Are PLM and Global Sourcing Related? Duh, And How! (Part I)

A number of TEC blog posts have discussed benefits but also the inevitable caveats of white papers (including all too common vendors' self-serving marketing fluff and buzzword verbiage), and about their (un)intended audiences. These posts have even caused some heated debates with other blogging sites and experts on white papers, and I am going to stay away from all that here.

My intention here is rather to acknowledge that, as part of my daily routine of doing research on vendors and their strategies and offerings, I've read a ton of white papers in the last decade or so. And yes, these have ranged from vendors' blatant bragging about their capabilities (a la the "Every man thinks his own geese swans" proverb) to some exceptional ones that were quite educational and established someone's expertise in something.

One latter example would be the white paper entitled "Manufacturing Outsourcing: Seven Common Pitfalls to Avoid" and authored by Symphony Consulting and Arena Solutions. Why?

Well, when I read it, many things therein rang true to me based on my previous experiences as a design person who had to deal with manufacturing, sourcing and procurement staff at my previous employers (back in the 1980s and 1990s). Shepherding products from design through manufacturing and after-sale support to the end of life (EOL) is always difficult, but introducing outsourcing into the process pushes it to a significantly higher level of complexity.

For one, suppliers have to then become much closer and more strategic partners (if not even the members of the family) that are involved early in product development, rather than casual contacts that one deals with at arms' length. Despite the potential cost savings associated with outsourcing, the management task becomes even more difficult and carries greater risk, especially for manufacturers who are using manual error-prone and complicated processes for managing their product record.

Yet, since the late 1990s, outsourcing has become a way of life for electronics manufacturers, whereby most original equipment manufacturers (OEMs) no longer consider manufacturing to be their core competency. Even in cases where some of this capability is retained in-house, there is an ongoing effort to evaluate more activities that can be offloaded to a contract manufacturer (CM).

These CMs, whose role in the electronics industry was previously limited to assembling printed circuit boards, have meanwhile transformed themselves into large-scale manufacturing powerhouses. Indeed, modern CMs today provide their OEM customers with a one-stop shop solution, providing excellence not only in manufacturing, but also in materials management, design and test services, order fulfillment, and logistics.

Again, despite the significant possible benefits that come with outsourcing, there are also risks and challenges for OEMs to consider, since outsourcing, by definition, leads to loss of control. In other words, activities that would have traditionally been conducted within a manufacturer's four walls by its own employees, and that would be visible on its internal information systems, are now placed in the hands of a manufacturing partner and managed through documented (or not!?) business processes, contractual agreements, and software tools.

Certainly, OEMs have to think strategically about the kind of infrastructure they need for support in managing the challenges that come with outsourcing, such as new product introduction (NPI), regulatory compliance, and engineering change order (ECO) management.

Maybe I am too subjective and I liked the paper's conclusion that
"...While outsourcing offers significant financial merits and enables companies to focus on their core strengths, it is not free of challenges, and that outsourcing manufacturing without the proper preparation, infrastructure and control is a recipe for failure."

Along similar lines are the premises of TEC's earlier articles entitled Understanding the True Cost of Sourcing and Who Could Object to Faster, More Responsive Supply Chains? The other reason I liked perusing the paper was that I really had to look up more into Symphony Consulting (having never heard of them before) and Arena Solutions (sure, I've heard of them as an on-demand product lifecycle management [PLM] leader) to discern how they are relatedto this topic.

In other words, it took me a while to come to the "Aha!" moment of realizing what these two software and/or consulting companies were respectively trying to tout (or what ax they have to grind). But, more about that later and in a separate blog post.

The Seven Global Sourcing Commandments (well, in Reverse)

In any case, the gist of the paper is that through the years of experience in working with electronics OEMs and CMs, Symphony and Arena have observed the following seven common pitfalls that impact manufacturing outsourcing success:

  1. Selecting the wrong CM;

  2. "Quote-and-go" approach (in particular due to component pricing ambiguities; lack of visibility to product pricing structure; unknown details regarding the supply chain model; and no attention to non-price issues);

  3. Negotiating a weak contract (or no contract at all);

  4. Poor NPI project management (in particular due to poor quality of product configuration and manufacturing data; CM's involvement in NPI too little, too late; and poor communication of product change during NPI);

  5. Inadequate change management processes and infrastructure;

  6. Broken environmental compliance management; and

  7. Ignoring the hidden costs of going offshore.

In each case, the impact on revenue, cost of goods sold (COGS), quality, inventory levels, and time-to-market can be measured. While the white paper offers much more insight on these seven most common mistakes and steps that can be taken to address them, I will hereby only zoom in on a few that struck my fancy the most.

Selecting CM like Selecting ERP?

For one, the process (and pitfalls) of selecting the CM pretty uncannily resembles that of selecting enterprise applications. Namely, here is in the verbatim what the paper says:
"Working with the wrong CM is at the root of many problems that we observe in outsourcing. An OEM selects a handful of contract manufacturers – or worse yet, a single CM – and starts discussing business without having a clear understanding of the appropriate selection criteria. Key inputs such as geographic location, technical capabilities, materials management capabilities, quality control, strategic fit, and financial health are overlooked or discussed too late in the evaluation process, as cost or schedule overrides all other concerns. Cutting corners like this is often justified in a variety of ways: by pointing to an existing operational problem; out of frustration with the current CM; in time for a new product launch; in response to immediate margin pressures; or a combination of these factors. While these are relevant issues to consider, a major undertaking such as establishing your CM relationship must be based on a robust strategic foundation.

Prior to starting any sourcing project, fully envision your idea of a successful contract manufacturing relationship. Critical sourcing projects are normally spearheaded by the operations/manufacturing organization. But be careful not to exclude major stakeholders such as engineering, product management, quality control, and finance. Outsourcing your manufacturing is not a traditional buy/sell arrangement, and it must be managed in a strategic manner. Your CM is an extension of your business and has personnel that must interact cross-functionally with your company. Determine what role such factors as size, technical expertise, financial strength, and brand name reputation play in your selection criteria.

For example, a tier-one CM may generally not be a suitable match for a start-up or small OEM merely based on size. The mindshare associated with an annual spend in the low millions of dollars is minimal for a large CM when compared to the hundreds of millions or billions spent on outsourcing by larger OEMs. However, some start-ups or small companies are in unique niche markets where a large CM is investing to become the contract manufacturer of choice. The potential revenue that the CM can realize as a result of this partnership may therefore overshadow the immediate revenue at hand. In that case, it may be worth pursuing a tier-one solution. Finally, get references from similar sized customers within a similar technology market. Keep in mind that every situation is different and requires thoughtful consideration of multiple factors.

Before making any decisions, spend time to develop a clear set of selection criteria, understand your short-term and long-term requirements, and cast a wide net to evaluate multiple options. Develop a clear plan and follow a methodical process until you have narrowed down your choices to at least two finalists. Refrain from awarding business until you have, at a minimum, finalized your key contract terms and agreed to how your products will be priced – now and in the future. Even if you are not planning on embarking on any new relationships, validate your existing solution from time to time to ensure ongoing alignment with the direction of your business or product roadmap. This will reduce the likelihood of a hasty selection process when the need arises."

Now, couldn't one insert the word "ERP" instead of "CM" in the above text and it would still make perfect sense? For those who are not quite sure, please check a number of TEC blog posts on software selections and selection projects.

In fact, given that strategic sourcing software vendors like Emptoris offer supplier evaluation and selection tools based on the multi-attribute utility theory quite like our eBestMatch software selection tool does, maybe this could be good food for the thought for TEC's business development folks? But, enough shameless plugging of our selection and decision-making capabilities...

From Whence Came the Findings?

Back to the main premise of this blog post. More than 800 individuals, predominantly senior executives and subject matter experts from a wide variety of discrete manufacturing industries including high-tech electronics, medical devices, consumer products, aerospace and defense (A&D), automotive and industrial segments, responded to a survey that Arena conducted in conjunction with Symphony in 2007 on the challenges of manufacturing outsourcing and the best practices for addressing them.

The research that lead to this white paper revealed that while 85 percent of the manufacturers surveyed outsource part or all of their manufacturing operations, nearly two-thirds of them risk the associated savings because they lack adequate control and processes.

Over 70 percent of the survey participants work for companies that generate less than $250 million in annual revenues and operate with fewer than 1,000 employees. Participants included professionals from engineering (41 percent), manufacturing and procurement (36 percent), and other functional roles (23 percent). These manufacturers still use manual, time-consuming processes such as phone calls, faxes, and emails with spreadsheets.

The high occurrence of errors that often result from these methods can lead to hard-dollar costs that ironically eat up the very savings companies are trying to achieve by outsourcing manufacturing in the first place. In fact, over 52 percent of the companies in the study had suffered from hard dollar losses due to communication and documentation errors including rework, scrapped inventory, excess materials and product recalls.

Perception among these manufacturers is that more effective collaboration with their CMs is critically important and will address these problems. For example, nearly eight out of 10 believe closer involvement and tighter control and processes with their CMs would reduce new product delays. Only 32 percent of respondents currently use a PLM system as a shared information infrastructure to manage product information and share it with their trading partners.

The companies that have a PLM system reported experiencing fewer outsourcing problems compared to companies that rely on manual processes for communication regarding NPI, ECO management and environmental compliance management issues. Three out of four of the respondents who currently use manual processes recognize improvements are needed, and are taking steps to improve their systems.

Underscoring the magnitude of the risk is the common belief that the cost of product changes increases ten-fold each time errors move into the next development cycle, from intial design through manufacturing. Having a PLM system, particularly one that is easy to use and deploy and that helps manufacturers reduce the incidents of late-stage changes is crucial.

The above findings are in tune with the finding of the TEC article entitled Global Product Development Seen as a Boon for Product Lifecycle Management Vendors.

In Part II of this blog post, I will infer Arena and Symphony's value propositions, given that they are not explicitly stated in the paper. In the meantime, you are more than welcome to tell me about your global sourcing challenges and experiences, as well as about your PLM software deployments and use.
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