The dramatically lower labor costs, higher level of talent, and growing track record of offshore business process outsourcing (BPO) and application development and maintenance (AD/M) providers, have convinced many companies to outsource their business process and software development activities (see Outsourcing 101—A Primer). For a company considering an outsourcing strategy for their supply chain planning (SCP) processes, there are some unique aspects that should be addressed, since both BPO and AD/M may come into play.
First, the quality and performance of SCP solutions are critical to the success of most manufacturers. SCP solutions augment the abilities of supply chain planners to improve service levels while maintaining or reducing the total cost of delivery. In the complex, global supply chains of today's world, these planning tools have the potential to deliver tremendous savings when well implemented, or to wreak tremendous havoc when they fail. Placing responsibility in the hands of an outside party for the design and daily operation of these applications means that a company is surrendering a great deal of control over its supply chain performance.
Second, these solutions must be updated on an ongoing basis to reflect changes in the supply chain and to take advantage of improvements in technology. That means the people who maintain the solution must be equally well-informed about technological advancements and the company's supply chain processes. If the business rules and solution model is not well maintained, the initial gain of competitive advantages may erode over time. Relying on an outside vendor to supply the resources for operating the solution model creates additional risk.
Criteria for Evaluating Outsourcing Potential
At a high level, there are a number of frameworks for evaluating outsourcing decisions. The graph below is commonly used during supply chain assessment projects. It uses alignment of a process with the business strategy, and the current level of performance (relative to industry leaders), to classify processes.
Business processes which are not crucial to achieving an organization's strategic objectives, and which are performing less efficiently than processes a leading outside provider could deliver, are typically the best candidates for business process outsourcing. This corresponds to the low performance-low strategic importance quadrant of the graph above. Payroll and accounts payable are prime examples of processes that fall into this category for many companies. The customer typically does not see or interact heavily with these processes. On the other hand, outside providers have the scale and expertise to perform these functions for a lower cost, with a high degree of reliability.
Processes rated as having high strategic importance are central to achieving the mission and objectives of a company. To compete effectively, these processes demand a high level of performance. When these processes are underperforming they must be reengineered or outsourced. Outsourcing may be appropriate when there is limited opportunity for differentiation and competitive advantage. Common examples include shipping and logistics. A number of third-party logistics providers exist who can provide a level of service and economy of scale that would not be possible for many individual companies.
Strategic processes that typically provide greater opportunities for differentiation include forecasting, master scheduling, production scheduling, and order promising. Handing the operational development and maintenance of these strategically important business processes to a third party decreases the level of control over performance. It also requires sharing supply chain strategies with a third party. Both of these factors may impact the ability to maintain a competitive advantage over the long term.
SCP Applications Tend to Be Critical to Achieving Business Objectives
Unless a manufacturer is in the enviable position of having no competition, or demand that far exceeds supply, its ability to deliver the right product at the right time and the right price will help separate it from the competition. That means it must be able to coordinate the performance of its entire supply chain.
The term supply chain implies a fixed, linear set of entities aligned to manage the sourcing, production, and delivery of products and services. However, today's supply chains are more like networks than chains. Customers are located around the globe, which means a company's distribution network must be similarly located. Outsourced manufacturing (i.e., contract manufacturing) may be used to handle peaks in production, or entire lines of product. Multiple manufacturing locations may be involved in producing a single end item. The supplier base may span the globe as well. Maximizing the performance of these supply networks is impossible without systems and tools. The complexity of the network is more than a planner working with spreadsheets and rules of thumb can handle. This is why advanced planning and scheduling tools have become strategically important.
Forecasting, scheduling, and planning tools linked to transactional data in enterprise requirements planning (ERP) systems can have dramatic impacts on customer service levels, inventory costs, production costs, throughput, and administrative costs. When the solution is well designed and well implemented, the impossible becomes possible. Finished goods inventory turns can rise while service levels improve, throughput can increase while work in process falls, and output can improve without investment in capital equipment. These become the sources of true competitive advantages in an industry. Understanding how to maintain these solutions to optimize the supply chain is something that should reside within the control of the organization. Otherwise, the ability to sustain any competitive advantage is at risk.
Failure to properly design and execute a supply chain solution can have disastrous results. The well publicized case of Nike's supply chain systems rollout in 2000 is a good example. An error in the demand plan published to Nike's suppliers cost Nike an estimated $100 million (USD) in lost sales, and a 20 percent drop in its stock price. On the other hand, this did not derail Nike's supply chain system implementation. Over the next four years, they made significant progress in reducing production lead times from nine months to six months. Nike believes that its supply chain strategy is a vital link in maintaining its leading position in the industry, and has stuck with the project despite the initial glitches. (Koch, Christopher. 2004. Nike Rebounds. CIO Magazine. June 15. http://www.cio.com/archive/061504/nike.html [accessed September 21, 2005].)
SCP Solutions Are Supply Chain Specific and Require a Different Support Model than More Standard Applications
Vendors continue to create industry templates as an attempt to simplify SCP implementations. Embedded in the templates are predefined strategies for common planning issues that might need to be addressed in a given industry. But the nature of SCP applications defies such "cookie-cutter" implementations. SCP solutions are specific to each supply chain, and this is the reason they are able to deliver such significant results. Developing an effective supply chain solution requires a deep understanding of each company's supply chain processes and objectives. Supply chain applications model the real-life constraints of the supply chain. If constraints are overlooked or not represented accurately, then the plans will not deliver realistic results. If the optimization objectives guiding the solution are not in line with the goals of the business, then the plans will not deliver the expected benefits. The business users of the application must work hand in hand with the developers of the solution to ensure these benefits and results. The SCP solution development process tends to be iterative in nature. It relies heavily on the use of prototype sessions with the business users to validate the accuracy of the design and the technical feasibility of the solution.
Given that SCP solutions are representations of a specific supply chain, and that supply chains change constantly, maintenance of the solution is critical. An up-to-date model is required to keep plans valid and to build on the benefits of the initial implementation. As planners work with an SCP solution over time, they will learn more about its capabilities. This will generate more ideas about how to increase the value delivered by the systems. The supply chain solution needs to be as dynamic as the supply chain itself. The resources who developed the solution are the ones who are best equipped to identify the point at which changes are warranted, and to implement those changes in the software.
While it is acceptable, and even preferable, to outsource the development and testing of a company's SCP software code (see The Many Flavors of Application Software Outsourcing), the same may not be true for the SCP business rules. The ability to support a SCP solution over the long term depends on keeping the personnel that developed the business rules for the solution available to the organization. If a company relies solely on outside resources to develop and support their business rules, they have much less control. Turnover in consulting and outsourcing organizations tends to be much higher than in other industries. Relying on an outside vendor to select and train a backup support person is also not sufficient. The secondhand training they receive is unlikely to convey the detail and business context required for understanding the solution well enough to make independent changes or to confirm that the results of changes are accurate.
Keeping the solution running on a daily basis also requires an understanding of the data coming from the transaction systems. Changes to the format of this data, or to the meaning of this data, will impact the ability of the SCP solution to run, or to stay meaningful. The person maintaining the business rules in the system needs to understand the business context of the transactional data, and to know how to modify the structure of the model to represent changes in the supply chain. This breadth of knowledge is difficult to maintain outside the organization. A typical worst-case scenario occurs when the overnight planning run fails, and the original resource from the outside provider—the resource that developed the solution model and initially supported it—is no longer available. The current support person doesn't know the model well enough to single-handedly diagnose the problem. The planner or scheduler who shows up in the morning has to manually issue schedules while assisting the outside provider in diagnosing the problem over the phone.
- Evaluate each component of the supply chain (manufacturing, planning, and logistics) separately to determine whether the best course of action is outsourcing, or maintaining in-house expertise.
- Assess which activities and business processes are central and which are not.
- Consider leveraging low cost offshore resources to perform some software development and testing, and other non-core activities.
- Evaluate and consider outsourcing shipping and transportation to best-of-breed logistics providers.
- If manufacturing is not a core competence and market differentiator, then consider outsourcing it to a contract manufacturer.
- If supply chain performance and optimization is an important competitive aspect in the marketplace, then outsourcing the development and maintenance of the business rules and solution model may not make sense.
- Make sure the resources that are responsible for maintaining the business rules and solution model thoroughly understand the supply chain, transactional systems, organization issues, and business strategy, as the integration of these elements are crucial to optimizing the supply chain solution model.
About the Authors
A.B. Maynard has over twenty years of technology, operations, technology, application software and management consulting experience. He is a proven leader, with executive experience in the software industry, Big 4 Consulting, and Fortune 1000 industrial companies. A.B. serves as the outsourcing analyst for Technology Evaluation Centers, and is president of Agilocity Consulting, a firm dedicated to helping companies improve their performance and profitability by driving positive change through the intelligent use of strategy, technology, outsourcing, and offshoring.
A.B. has a master of business administration from Villanova University (US) and a bachelor of industrial engineering from Georgia Tech (US), and has been CPIM-certified by APICS. He can be reached at firstname.lastname@example.org
Ron Boling is a management consultant focused on aligning processes, technologies, and people with business strategies. Ron has over fifteen years of practical experience in strategy development, business process analysis, business process reengineering, requirements definition, vendor selection, internal controls analysis and IT Governance. Ron has worked as an executive in a Big 4 consulting company, and in a supply chain software company.
Ron is a principal with Agilocity Consulting. He focuses on aligning IT strategies with their business partners' objectives, and on creating business processes that can achieve strategic objectives.
Ron has a BS in electrical engineering from North Carolina State University (US). He can be reached at email@example.com.