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

Written By: Predrag Jakovljevic
Published On: June 25 2008

Part I of this blog post analyzed the white paper entitled "Manufacturing Outsourcing: Seven Common Pitfalls to Avoid" , authored by Symphony Consulting and Arena Solutions. It also established an intrinsic connection with product lifecycle management (PLM) software technology as a global sourcing collaboration enabler.

Indeed, several macroeconomic trends seem to be helping the PLM market, starting with the rampant offshoring of facilities and/or expansion of outsourcing and contract manufacturing overseas. There are also escalating mergers and acquisitions (M&As) within multiple business sectors and the inexorable spate of regulatory and compliance mandates within many industries and geographic regions.

This dovetails into the relentless pressure for companies to innovate and bring ever more functional (if not even "ever-cooler") products, that have ever-shorter lifecycles, ever more quickly get to the market, and thus differentiate, especially in the electronics/high-tech and consumable packaged goods (CPG) sectors.

So, How Can Arena and Symphony Help?

While not explicitly stated in the paper, my logical conclusion is that the Arena PLM suite [evaluate this product] could enable original equipment manufacturers (OEMs) and their global supply chains to streamline outsourcing, improve operational efficiencies, and speed time-to-market.

To be more precise, a PLM infrastructure can help with the issues of poor NPI project management, inadequate ECO processes and infrastructure and broken environmental compliance management.

The research showed even greater advantages came from using on-demand PLM software (also known as software as a service or SaaS) versus traditional client/server on-premise systems. Namely, on-demand software requires no special hardware or information technology (IT) staff, is easier to deploy than traditional on-premise client/server software and is accessible from anywhere in the world through an ordinary Web browser and Internet connection.

Specifically, the survey respondents who use on-demand Arena PLM reported 40 percent fewer hard-dollar incidents related to excess inventory and unplanned rework. Leading to these results were Arena PLM users who responded to the survey reporting significantly fewer outsourcing problems than when they were using traditional client/server PLM, including:

  • 32 percent fewer problems with new product introduction (NPI);

  • 29 percent fewer problems with environmental regulatory compliance; and

  • 26 percent fewer problems with frequent product changes management.


Well, the likes of Omnify Software, which offers its inexpensive on-premise web-enabled Empower PLM suite [evaluate this product], with behind-the-firewall protection for internal users and secure Web access for external users, and Oracle Agile PLM, which offers a hosted model besides the on-premise one, will vehemently disagree and counter-offer their case studies and whatnot.

Still, about 300 Arena PLM on-demand customers could vouch for the simplified collaboration point the vendor is trying to make here.

Creating "Symphonic" Supply Chains

For its part, Symphony Consulting is a Silicon Valley-based company that provides strategic supply chain, procurement, and manufacturing outsourcing expertise to help high-tech companies reach their financial and operational goals. Symphony's strategic consulting services and in-depth training workshops on advanced supply chain methodologies aim to show companies how to enhance revenue potential, increase profitability, and reduce inventory liability.

While the company can help with remedying all of the seven outsourcing pitfalls listed in Part I, it is more likely that its services revolve around selecting the right supplier, improving on the ineffective quote-and-go approach (with contract negotiation), and revealing and eliminating the hidden costs of going offshore. Outsourcing or transferring production offshore is not for everyone, especially in light of the over $4 per gallon gas prices of today.

Therefore, the total cost of ownership (TCO) model should encapsulate not only the list price OEMs pay for the product, but also:

  • the transportation strategy (air versus ocean) that they will employ based on their product lead time and demand profile

  • in the case of ocean freight, the cost of carrying inventory due to an extended lead time

  • the cost of supply buffers that an OEM will need to put in place at various points in the supply chain in order to respond to demand upsides

  • the overhead required to manage an off shore manufacturing partner

  • not losing sight of the OEM's increased level of inventory liability due to the longer transportation lead times


At the end of the day, the white paper concludes (and I concur) that outsourcing can be successful only if OEM's have the right strategy, processes, people, and tools to maintain control of their businesses. Even more, without setting some strategic assumptions beforehand and instituting right policies, even the best PLM software system will not help much.

That is to say that OEMs should know and have the answers beforehand to issues like, for example, what role has volume played in the pricing received from the component suppliers? How will purchase price variances be managed, and what minimum order quantities apply to each component? Have any approved vendor list (AVL) or approved manufacturer list (AML) substitutions been made? What assumptions were used in quoting the product, or what cost improvement opportunities may there be in the future?

Furthermore, what are the cost drivers in the OEM's bill of materials (BOM) so that it can plan for cost reduction initiatives? How are material mark-up and factory overhead allocated to the products, and are they are commensurate with the rates in the geographic region in which the products are manufactured? How will new products be priced in the future, and is the contract manufacturer (CM) quoting a price they can sustain, or is it just “buying” the business initially and then planning to raise prices when it has secured the business?

If these issues were not overwhelming enough, then how about what inventory turns were assumed during the quoting process? How is the CM using vendor managed inventory (VMI) and how does it handle Kanban, including bin sizing, engineering change order (ECO) management, and buffers? How is the purchasing order policy being managed: through the traditional ABC categories, or by a more modern approach? At what point in the supply chain does the ownership of the finished goods inventory transfer? Are all transportation costs such as freight, taxes, and duties included, or will they be invoiced separately?

Last but not least, what is the scope of the CM’s warranty, and for what period of time are the products covered? What is the cost structure for repairing products that are outside of warranty? How do quality-related metrics such as yield and part-per-million failure rates play into the OEM's TCO? Are transportation, duties, tariffs, prototyping costs, engineering services, and RMA (return material authorization) services taken into consideration?

Symphony Consulting seems to be happy to oblige OEMs with its "know-how" about the abovementioned issues. A future blog post will focus on Arena's PLM value proposition. Until then, you are welcome to comment on your global sourcing challenges and experiences, as well as your PLM software deployments and use.
 
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