For Strataico Systems, it truly is a global business economy, and we've leveraged manufacturing and service capacities far away and close to home to build outsourcing relationships that have enabled exponential growth. As a provider of complex telecommunications systems, our outsourcing relationships are many and varied (components, subsystems, complete systems, and services such as product development and customer support), and we've attempted to hold these partners to four primary performance objectives: high quality, competitive costs, timely delivery/service, and, importantly, an ongoing strategic fit with Strataico.
But as we've expanded into an international company with revenues approaching $850 million, our ability to manage — or even stay informed of — the processes within our outsourcing base and the handoffs to Strataico and its operating systems has eroded. And, frankly, that's assuming we had a good view of what was going on in the first place.
Strataico Systems has been fortunate, riding a huge wave of increasing sales. But as the incoming COO, I realize that my top challenge is to quickly gain some degree of control over our virtual enterprise — even as outsourcing relationships, processes, our products and the supply chain get evermore complex. The hairline fractures in this enterprise are only now emerging — dissatisfied and exiting customers, subpar operating performances internally and at our outsourcers, and a buildup of wastes throughout the supply chain (e.g., excessive inventory, rising expediting costs, obsolete components) that is beginning to hit the bottom line. Not only is Strataico Systems beginning to feel the pain, but our outsource partners, too, are increasingly dissatisfied with the supply-chain direction, despite rising revenues for the foreseeable future.
How can Strataico Systems stabilize this virtual enterprise, re-establish key performance criteria throughout the supply chain, and regain the trust and dedication of outsource partners who increasingly view this as something less than a win-win relationship?* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Clarence Chen
If it's any consolation to you, many chief executives across industries struggle with similar challenges as they outsource manufacturing and supply-chain components to third parties and suppliers. Companies faced with rapid growth and increasing cost pressures simply must pursue outsourcing to stay competitive. However, management teams often assume that by outsourcing certain operational responsibilities to suppliers, they will automatically simplify their company's operations. Our experience shows that outsourcing does indeed simplify some things — but it also introduces a new set of challenges that, if unchecked, can result in the symptoms you describe. This is particularly true when a company expands its supply-chain footprint and outgrows its initial set of suppliers.
Clearly, outsourcing of manufacturing operations alone cannot all at once minimize your costs, increase customer responsiveness, and optimize asset utilization. To realize the benefits of outsourcing, you must think strategically about all the moving parts in your operating model. For example, you will typically lose visibility into an outsourced supply chain, which will impair your ability to respond to changing customer demand in a timely manner. What will you do to fix it? How much additional inventory cost should you incur to improve your customer responsiveness? If your supplier has idle capacity, should you build now or later? And do these tradeoffs make the outsourcing proposition less attractive?
The answers will ultimately depend on your capabilities to support your outsourced supply chain. As an OEM, you are a global supply-chain orchestrator who must make aggregate decisions that no single outsourced partner can make. For example, if a component used by several manufacturing partners is frequently in short supply, you must resolve the issue. The capabilities that will help you do it include the right level of supply-chain information, visibility, decision-making support, and a collaborative process with your outsourcing partners.
The capabilities that you decide to build as an OEM will define your ability to manage your extended supply chain and synchronize all planning and execution activities. In our clients' experience, OEMs can continue to maximize the benefits of outsourcing while meeting the challenges of an outsourced operating model. To that end, successful OEMs apply a proven five-step approach to develop and implement the right capabilities:
- View your supply chain as a strategic asset. A nimble, fast, and responsive supply chain (virtual or not) "happens" only by design. An end-to-end operating and planning model becomes crucial when supply-chain assets are outsourced, helping the OEM to become a superior supply-chain orchestrator.
- Develop end-to-end process architecture and technology capabilities. Excellent supply chains leverage a tailored set of processes that are derived from the business strategy and are adapted as the strategy evolves. They are supported by the technology enablers such as supply-demand balancing solutions that enable you to react to changes in business conditions rapidly.
- Design your organization for performance. An effective supply-chain organization must have the skills required to develop and manage a complex and rapidly changing supply chain. You also need to understand how the organization will be built — will skills be acquired or developed? How much should you outsource? These are just a few of the critical questions that must be answered.
- Build the right collaborative model. To successfully leverage the skills of outside partners, you need a solid management framework, a clear understanding of the commitments being made on both sides, and a realistic assessment of the underlying economic assumptions.
- Use metrics to drive business success. The right set of metrics can provide information about the health of each core supply-chain process and identify problem areas to focus on.
By adopting this integrated approach, you can solve Strataico Systems' challenges and repair its "hairline fractures." More importantly, this approach can help you improve your operational performance in the long run
Clarence Chen a principal at PRTM (www.prtm.com), has more than 18 years experience in supply-chain management and operations. He focuses on supply-chain innovation and the use of systems to enable strategic change in high-tech and industrial manufacturing companies. Clarence is APICS CPIM certified, and obtained a Master of Business Administration from the University of California, Berkeley, and a Bachelor of Science in mechanical engineering from the University of Notre Dame.
By Randy Littleson
Many brand owners struggle with the transition involved in shifting from an internal manufacturing model to a heavily outsourced model. Despite the fact that you have outsourced the execution of critical processes, you remain accountable for the end result — for quality, customer satisfaction, your operating performance, etc. While the benefits of outsourcing are reasonably understood, the challenges are often less obvious.
Most brand owners say they now have less control over key supply-chain processes, including order promising, analyzing and managing risk, inventory liability, and forecast sharing. The natural instinct is to try to regain control by micromanaging the process. This will prove counterproductive and will undermine what needs to be strong relationships with your suppliers and contract manufacturers built on transparency and trust. While we understand your desire for some “control” over your virtual enterprise, you should really consider efforts to “coordinate” rather than control. It is a far more effective means to work with partners.
Since you are accountable for the end result, you need to be active participants in the process, but your role is that of coordinating an effective response to change. Since you have outsourced much of the execution, your role is no longer about creating and executing an optimized plan, but now shifts to making the right tradeoffs to deal with the myriad of unplanned events that will come up daily.
To do this, you’re going to need to empower your front-line staff with the tools for risk tradeoff and response. Your team — including customer-service representatives, demand managers, outsourcing managers, etc. — will face a lot of judgment calls when things do not go according to plan. These highly complex decisions can have significant impact to the business and require rapid and accurate action by your team.
To facilitate this, your team is going to need visibility into the extended supply chain. This is often lost when companies outsource since they outsource not only the execution, but much of the data associated with it. For your team to coordinate response to change, they are going to need to know what is going on. Building this transparency into your outsourcing relationships from the onset is critical, and your focus on coordinating vs. controlling helps build the mutual trust to make this work.
Armed with visibility into the extended supply chain and tools for risk tradeoff and response, your team can now be active contributors and coordinators. Instead of asking your suppliers “What would happen if … ?” to test out your ability to respond to a demand spike, for example, your team can test out many of these scenarios on their own, freeing your partners to stay focused on executing to the plan. And when unplanned misalignments between demand and supply pose risks to customer satisfaction and operations performance, your team can step in and coordinate the appropriate response that ensures that your operating metrics are achieved.
Outsourcing can and has brought substantial benefits to many companies. But in order to take full advantage of its opportunities, you need to realign your focus to proactively manage the risks and reorient your focus to your new role. That role is to work closely with your partners as the coordinator of responses to unplanned events, while demonstrating trust in their ability to execute to the plan.Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the leader in Response Management for operations performance. Randy can be reached at rlittleson@kinaxis.com.