficiently deliver new products to market, reduce costs, and ensure product quality and availability. Outsourcing: a review of current trends and supporting tools by DR. PJ BYRNE, Dept. of Manufacturing and Operations Engineering, UL, Limerick JAMES BYRNE, Dept. of Manufacturing and Operations Engineering, UL,Limerick AOIFE O’RIORDAN, NITL ‘ ‘ 1. Forfas (2004), Innovation Networks Report, 2. Francois, H. (1999). Contract Manufacturing Industry Review Update, Credit Suisse First Boston: Sept. 28., 3. A term for a company, which repackages equipment, such as computers, made by other companies and sells them under its own name., 4. A third party that performs one or more production operations for a manufacturer who will market the final item under their own name., 5. Boase, T. (2001). Contract Electronics Manufacturing Industry Quarterly Report, A.G. Edwards., 6.Van Arnum, P. (2000). Bulls or bears? Outlook in contract manufacturing, Chemical Market Reporter., 7.The Outsourced Manufacturing Strategies Benchmark Report