Subcontracting flexibility

A significant flexibility is that prime contractors are not required to follow public sector competitive tendering rales for work they subcontract. 

The trend for companies to focus on core competencies has forced enterprises to collaborate closely with their suppliers as well as with their customers to improve business performance (Lutz et al. 1999). The next step in the supply chain concept is the production or supply networks (Figure 15), which are characterized by intensive communication between the partners. TTie aim of the system is to allocate among the collaborating partners the excess in production demand that could not be faced by one of them alone. This capability provides the entire network with the necessary flexibility to respond quickly to peaks in demand for the products. A tool developed at the Institute of Production Systems at Hanover University, the FAS/net, employs basic methods of production logistics to provide procedures for the efficient use of capacity redundancies in a production network. The tool satisfies the following requirements derived from the capacity subcontracting process ... 

Use of subcontracting In this approach, a firm subcontracts peak production so internal production remains level and can be done cheaply. For such an approach to work, the subcontractor must have flexible capacity and the ability to lower cost by pooling the fluctuations in demand across different manufacturers. Thus, the flexible subcontractor capacity must have both volume (fluctuating demand from a manufacturer) as well as variety (demand from several manufacturers) flexibility to be sustainable. For example, most power companies do not have the capacity to supply their customers with all the electricity demanded on peak days. They rely instead on being able to purchase power from suppliers and subcontractors that have excess electricity. This allows the power companies to maintain a level supply and, consequently, a lower cost. 

In volume-based tailored sourcing, the predictable part of a product s demand is produced at an efficient facility, whereas the uncertain portion is produced at a flexible facility. Benetton provides an example of volume-based tailored sourcing. Benetton required retailers to commit to about 65 percent of their orders about seven months before the start of the sales season. Benetton subcontracted production of this portion without uncertainty to low-cost sources that had long lead times of several months. For the other 35 percent, Benetton allowed retailers to commit orders much closer to or even after the start of the selling season. All uncertainty was concentrated in this portion of the order. Benetton produced this portion of the order in a plant it owned that was very flexible. Production at the Benetton plant was more expensive than production by the subcontractor. However, the plant could produce with a lead time of weeks, whereas subcontractors had a lead time of several months. A combination of the two sources allowed Benetton to reduce its inventories while incurring a high cost of production for only a fraction of its d and. This allowed it to increase profits. 

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