White Paper MANAGING RISK IN OUTSOURCED MANUFACTURING An E2open White Paper 2 2 3 5 Contents Executive Overview Issues and Challenges of Managing Outsourced Manufacturing Resolution Plan for Key Issues Success Stories e2open.com White Paper: Managing Risk
This white paper outlines some of the management risks and challenges associated with outsourced manufacturing, and summarizes the strategies implemented by companies that have successfully resolved or mitigated these risks. Executive Overview Global outsourced manufacturing continues to dominate the agendas of executives across numerous industries, as companies look for new ways to deliver high quality products at the most cost effective prices. While companies are attracted to outsourced manufacturing models by the lure of reduced operating costs and asset investments, they are also concerned about the inherent challenges and risks associated with this type of manufacturing strategy. Issues and Challenges of Managing Outsourced Manufacturing Many companies have pursued outsourced manufacturing strategies with the objective of achieving lower material costs, asset reductions, and quality improvements. While these are realistic and achievable goals, there are significant challenges and risks associated with outsourced manufacturing that must be addressed in order to realize success. Supply chain executives considering outsourced manufacturing, or having recently adopted an outsourced manufacturing strategy, need to be prepared to address the following top issues: 1. Enabling visibility to outsourced operations When manufacturing is outsourced to remote trading partners, the original equipment manufacturer (OEM) immediately loses visibility over the day-to-day operations, planning, and execution that occur in manufacturing and supplier management. Lack of visibility to outsourced operations is the number one challenge cited by supply chain executives moving towards an outsourced manufacturing model. Without visibility across the extended demand and supply network, executives have difficulty obtaining the information needed to commit to new customer requirements, and struggle to identify production or supply issues in a timely manner. 2. Ensuring continuity of supply With more trading partners participating in the manufacturing process, there are more opportunities for demand and supply to become misaligned. Outsourcing introduces additional tiers of partners to the demand and supply network, increasing the risk of supplier disconnects and threatening supply continuity. Demand and supply disconnects can quickly translate into missed revenue opportunities, customer dissatisfaction, and increased liabilities and expenses due to inventory imbalances. 3. Harmonizing fragmented business processes Establishing, executing, and managing a set of demand and supply network processes is challenging enough in a vertically integrated model, and is even more challenging when additional tiers of partners are introduced in an outsourced manufacturing model. Fragmented processes that are not aligned Page 2
or harmonized across the various tiers of the value network can have expensive consequences, resulting in longer lead times, missed customer expectations, poor delivery performance, and lack of accountability. 4. Establishing common performance metrics and indicators Supply chain executives have worked for years to align internal performance metrics and incentives to support customer delivery performance, satisfaction, and cost targets. Outsourced manufacturing amplifies this challenge as it requires the respective performance goals and incentives of your trading partners to meet the end customer objectives as well. Even if a shared process is agreed to, without shared performance metrics and incentives, trading partners may not be motivated to work towards collaborative processes and objectives. 5. Managing extended cycle times One of the potential trade offs associated with outsourced manufacturing is longer cycle times, as planning and execution information must be communicated across multiple tiers. Propagating demand and supply changes across multiple tiers is significantly less efficient than a vertically integrated model unless all trading partners are connected along a single platform and able to communicate in real time. Ensuring that demand and supply information can be rapidly aligned across multiple tiers is a critical capability for OEMs hoping to maintain the flexibility needed to respond quickly to changing customer needs. 6. Managing increased demand and supply network lead times and logistics costs In many cases, outsourced manufacturing strategies are combined with globalization initiatives designed to capitalize on the purchase and labor cost advantages of low cost countries. As a result, most outsourced manufacturing partners are geographically remote (from both the OEM and target customers), increasing the complexity of the demand and supply network, and potentially leading to increases in lead times and logistics costs. An OEM that is unable to track in-transit materials and manage lead times across multiple tiers is likely to experience reduced revenues, increased expediting fees, poor delivery performance, and overall customer dissatisfaction. Resolution Plan for Key Issues 1. Define common business processes Define a set of business processes that span the multiple tiers of the global demand and supply network. An outsourced model often requires a rethinking of how the planning and execution of procurement, inventory management, replenishment, fulfillment, and returns processes should work between all partners to meet the end customer s needs. Multi-tier processes require significant planning and Page 3
coordination; an effective value network cannot be generated simply by stringing together multiple single-tier processes in serial fashion. 2. Define joint performance metrics and align incentives Define joint performance metrics that are tied to results with the end customer. This ensures that all trading partners are aligned according to the end customer s objectives, instead of according to the optimization of their individual function or role. Once the joint performance metrics are defined, outline how the processes will be measured and monitored by all participants according to a common source of accurate and timely information. Companies should also explore shared risk and rewards models based on overall performance in meeting the end customer s objectives. 3. Align the organizations Align the management and operations teams across all tiers of the demand and supply network in order to support the processes and performance metrics defined. Understanding how the various processes will be measured, how often, and what communication paths are in place in the event of operational problems or disruptions is essential to the successful management of your value network. In order to enable these capabilities, many OEM s establish centralized control towers comprised of key representatives from each trading partner. This group is responsible for monitoring, managing, and improving the end-to-end processes on an ongoing basis. 4. Establish partner agreements Draft a set of partner agreements to capture the commitments and appropriate functions of all participating trading partners. These agreements must be updated to reflect changes in processes, trading partners, or program objectives. 5. Deploy a shared process and information platform Deploy a shared process and information platform to support the multi-enterprise demand and supply network. This will ensure that all processes are executed properly across multiple tiers, and that information is available (to the appropriate parties only) in an accurate and timely fashion. A shared platform can also be utilized to eliminate data latency, to identify potential problems and exceptions before they have material impact, and to measure trading partner performance against predefined metrics. Common performance scorecards and executive dashboards allow all partners to track and manage relevant performance metrics and criteria. 6. Enable all partners to adopt processes Executing the recommendations in the previous five steps is only effective if all trading partners are able to adopt and participate in the relevant demand Page 4
and supply network processes. An effective approach includes training and technical onboarding of all global partners to ensure timely rollout and proper participation in all end-to-end processes. The common information and process platform should enable participation regardless of the technical sophistication of individual trading partners, and should leverage existing integration capabilities to minimize cost, time, and risk. Success Stories Globalization, global manufacturing, and outsourcing represent permanent paradigm shifts for companies involved in manufacturing today. While many companies are still in the beginning stages of outsourcing, others embraced the paradigm shift early and have transitioned successfully to global outsourced models. The following case studies provide examples of companies that have experienced success in transitioning to models that leverage global manufacturing partners. Motorola Motorola is known around the world for innovation and leadership in wireless and broadband communications. With a vision of seamless mobility, Motorola is involved in the design and manufacture of products that allow its customers to connect to the people, information, and entertainment that they need every day. In order to bring best quality products to market at competitive prices, Motorola moved to a global manufacturing model that leverages multiple outsourced manufacturing partners around the world. Their global manufacturing model gives them increased flexibility to meet changing demand patterns and to quickly scale new products. One of the challenges for Motorola was to leverage world class manufacturing partners while still maintaining control over the end-to-end processes of its value network. Supply chain executives worked to define a new set of planning and procurement processes that would enable collaboration between Motorola, its outsourced manufacturing partners, and key component suppliers. As part of these unique processes, Motorola owns the contractual relationship with the critical component suppliers, while its outsourced manufacturing partners are responsible for the day-to-day process execution and movement of materials. Through a highly coordinated set of buy-sell processes, Motorola is able to retain control of critical component relationships while leveraging the manufacturing expertise of its outsourced manufacturing partners. To execute the processes in an automated fashion, Motorola deployed a common process and information platform. The multi-enterprise platform manages forecasting, buy-sell, and drop-ship processes in real time between multiple tiers of trading partners. Page 5
Motorola attributes its success to having representatives from its various trading partners play an active role in defining and measuring end-to-end processes in the demand and supply network. Electronic integration to a common multienterprise platform was also critical to the success of Motorola s outsourced manufacturing model. IBM IBM has one of the largest and most complex demand and supply networks in the world, working with more than 33,000 suppliers and 45,000 business partners, and spending over $41 billion annually on orders for more than two billion component parts. IBM s value network is responsible for lead management, the creation of customer proposals, component sourcing and procurement, manufacturing fulfillment, customer service, billing, accounts receivable, and aftermarket services. While IBM has long focused on creating and building an integrated, end-to-end demand and supply network, it also wanted to invest in new levels of collaboration. To achieve its value network goals, IBM needed to extend the integration of business processes to include multiple tiers of its extended network. In the past, IBM relied on suppliers and partners reports and management systems for visibility into its own demand and supply network. IBM operated in a reactionary mode, relying on its outsourced manufacturing partners to provide self-reporting and supplier end-of-quarter information. After extended analysis, IBM identified specific pain points in two key areas: synchronization of demand and supply information, and visibility into tier two and three trading partners. The company partnered with its tier one suppliers to establish a set of multi-tier business processes and common business metrics. They then deployed a shared process and information platform to support all of IBM s global manufacturing sites and divisions, and to provide visibility and control across multiple tiers of trading partners. The shared solution synchronizes demand and supply information across partners, tracks supplier commitments, monitors supplier inventory levels, triggers replenishment cycles, and helps to ensure continuity of supply. By defining key demand and supply network processes, aligning intercompany organizations, and implementing a shared process and information platform, IBM gained visibility and control across its extended network of trading partners. Working seamlessly together, IBM and its suppliers now have a consolidated view of customer demand, available supply, and potential imbalances across 85 percent of IBM s manufacturing procurement expenditures. Page 6
About E2open E2open is the leading provider of software and services to manage inter-company processes such as inventory management, order management, demand/supply forecast synchronization, outsourced manufacturing visibility and multi-tier visibility integrating trading partners across multiple tiers of distributed global supply and demand networks. For more information, call 1.650.645.6500 or visit www.e2open.com. Published: 2009 E2open, Inc. E2open and the E2open logo are registered trademarks of E2open, Inc. Customer legal disclaimer goes here. All other marks are trademarks, service marks or registered trademarks of their respective owners. All rights reserved. Offices E2open U.S.A. Corporate Headquarters Foster City, CA Dallas, TX Austin, TX E2open Europe Reading, UK E2open Malaysia Kuala Lumpur, Malaysia E2open Taiwan Taipei, Taiwan Page 7