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Subcontracting within the supply chain for electronics assembly manufacture.


Study of the literature on subcontracting and related issues has revealed a dearth of work in this area in the manufacturing sector[1]. This, despite recent initiatives aimed at highlighting its increasing importance in the supply chain for manufactured products[2-5], and arguments that with a growth in decentralized and fragmented forms of control, external subcontracting arrangements are becoming more common[6]. This paper concentrates on the use of subcontracting as a manufacturing strategy, and focuses particularly on the associated operational issues. Discussion of related research streams provides background and context to the central themes.

First in this paper, the use of subcontracting is considered in relation to alternative models of integration within the supply chain. A working definition and description of subcontracting is presented, followed by a consideration of possible categorization methods for it. Advantages and disadvantages for both parties are given, with a discussion of some of the risks of this type of agreement. Ideas from exchange and power theories are used to consider these risks in more detail, and to explore the nature of the relationship between parties to the agreement. The importance of the concept of trust between parties is highlighted. This leads to a discussion of how lessons can be learned from the globally successful Japanese manufacturing culture, which incorporates just in time (JIT) purchasing and long-term trusting relationships between members of the supply chain.

The paper then considers operational issues surrounding the management and control of subcontracting, particularly relating to the choice of subcontractor, control over manufacturing activity, the scheduling of work, and material control. A brief introduction to these issues is followed by the presentation of two case studies from the electronics assembly sector.

Integration and subcontracting within the supply chain

Within a vertically integrated supply chain a single enterprise retains ownership and/or control over the others. This can be achieved by merger, or other form of formal corporate alliance with enterprises elsewhere in the chain, and does not normally make use of subcontract arrangements with independent organizations (as defined in the next section). By contrast, within a vertically disintegrated supply chain, production can be subcontracted down through a series of levels from the original principal to several independent enterprises[7]. The subcontracting of manufacturing activity is an integral part of manufacturing strategy within this model of the supply chain. Between these two extremes a continuum of intermediate approaches exists. It has been reported that the use of vertically disintegrated production is more widespread in Japan than it is in the UK, and that its use is a contributory factor in the continuing success of Japanese industry[7].

There has, however, been recent Western interest in the development of new organizational strategies which incorporate subcontracting - such strategies advocate downsizing to focus on core competencies or core intellectual and service capabilities[8,9], and outsourcing all other activities. Taking this policy further, the postmodern enterprise - also called the dissipative organization, the imaginary organization, the adaptive organization, the learning organization, the flexfirm, the agile enterprise, the pulsating organization, the network organization, and the virtual organization - is fluid, flexible, adaptive, and agile[10,11].

Based on the premiss that industry needs to innovate and upgrade in order to remain competitive it has been suggested that there is a need for innovative operational principles such as JIT, total quality management and lean manufacturing together with supporting information technologies to be provided at all levels within the supply chain. Within a vertically disintegrated system, this would include the SMEs which subcontract for larger enterprises and would facilitate greater integration between organizations[12-14].

An additional component of the successful disintegrated supply chain organization is the concept of trust between enterprises, demonstrated within the successful partnerships often seen in Japanese subcontract arrangements[7,12,15,16]. Trust is intrinsic to Japanese JIT purchasing procedures where benefits to both parties are achieved by a reduction in the need for adversarial contract negotiation[17].

Definition and description of subcontracting

Definitions of subcontracting are scarce[1], and a generic working definition which uses the term principal to refer to the prime contractor[7] - has been developed by the authors:

Subcontract manufacture is the process by which a subcontractor (i.e. an organization with business objectives which are independent of those of the principal), performs all or part of the manufacture of the principal's product, to a custom
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Author:Webster, M.; Alder, C.; Muhlemann, A.P.
Publication:International Journal of Operations & Production Management
Date:Sep 1, 1997
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