9.10 End-of-chapter Case: Outsourcing to save costs—but for whom?

MediTec Inc. was founded in 1962, but with a very different name: KitchenTech Inc. designed and manufactured designer countertop kitchen appliances. KitchenTech had begun to make respirators and other medical equipment in the early 1980s as an effort to diversify its product range. Senior managers had grown weary of the cyclical nature of household appliances—and they were worried about rising foreign competition in the small appliance sector. At the time, medical equipment seemed immune to both threats. Surprisingly, the company's high quality standards, short-cycle innovation capabilities, and efficient production made its medical equipment very popular. The medical supply portion of the business grew at a double-digit pace year after year. By the late 1980s, KitchenTech changed its name to MediTech Inc., sold off its appliance division, and relocated its headquarters to Newport Beach, California.

Unfortunately, by 2014, the competitive pressures the company had sought to avoid 30 years earlier had finally caught up to MediTech. Since the early 2000s, medical costs across the industrialized world had been increasing dramatically. The aging populations of Japan, the European Union, and the United States drove many of these costs increases. The bottom line: The demand for medical devices—including respirators—had grown fast enough and large enough to attract new low-cost entrants from Brazil and China. These new players came to market with a cost advantage. MediTech had lost four or five points of market share each year for the past three years. MediTech needed to get its costs down.

Entering 2014, MediTec had sourced over 80% of its spend domestically. As a model lean manufacturer, MediTec relied heavily on rapid and responsive delivery from suppliers. Critical components like A39DS (a small electric motor) had never been globally sourced. But, the persistent loss of market share had caught everyone's attention. Top management had made one point clear: Intensifying competition meant that everything that wasn't part of MediTech's core value proposition or a core competency had to be re-evaluated.

As purchased goods represented 65% of MediTech's COGS, purchasing felt the heat perhaps more than any other function. After all, MediTech's production was already extremely efficient. Lean wasn't just a fad at MediTech. High-cost components like small electric motors were the first to be evaluated for global sourcing potential. For the past 10 years, A39DS had been bought from three different suppliers located in the Tacoma, Washington; Mobile, Alabama; and Saginaw, Michigan. These suppliers had been selected for four main reasons:

1. Outstanding design and engineering

2. Lean production practices

3. High-quality production

4. Proximity to one of MediTech's production facilities

More importantly, the suppliers had all performed at outstanding levels as documented by MediTech's supplier scorecards. Urban had also been pleased that the suppliers always delivered on time. He had also appreciated their willingness and ability to expedite production to keep MediTech's lines running—without the need for Urban to use special, high-cost logistics. Urban knew that Joan appreciated these behaviors. These suppliers helped MediTech win and keep contracts with key customers.

As Urban read the purchasing proposal, he leaned back in his chair. He could hardly believe what he was seeing. The purchasing department had located, evaluated, and certified a Chinese supplier, HuaTong Electronics, that had quoted delivered prices that were 50% lower than those offered by MediTech's domestic suppliers. Moreover, purchasing recommended purchasing MediTech's entire requirement of A39DS from HuaTong. This was BIG! But, was it the right thing to do? Urban understood purchasing's logic. But, he also knew why Joan sent him the email. He shared her concerns.

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