Industrial subcontracting and outsourcing are modern and efficient ways to organise industrial production, through cooperation between various complementary production units. Industrial subcontracting consists of an agreement between two parties - the main contractor and the subcontractor. The main contractor entrusts one or several enterprises with the production of parts, components or sub-assemblies and/or provision of industrial services necessary for the manufacture of its final product. The subcontractor executes the work as per the specifications provided by the main contractor. Industrial subcontracting consists of a division of work in the production systems with subcontractors potentially becoming increasingly specialised in one or more technological processes.
Subcontracting of industrial production is generally based, among others, on two important criteria; production capacity and technical specialisation of the enterprise. When the available production capacity with a main contractor is not sufficient to cope with the total volume of production necessary to execute an order and when further creation of an in-house capacity is neither feasible nor desirable, the main contractor has to depend on a subcontractor to manufacture the balance quantity of the order. Subcontracting based on specialisation occurs when the main contractor wishes to obtain the services of subcontractors who have specialised equipment or machinery and skilled labour to undertake complex and precision jobs. Such subcontractors have specialised technical skill/know-how for specific production processes/items and the main contractors prefer to utilise their services. This relationship is not associated with fluctuations of orders and hence tends to be on a long-term or structural basis. In view of its specialised knowledge of production facilities, sometimes these subcontractors may be in a controlling position.
The main contractors are generally, though not necessarily, large industries engaged in industrial manufacturing, which require a large amount of parts and components for final assembly. All these parts and components are not generally manufactured in-house in an integrated way either for reasons of economy or of specialisation. Though subcontracting relationship can exist in various sectors of activity, it is most prominent in the engineering sector in industries like automobiles, railways, aeronautics, electrical equipment, electronics, domestic electrical appliances, precision equipment, surface treatment, and also in plastic and basic metal work industries like foundry, forge, general mechanical or precision mechanical works.
The subcontractors are generally, although not necessarily, the small and medium industries which, having specialised in certain processes and operations, are capable of supplying quality goods as per specifications of the main contractor and at the same time offer advantageous economic terms. Sometimes large industries having available extra capacity may also act as subcontractors. It may also be the case that small and medium industries require the services of other enterprises for the manufacture of parts and components in order to fulfil large orders, thus acting as main contractors.
As the practice of industrial subcontracting has developed and become more widespread, the need gradually arose for the establishment of a more permanent and evenly balanced relationship between two or more industrial partners to be more in line with market requirements. In order to meet that need, since 1985, UNIDO has been advocating the concept of "industrial partnership" under its Programme for the Promotion of Industrial Subcontracting and Partnership. This concept refers to a modem form of industrial subcontracting based on subcontractor's specialisation and technological expertise, leading to long-standing, stable and horizontal inter-enterprise relationships, with equitable sharing of responsibilities among the industrial partners concerned. In order to increase the chances of success, these new forms of more stable subcontracting and supply linkages often call for other complementary forms of linkages, as can be seen in some of the more successful SPX case stories where the traditional subcontracting relationship has transformed into a full-fledged partnership between enterprises.
- A growing entrepreneurial commitment to total quality management by the main contractor and subcontractor, and often jointly;
- An increased flexibility in the production processes;
- An increasing amount of information and technology exchanged between the main contractors and among subcontractors which accelerates the rate of innovation;
- Subcontractors are involved from the early stages of product design;
- Delivery time is reduced (“just-in-time”) and more services are delivered with the product;
- Reduction of production defects and lead-time prioritized;
- Cost reduction has become a common task of subcontractors and main contractors;
- An increased trend towards the formation of industrial clusters, or groups of firms, which rely on the same or complementary business;
- A reduced number of suppliers to each main contractor. Subcontracting systems are increasingly based on a pyramidal structure where the main contractors rely on a small number of first tier subcontractors, who in turn rely on a large number of second and third tier subcontractors;
- An ever increasing search for long lasting reliable partners. They both rely and are loyal to each other, and the only danger remaining is the fluctuation in business activity
UNIDO SPX Centres are, first and foremost, non-profit organizations enjoying full autonomy, but supported/sponsored by public authorities and professional organizations. These offices are run and manned by a team of qualified engineers and managers specially trained to implement the SPX programme components in respective countries and regions. SPXs are established and incorporated in public agencies or in private sector institutions such as Chambers of Commerce and Industry, Federations of Industry, Professional or Manufacturers Associations.
Services provided by SPXs include information services, promotion services and advisory services. Information services may include the following: technical information concerning SMEs which are capable of working as sub-contractors, suppliers or partners for domestic and foreign main-contractors; brokerage of information relating to the supply of and/or demand for sub-contracted products and supplies; information on supply of and demand for know-how, patents, technical cooperation, opportunities and procedures for the setting-up of partnership agreements. SPX promotional services refer to the organization of business meetings with procurement managers from domestic and foreign industrial groups; organization of collective participation in industrial fairs of the sectors concerned; preparation and dissemination of promotional material including internet sites on the SPXs and their member industries. Advisory services on legal aspects of sub-contracting operations, product development and adaptation, quality control, standardization and certification, marketing may be provided.
10. Who are the SPX clients/end-users?
SPX offices provide a complete range of services to SMEs and suppliers in the respective countries, providing information services to large domestic and foreign enterprises acting as main contractors or purchasing enterprises, to other SPXs operating in the sub-region and worldwide.