The best of both worlds - strategic outsourcing - Second Partner, Once Removed: Maintaining the New Extended Corporate Family

Chief Executive, The, June, 1997 by Peter Hapaaniemi

NEITHER A SUPPLIER NOR A CUSTOMER BE. IN THE NEW WORLD OF STRATEGIC OUTSOURCING, MOST CORPORATIONS ARE BOTH. WINNING COMPANIES, THESE FOUR CHIEF EXECUTIVES AGREE, ARE THOSE WHO'VE FIGURED OUT HOW "TO LEVERAGE THE EXPERTISE OF OTHER ORGANIZATIONS, WHEREVER, THEY FIND IT..."

Over the years, Mary Kay really changed its philosophy toward outsourcing. We used to look at it for cost savings or perhaps for a limited, short-term capacity boost. There was a time, I think, when we were kind of insular and maybe a little cocky in our vendor relationships. They were more traditional and standoff-ish, and the basic message to the vendor was, "You will deliver, and if you don't, there will be a penalty - or we'll get someone else to do it." Today, we've come 180 degrees from there. We now look for long-term relationships and strategic outsourcing partners, and we have developed these relationships in our manufacturing, information technology, and R&D areas. Of course, we've had long-term relationships with some companies for years, but now this is really embedded in our philosophy. In many ways, we now prefer to do things with a partner.

This all started in our manufacturing. We have plants in China and Switzerland, but we also outsource a lot of production to companies in Australia, Argentina, and other countries. We are actually very good at manufacturing - we are a low-cost producer, and we've trebled the output per manufacturing employee the last few years. But we reached a where we felt there was only so much could do on our own. For example, are many overseas markets that smaller runs of products that we can't efficiently produce. And of course, our core competency is not in 200 million units of cosmetic year, although we can do that. It is ability to build and maintain and a huge sales organization. So a few years ago, we re-evaluated the whole subject and decided to take a long-term, strategic approach to building manufacturing partnerships. And since then, we've gone through a critical review of all our products, SKU item by SKU item, to see which ones may be more efficient to manufacture outside - and those that were are handled by our manufacturing partners.

So this approach really isn't about cost savings. It gives us the flexibility to serve those smaller markets in other countries. A closer relationship also gives us a good way to make sure that quality is maintained, because we can share what we've learned about manufacturing and quality with our partners. And, we haven't had to go around the world building plants. So, where a lot of companies find themselves stuck with all this brick-and-mortar capacity, we have the same U.S. manufacturing footprint today, as a billion-dollar-plus company, that we had years ago when we were a $17 million company.

We have a very well worked out process for building and maintaining these relationships. We have formal audit and verification processes that we engage in mutually with these other companies, and we have some sharing of the risk with many of them. We've also made good use of our information systems to share data with partners: That means we are both looking at the same sets of numbers, so that rather than argue about the accuracy of the information, we can look at it together and say, "something isn't working, let's fix it."

That attitude is an important part of these relationships. We've found that with a long-term outsourcing arrangement, there is less of the command-and-control kind of stuff, many challenges and justifications going back and forth. There's more give and take. And that has meant that we've had to develop a certain management mind-set, if you will, and new people-related skills to make this all work. We've had to change a lot of attitudes, and people have left this company because they didn't have the right attitude for these kinds of relationships.

Another important element in our approach is our up-front use of a vendor-certification process to make sure that we are both on the same page. We go through this process very laboriously to make sure that the other company is aligned with our ethical structure. It's very important to us that they think like we think about the ways in which they treat employees and the standards and values to which they hold their organization. A company might be a very efficient producer, but if they are not aligned with us in terms of integrity, they are not going to do business with us.

You have to have this kind of match in the way you do business, because there will always be problems in a relationship - it's axiomatic in this world. There are always going to be a lot of people coming to you and telling you how great they are. But we like to dig in and see for ourselves. And so we might do some small projects where there are risks for both parties. That lets you see how the other guy reacts when somebody stubs their toe. That tells you a lot and lets you know early on how well you work together to solve problems. Then you can decide if this is a good fit and move toward a long-term partnership.