Process manufacturing: New wrinkles in outsourcing

Editor Nick Basta says outsourcing is here to say and offers some information on how it can work best for your plant.

By Nick Basta, editor at large

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As much as rank-and-file chemical industry professionals might bemoan it, outsourcing is here to stay. Chemical companies see its attraction the same way many firms in other industries do. Employees of management-consulting firms, who have the ear of upper management, universally tout its benefits.

The offshoring aspect of outsourcing remains controversial, especially when it affects public-sector jobs. Several state legislatures have considered requiring that public monies only be spent domestically. In the private sector, a company’s willingness to offshore jobs becomes a bargaining chip in negotiations with unions. Regardless, however, offshoring has its positive side, say studies performed last year by, among others, McKinsey & Co., New York, and Global Insights, Waltham, Mass. They give evidence that moving work offshore results in a net gain domestically by enabling companies here to compete internationally.

According to a recent cover story in BusinessWeek, research and development is now the latest candidate for outsourcing, even offshore. “Now companies are farming out R&D to cut costs and get new products to market faster. Are they going too far?” asks the article, which goes on to highlight how many electronics and communications firms no longer do their own product development. These companies set some general design specifications, but leave the detailed design to their partner firms, which often are based in China, Taiwan or India.

Some critics undoubtedly consider outsourced R&D to be on the extreme edge of what’s happening and a perfect example of outsourcing gone too far. Yet, many industries, including chemicals, for decades have been outsourcing some part of their R&D, often to university researchers, including some outside of the country. For many years, operating companies in several sectors of our industry have relied heavily on proprietary technology developed elsewhere, often by engineering-construction companies. Within the pharmaceutical industry — one of the most R&D-driven businesses around — the concept of a contract research organization (CRO) is well established. And let’s not forget the wide swath of energy and environmental technologies that the U.S. government has developed, either through its own national laboratories or by funding R&D efforts in industry and academia.

Of course, in manufacturing the outsourcing trend already has gained a lot of momentum during the last few years. However, here, too, it has a historical context. As detailed in the story on p. 34, vendors of many different stripes — suppliers of automation systems, fluid-handling equipment and plant utilities, among others — are shifting to a service provider model. Their customers in the chemical industry are calling upon them to go beyond just providing equipment and to offer broader engineering and optimization services. This stems from chemical companies’ ongoing efforts to shrink internal engineering or maintenance departments by having outside providers handle more of the work. Yet here, too, the practice is not new. Chemical companies for decades have contracted out maintenance, to cite just one example.

That doesn’t mean, though, that the current buzz about outsourcing is mere marketing hype. Many chemical companies are now much more willing to put more responsibility on their suppliers’ shoulders. It makes a difference when a vendor is called upon to help design the process in which its equipment is being used and to remain involved with the equipment not just at the time of installation and commissioning, but for its entire service life.

So, if outsourcing is more of an accelerating trend than a novel practice, what lies ahead? There are intimations of this already: companies offering the types of services that equipment vendors do, but without providing the equipment (such as automation specialists that don’t sell their own automation equipment); firms operating manufacturing processes, especially ones that are designed to run more or less continuously (using the model of how plant utility outsourcing has worked); and outfits handling the networking of remote operations for centralized control and monitoring (using the model of how communication networks are currently operated).

Whether these activities occur inside the United States only, or from or to the United States and elsewhere in the world, will depend upon the quality of service provided. And, on that footing, everyone has a chance to compete.
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