Outsourcing strategies for wood product manufactering firms : driving forces and strategic development

Abstract: In this thesis outsourcing in the wood product manufacturing sector (WPM) is studied. More specifically, the study aims to describe and analyse outsourcing strategies for firms in the WPM industries (door, floor and window). Firms in the WPM sector have previously not dealt with outsourcing to any large extent and have usually handled all manufacturing activities in-house. Recently, however, firms in the WPM sector seem to more and more considering outsourcing parts of their manufacturing. Using frameworks developed in other business contexts, this thesis will focus on these firms' outsourcing strategies. A multiple case study research strategy based on six case companies is employed.This study confirms that WPM firms are focusing increasingly on outsourcing, which means that all manufacturing of components and products will not (and does not need to) be handled in-house. The case companies have a varied degree of outsourcing experience. When there is a need for strategic development by increasing customer orientation outsourcing becomes an inevitable ingredient for the companies studied. Today, the manufacturing of many types of wood components (often at the beginning of the value chain) is no longer considered as a core competence and creates little added value for the customer. This creates a strong driving force for outsourcing the manufacturing of these items. Instead, the companies' focus is on those activities that enable differentiation on the market, as it is now these that are considered as core competencies of the corporation. Four major driving forces for initialising outsourcing can be identified: (1) increasing customer orientation for strategic development, (2) optimising the balance-sheet to achieve fmancial effectiveness and focus resources on core activities, (3) strategic flexibility by not handling everything in-house and (4) minimising costs to achieve operational effectiveness and improve relative cost position.The firms studied define outsourcing strategies on the basis of components and products, not certain activities. The primary focus is on component outsourcing, but in the future outsourcing will also include more products. Outsourcing strategies seem to enable more focus factories and in the future more component manufacturing will be outsourced to suppliers in low-cost-countries, where both labour and raw material costs are lower. Outsourcing strategies for products involve the outsourcing of products where little contribution to competitiveness can be obtained by manufacturing in-house. Thus, the products suitable for outsourcing are considered more as non-core products that are needed to  keep or expand product diversity. The outsourcing of wood components is becoming an important strategy and, in line with product outsourcing strategies, the WPM firms' focus will be on those components that create differentiation, other components will be considered for outsourcing. In this way the firms studied intend to go from buying sawn timber, considered as a bulk commodity, to a component strategy. Components considered for outsourcing are not regarded as any major determinant of competitive advantage but are not viewed as problematic either. The component outsourcing strategy includes decreasing the supplier base to have some major first tier suppliers. However, the companies that have been studied are not likely to apply a single sourcing strategy. The suppliers will take over this initial manufacturing, and this development also places more responsibility on these suppliers and entails higher demands on supply reliability.The former resistance to not working closely with the primary wood industry seems to have decreased and the WPM firms seem less need of having in-house processirlg of the raw material and component manufacturing. However, a recurring theme is the need to reduce the risks of dependency and to ensure supplier competence, when considering the outsourcing of components.A fundamental requirement for outsourcing must be that there is a developed market to outsource to. However, the companies studied intend to outsource wood components even though they realise that there is no well developed supplier market as today there are not necessarily any or only a few companies that can manage a supplier role in an outsourcing agreement. What the case companies have in common is the difficulty to outsource to a supplier market where the firm needs to find suppliers that have the competence to handle the outsourcing of components, and also the scale and the fmancial possibilities to offer comparative advantages. There seem to be very few suppliers available who have sufficient capacity and competencies and the companies studied instead intend to develop their suppliers, but the strategy for this varies. Three ways for handling supplier uncertainty and development when outsourcing components can be identified: (1) wait for a market to develop, (2) proactive development of suppliers and ensure reversible outsourcing (3) partnering with larger supplier with sufficient size, competence and financial possibilities.