Saturday, May 26, 2007

Outsourcing success faces new complexity for supply chain network design


Outsourcing is a potential source of differentiation for any company. Making it a positive source of differentiation depends on how it’s managed, says Ray Homan, vice president of IBU High Technology for SAP labs, LLC, Palo Alto, Calif.. Homan delivered his message in a keynote speech that opened this week’s DC Expo, held at Chicago’s Navy Pier. The problem, according to Homan, is outsourcing is more complex than many companies expect it to be.

“Most enterprises are unaware of all the stakeholders [in the decision],” he said. “In terms of enterprise risk and the ability to deliver on the revenue commitments CFOs made to the markets, this is where things begin to break down. Mastery of fill rates in this environment is where outsourcing starts to rear its head. The cost to manage an outsourced operation are far higher than most companies realize. Often the cost of doing business in this mode is lost customers—or the loss of a direct relationship with a customer if the process is not mastered.”

The supply chain network design is the key strategic element in an outsourcing scenario, and logistics managers hold the key to making things work. It’s a matter of supply network collaboration. Smart Modular Technologies (SMT), a spinoff of Selectron,assembles memory modules. Management knew the only way for SMT to win business in its market was to be able to provide service with cost guaranteed delivery dates. These are aspects of perfect order fill and that had to be their differentiation.

SMT had two major OEM customers. Failure to serve one adequately could mean catastrophe. Their strategy was to become the orchestrator of all memory modules for those two customers. They disintermediated all of their competitors by orchestrating the supply from competitors as well as from their own plant.

That was a major achievement for them, considering how complex supply chains are in the high tech world. Homan cited an AMR research study indicating that high tech is the worst performing industry when it comes to perfect order fill rate. It requires business models in that industry to morph constantly as relationships multiply.

Customers must determine if they’re willing to extend their pipeline to meet this extended service level. What helps customers justify doing business with such suppliers is the availability of information. Homan gave the example of a telecom equipment manufacturer that switched subcontractors because the new one was easier to do business with and would provide them with higher quality information.

The conclusion for companies either outsourcing or offering outsourcing services is, keep your eye on the changing stakeholders. They’re global. How many different countries have different requirements that dictate how you do business and how you report on your business? As your services change, the stakeholders in your supply network will change. Perfect order fill rate will take on new complexity.

“You can’t achieve perfect order fill just by increasing inventory,” Homan concluded. “You now need to improve that under a whole set of constraints—financial, legal and regulatory. Most companies don’t even have visibility to what they have in their own supply base.”