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The Seven Myths of Supply Chain Outsourcing[Steven Mason, Ghostwriter] Understanding what is required to make outsourcing work in manufacturing and fulfillment operations will help ensure success. Outsourcing was once a mere option. Today, it has become a competitive imperative. The growth of the Internet, the rise of mass customization, and a renewed focus on core competencies at the expense of vertical integration mean that original equipment manufacturers (OEMs) must contract out part or all of manufacturing, assembly, distribution, and support operations. Shareholders look less kindly than ever upon declining margins and revenues caused by the inherent inability to scale in-house operations . Outsourcing should be a blessing to OEMs worldwide. The reality, however, is that it's often been a curse. The reason is that the decentralization of manufacturing, fulfillment, and support operations creates a myriad of challenges in the OEM's newly outsourced supply chain network. Companies that fail to meet these challenges actually lose day-to-day control over their business processes. Their outsourcing initiatives produce chaos instead of scalability. Successful OEMs have no illusions about the difficulties of outsourcing. Rather, they succeed because they do not allow themselves to fall victim to seven insidious myths. Myth 1: My outsourcing partners are all supply chain experts. The reality is that they know very little about your (or anyone else's) supply chain. What they are experts in is producing the maximum volume of product for the minimum cost. Doing this does not require much visibility into their supply chains; it requires focusing on their internal business processes. The old saying of "garbage in, garbage out" applies here. The best partner in the world will do a great job of building perfectly to specifications and delivering on time a product that never has and never will work. It's your responsibility to ensure that your outsourcing partner knows your current specifications (not those planned three to six months ago, which have since become obsolete), and that you have real-time, Web-based access to their work in progress and bills of materials. You must have that oversight in order for them to produce as though they were supply chain experts. Myth 2: My partners have state-of-the-art information technology (IT) infrastructures. You may assume that your outsourcing provider has a fully automated system and end-to-end electronic data interchange or Web-based links with its suppliers. Unfortunately, this assumption is not grounded in reality. The reason is that most outsourcing providers have net profit margins in the 2 percent to 4 percent range, and any cost center that does not directly relate to product quality becomes a candidate for the budget axe. Consequently, new investments in IT infrastructures are about as common as ice storms in the Sahara. What's common instead are legacy systems that predate the Internet and lack supply chain-specific functionality. When you choose an outsourcing provider, your must include in your IT budget their access to state-of-the-art supply chain systems, because your partner will not spend a penny on those systems. Myth 3: By outsourcing production and fulfillment, I won't have to worry about execution. The issue here is that you--and you only--are responsible for the ultimate execution of your project and the delivery of your products. Outsourcing is a means to an end, and your ends are necessarily different from your outsourcing partners'. Consider that multiple subsets of unfinished goods generally comprise finished goods. Each unfinished good has a particular process, timetable, set of inefficiencies, and set of potential obstacles. The result is that an order's acceptance can be followed by third-party missteps and missed deadlines, any of which can cause serious problems with manufacturing and fulfillment. The proliferation of these third parties often confirms the aphorism, "When everyone's in charge, no one's in charge." Therefore, you must take direct responsibility for end-to-end execution or suffer the consequences. Myth 4: My outsourcing partners will provide expert project management. It's better to view these partners as renegade divisions of your company. They may get the job done, but they'll do it their way, with their own processes, and without an interest in integrating their data with yours. How can your reconcile these apparent conflicts of interest? First, recognize that your outsourcing partners wouldn't be in business unless they had many other customers' demands to satisfy, many other deadlines to meet, and high attention to cost containment. Second, understand that your partners pay attention only to that small portion of the manufacturing/fulfillment process with which they are concerned--not to the entire supply chain. That is necessarily your concern. Ultimately, accept that outsourcing and retaining control of your supply chain network are complementary activities, not antagonistic ones. Myth 5: Outsourcing automatically gives me a time-to-market advantage. This myth is often the most compelling driver of an outsourcing policy. But unless you carefully select your partners, provide them with integrated access to your supply chain systems, and enable your company to supervise the relevant projects, the advantage will redound to your more nimble competitors. Why? Because contract manufacturers' processes and systems were designed for mass production, not for mass customization and weekly new product introductions. It's easy to say that you should select your outsourcing partners based on their demonstrated commitment to fast paced manufacturing environments. It's easy to suggest that your partners should implement strict management oversight and control mechanisms to ensure that their subcontractors respond rapidly to fast-changing deadlines. The reality is that these bromides cannot substitute for your enabling your partners with cost-free access to a real-time, Web-enabled, collaborative software platform that instantaneously shares and distributes management, scheduling, and other data to all relevant parties. This is how to gain a real time-to-market advantage over your competitors, who will still be expecting their partners to shoulder such unwanted burdens. Myth 6: Outsourcing is the key to making my operations highly scalable. Vertically integrated companies have to scale linearly, not exponentially. Real estate and labor pools inherently grow in a linear fashion. Exponential growth, on the other hand, arises only from leveraging the efforts of multiple contractors, who in turn leverage other contractors. In principle, outsourcing then becomes a direct application of the network effect. But if you lose control of your supply chain network, outsourcing may create interminable delays instead of exponential growth. Therefore, at each step in your supply chain, you need to make decisions. Some can be automated, while others will require people with domain-specific knowledge. If you do not know your outsourcing partners' activities or their visibility into their supply chain networks, important decisions will get delayed or tabled. To achieve the scalability that outsourcing promises, require your partners to collaborate with you in real-time with you (at no IT cost to them). Myth 7: Fulfillment is easier to outsource than manufacturing. Fulfillment companies, as do manufacturers, have to optimize their cost structures. These firms are, therefore, also reluctant to invest in IT systems that would optimize the management of inventory by accelerating their own supply chains. Also, fulfillment firms typically pass their costs onto their customers, thus removing any short-term incentives to improve efficiency. Still, there you can employ strategies that will deliver meaningful benefits to your fulfillment partners and that will enable you to capture the business of the best of them. Specifically, you can deploy a system that automates stock replenishment before product shortages occur. The benefit to your partner will be lower inventory carrying costs. Your benefits will be gaining the same advantages from outsourcing fulfillment as from outsourcing manufacturing. Realizing the Promise of Outsourcing
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