Over the past dozen years I have increased the outsourcing of Glaask Appliance kitchen products, an extensive line of powered utensils for restaurant, commercial, and consumer kitchens. Many of the firms providing my products are now located overseas, either by intent at the time of the agreement or because of partnering relationships that have gradually crept abroad. Glaask still makes about 45% of our finished goods in the U.S. — and I want to always maintain a domestic base — but much of that now is assembly only, with components and materials also coming from overseas.
Glaask has grown fourfold during this outsourcing period and remained profitable, but I'd be foolish not to recognize warning signs coming from our customers and from our assembly operations: Our warranty costs have risen steadily over the last five years, and we've lost a few institutional accounts because of faulty products. We frequently get notice of quality problems coming out of our supply chain, but only after a large batch of products has shipped. We've gradually lost visibility into the facilities of some processes, especially those now occurring overseas. And even where visibility exists because we've got EDI and other electronic data-exchange mechanisms with partners, the decision-making process remains fragmented, so we're slow to get warnings and react to quality, volume, or priority issues.
In some corners of manufacturing, outsourcing is not as popular as it once was. But I'm not calling for eliminating our outsourcing relationships. I think these firms can still be productive arms of Glaask — provided we can share information with these suppliers, monitor and react to their performance today rather than weeks from now, and manage their activities and processes as if they were located under our roof. Am I being naïve? Can this be done?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Christian Verstraete
Outsourcing is a key trend in manufacturing, but looking only at the price differential is no longer enough; visibility and control increasingly become important as companies make their supply chains leaner, reducing inventory buffers along the way. Many manufacturers that outsource experience issues similar to the ones at Glaask Appliance.
Building an understanding of what happens in the supply chain, correcting issues in a timely manner, and improving the agility and responsiveness of the supply chain ecosystem is the Holy Grail. For Glaask to achieve this vision, three elements have to be put in place: First, the appropriate information needs to be shared by partners in a format that is understandable by all. Second, a "dashboard" and appropriate analysis- and event-management tools have to be established. Third, decision and escalation processes have to be designed and implemented.
Information sharing can be done in a variety of ways, from setting up EDI links to using a cloud-based platform. The real skill is to identify how far upstream and downstream within the supply chain Glaask needs to go, and to establish the information items required. For each component that goes into a Glaask product, the source, format, measurement unit, frequency, etc. need to be agreed upon. Standards such as the Supply Chain Operational Reference (SCOR®) model help in that process. Obtaining such information from suppliers requires the development of a collaborative relationship, which can only be achieved once the procurement department abandons its confrontational approach.
Once the information has been assembled, it needs to be analyzed, and you will want to look for events harming supply chain operations. Simple graphical displays, similar to the ones used in factories, facilitate the understanding of the situation. Analysis tools improve the relevance of the displayed information. For issues such as warranty problems, analyzing non-structured data, including call-center notes and blog entries require special tools, but experience has demonstrated they can greatly speed up the identification of problems.
Just looking at what happens in the present may not be enough to understand why things are going wrong. Looking at trends helps spot and correct issues. Keeping summary information for long periods of time facilitates your understanding of the dynamics of the monitored supply chain.
Gathering information and identifying problems is a must if you wish to improve at Glaask, and it will enable you to make timely decisions that avoid disruptions and improve customer service. Establishing appropriate escalation processes as potential disruptive events occur speeds up the proliferation of the resolution across the ecosystem.
By implementing an environment in which information is collected across the supply chain and then analyzed and used to support the decision process, you'll tap into a wealth of interesting information. Storing this information and correlating events over time improves the understanding of the dynamics of the supply chain. This can serve as an input to build mathematical models that mimic the behavior of the ecosystem. Such models prove invaluable not only to redesign the supply chain for more robust operations, but also to check the impact of decisions prior to implementing them.
Improving visibility requires building a partner collaboration infrastructure, setting up a supply chain dashboard, and establishing processes that ensure a fast response.
Christian Verstraete is CTO for HP's Manufacturing and Distributions Industries Worldwide, and has been a member of HP's manufacturing team for more than 29 years. Verstraete is responsible for thought leadership and innovation — scanning industry and technology trends and assessing their mid/longer term effect on emerging MDI business opportunities and how to capitalize on these. He is the linkage to the CTO community both inside HP and with customers and partners. Christian is also a supervisory board and speaker faculty member of SCM World (www.scmworld.org), the leading online global community for senior supply chain professionals.
By Trevor Miles
Glaask is not alone in its experience with outsourcing. That alone does not solve the problem for Glaask, but it does indicate that other companies are solving such problems and can provide a model for improvement.
So how does a company in this position transition to the next level of supply chain maturity? There are two key elements:
It is important to always review your decision to outsource and offshore. While you do not explicitly state the reason to outsource, I assume that it was to reduce the cost of components. Yet Glaask has experienced an increase in "hidden" costs, as have most other companies that have outsourced to offshore companies, such as increased warranty costs and loss of customers because of quality problems. In my experience, the loss of quality is not only product quality but also customer-service quality. I am pleased to see that in Glaask's case, as is true in nearly all cases, the financial value of outsourcing still outweighs the increases in other costs.
From an operational perspective, no one in their right mind would outsource and/or offshore for all the reasons you cite, principally the loss of visibility and control over the manufacturing process and the extended lead times (and increased uncertainty) of product delivery. The question is how to regain visibility and some amount of predictability, if not absolute control.
Glaask is not being naïve to believe that a closer relationship with suppliers will improve the situation. The companies that are naïve are the ones that believe that the situation will improve without a closer relationship. An understanding of the cultural differences and financial imperatives of your suppliers also is key to reducing the effort and cost of working with distant suppliers.
One of the greatest barriers to decision-making is timeliness of information. You must get visibility to planned production at suppliers, be able to identify a problem before it occurs, and understand how it can impact operations: For example, a one-day delay in outsourcing production can mean a missed sailing date and, ultimately, a 14-day delay in goods arriving in the U.S. Of course, one can always recover from a problem after it occurs and not all problems can be avoided, but early warning to an impending situation is always most effective. This implies a deep level of two-way information sharing and, perhaps even more importantly, a collaborative manner to problem-solving that allows all parties to view and evaluate the alternatives available before making a decision.
But doing this with all suppliers will be prohibitively expensive and take too long. Glaask needs to perform an analysis: identify key suppliers, and tailor your approaches to resolving issues with these key suppliers on an individual basis. For those key suppliers that have a big impact on operational performance — revenue impacted, long lead times, perishable components, etc. — it is important to put in place processes and systems that allow not only information sharing but true collaboration in decision-making and joint risk-sharing. The key to doing this is to have timely information available in a common and shared format, which not only alerts Glaask and its suppliers to impending risks, but also provides a collaborative environment in which they can share alterative solutions and evaluate the financial and operational consequences of choosing one alternative course of action over another.
This isn't nirvana. The practices and tools currently are available to Glaask, and many companies in high-tech and electronics industries have adopted this approach and applied technology to improve outsourcing relationships.
Trevor Miles is director of industry and applications marketing at Kinaxis (www.kinaxis.com), and is responsible for identifying market trends and translating these into high-level functional requirements for the company, and opportunities for value capture by Kinaxis customers and prospects. Prior to joining Kinaxis, Trevor worked for i2 Technologies, where he held a number of sales and marketing roles and worked with global industry leaders such as Continental, Volkswagen, Nokia, and Thomson. Previous to i2, Trevor worked for Coopers & Lybrand performing several studies in supply chain reengineering for companies such as Levi's, Burmah Oil, TNT Logistics, AGA Gas, and Schneider Electric. Trevor has degrees in Chemical Engineering and Industrial Engineering. He can be reached at tmiles@kinaxis.com