NCR Retreats from Outsourcing

By Kevin Meyer

It's starting to be a trend... a good one for a change.  Companies rethinking their outsourcing strategy after realizing how traditional accounting puts the blinders on total cost... and opportunity.  A hat tip to regular reader Jason for shooting me this article on NCR.

When NCR decided to outsource production of bank ATMs in 2007, it was joining a trend that had been sweeping America’s electronics industry for more than a decade.  By shutting its own factories in Canada and Scotland and inking a five-year deal with a contract manufacturer to make ATMs for North America, the company assumed it could cut costs.

And the inevitable happened.

Instead, says one NCR manager, the collaboration became “an enormous and costly exercise” that led to product delays and upset customers.

NCR makes ATMs at its own plants in China, Hungary, and India. The devices are also assembled in South Carolina and offshore in plants run by Flextronics, which in 2007 acquired Solectron, NCR’s original contractor. Among the headaches: Because ATMs are so complex, NCR engineers often had to jet around the world to sort out production glitches and design changes. This led to delays just as NCR was launching a line of ATMs that simplify making deposits and verifying transactions. “By outsourcing, we just couldn’t move as quickly,” Nuti says. E.C. Sykes, Flextronics’ president for industrial products, says: “We did have some bumps with this product line.”

So what is NCR doing?

Now NCR is changing course again. And this time it may be in the vanguard of a shift in corporate thinking that could bring skilled manufacturing jobs back to the U.S. Not only will NCR once more build all automated teller machines in-house, but it will also supply North America entirely from an 800-worker plant in Columbus, Ga. Before, some ATMs sold in the U.S. came from China and Brazil.

Why would they do that?  Doesn't it fly in the face of the quest for "cheap labor"?

Behind the reversal is a sweeping rethink of corporate strategy prompted by the recession.

Nuti and his team decided they had to halve development times of intelligent, easier-to-use ATMs—currently 12 to 18 months—and consolidate production. Because many ATMs are custom-designed, NCR wants buyers to be directly involved in development.

The plant is just a two-hour drive from three key spots: NCR’s main customer service center, its innovation hub, and its new headquarters in the Atlanta area. “We want quantum-leap changes in our cost structure,” Nuti says. “To effect that change, you have to control your destiny.”

Yes, value is created by more than just a pair of hands.  Chasing low labor costs ignores many other costs, values, and especially opportunities inherent in any supply chain.  Congrats to NCR for realizing that the traditional P&L and balance sheet is just one part of the picture.

Comments

[Moose]

Wasn't Flextronics the same contract manufacturer that messed up Lego?

[df]

Hey Kevin,

What would you say would be a good book to look into the differences between traditional accounting and (I guess you're talking about) "lean accounting."

Goldratt talks about it a bit in The Goal, but I'm looking for some more meat.

[Kevin]

Moose: Good catch! Yes it was Flextronics!

df: I recommend Practical Lean Accounting by Maskell or Real Numbers by Cunningham.

[Steve]

This is an example of how to do outsourcing very very badly but the jury is still out on whether NCR has done the right thing. The US has a very high cost structure compared to the countries in question and in this flat world a more agile company might just whoop NCR at its own game. That being said, outsourcing definately has its drawbacks, the biggest being a serious lack of the technological intellectual capital that is common in the US but not in these other countries.

[Serge]

We had a strong and collaborating team between US and Canada, we needed a slight management reajustment here in Waterloo (Canada) and we would have been golden in all aspects. I wished they never closed Waterloo, we had a good productive and quality driven team and rapport with homebase in the US.

[Howard Steel]

Yes - well "insourcing" as it has become known is also not without it's growing pains. A long-term, highly skilled work force that handled NCR's cheque processing equipment and ATM's was closed in Canada taking with it hundreds of jobs and literaly thousands of years of experience. In a single plant the engineereing team, supply line team, and manufacturing operations work hand in glove to produce exceptional products. The complexity of the products and associated problems was mitigated by the extremly close relations between these three groups. The same can be said for Scotland. The problem now becomes - how many years does it take to gain that back? Under the auspices of creating American jobs NCR comes up smelling like a rose while in actuality they simply have let qualified work-forces languish in areas that could arguably start up and hit the road running in rapid order. NCR, once a revered name in many locations has left somewhat of a bad taste in the mouths of 10's of thousands of workers, suppliers, and other support industries. While exceptional human resources slip away to other high-tech industries one has to wonder if NCR has not already broken it's back as they continue to outsource engineering excellence in addition to the manufacturing that they are now clawing back.

[Alysha]

I worked with both of the above individuals at the NCR plant in Waterloo, Canada and I agree with both of their statements. I think Howard's statement was eloquently put, and is exactly how I was feeling when reading this article. I don't understand how NCR can come out of this whole ordeal as a hero, when they have hurt so many thousands of exceptionally skilled employees in the process. If NCR decided to re-open in Waterloo, I would be one of the (possibly) many people willing to go back to work for them, and with a starting force of previously trained employees, they could hit the ground running and I think, be much more productive in the long run. I am not very enthusiastic hearing about new jobs being created in the U.S., as that does nothing for me, and I suppose a little bitter piece of me is glad that their plan to outsource has failed them.