Wednesday, July 04, 2007

The Impact of Outsourcing the Manufacturing Process on Innovation


A new survey by the Economist Intelligence Unit of 315 senior executives from manufacturing industries reveals that the majority of respondents plan to increase their use of outsourcing for both design and manufacturing in the next three years. They also believe that greater quantities of intellectual property (IP) will be derived from their external partners. At present, however, manufacturers are struggling to marry outsourcing with the need for innovation. Only a minority of respondents believes that outsourcing of design and manufacturing has had a positive effect on the creation of new intellectual property (34% for the former and just 23% for the latter).

The findings suggest that, while companies recognise the need to look outside the company for sources of new IP, they have not yet discovered how to turn the use of external partners to their advantage in terms of process and product innovation.

The report finds that, in addition to having difficulties sharing knowledge with partners outside the organisation, many manufacturers also face significant challenges with internal knowledge transfer. Common problems include a lack of communication between functions in the company, the fact that knowledge frequently resides in unstructured sources (e.g. e-mail and notebooks) and the tendency for some individuals to hoard knowledge.

Other key findings of the report include:

1) Many companies do not know the extent of their IP. Around half of respondents say that they do not know the true extent of IP in their organisation, suggesting that more needs to be done to realise the full value of this vital asset.

2) Respondents expect a gradual increase in IP from outside the company. External partners have not yet become important sources of IP for many organisations, although 67% of respondents expect the proportion of IP derived from external partners to increase in the years to come. The most likely sources are perceived to be suppliers, cited by 26%, design partners, cited by 18%, and customers, also cited by 18%.

3) An important goal of knowledge management is seen to be the sharing of best practice. The main benefits of improved flow of knowledge through the organisation are perceived to be the sharing of best practice around business processes, cited by 61% of respondents, and the ability to respond more effectively to customer demands, cited by 55%.