The difficulty often lies in minimizing the risk of the outsourcing decision. One sure fire way to reduce the risk is by treating your partner as an extension of your business,, whereby, information is shared freely without latency. A company cannot make good decisions based on data that is a week old. Supply chain executives will often challenge receiving data related to the outsourcing process since managing that part of the business is what they are paying their partner for. That is true, but if you are accountable to your customer, you need to have some level of understanding of your business including (and especially) the outsourced pieces. Be selective on what you need to see, but see it often! Let your systems monitor the business and alert you when you need to take action.

The article refers to the due diligence that must be performed when selecting the right partner, aligning strategies, and considering more than cost when making your selection. This is very true – you can pull the trigger on an outsourcing partner relatively quickly, but pulling out work and moving to another partner can have serious consequences, affecting fulfillment and cost.

Service level agreements (SLA’s) are critical along with creating the appropriate key performance indicators (KPI’s) to track performance and project future performance. For example, if your partner is manufacturing for you, and you provide them with a new forecast, you need to understand the implications of that forecast before execution commences. You may have just created an obsolescence issue worth millions of dollars that could have been mitigated if you knew sooner. This is why visibility into your partner’s operations is so important in this example. Often when things go wrong in an outsourcing model, there is considerable finger pointing, and resources are wasted tracing back to root cause. The end result is non-value added activity. Understanding how your actions today will impact all of your KPI’s now and in the future eliminates this waste. Look forward rather than backward.

An important aspect of any outsourcing relationship is trust. Progress is being made. However, this will continue to be a challenge as both parties are so focused on their own profit and loss. My colleague, Trevor Miles, has made some excellent points on this topic in his post: Do you trust yourself to collaborate? The real barrier to collaboration is not technology, but trust.

Companies that have struggled with outsourcing or are considering it as a new strategy will benefit from the referenced article.

What are your thoughts on outsourcing?

This incident hammers home the point that the companies we contract to build our products become extensions of our brand. If the company does something unethical, illegal or environmentally damaging, the brand owner is mired by the contractor’s actions. The problem is that as a brand owner you may feel that you have limited influence on your subcontractor as they are a separate corporate entity.

Let’s look at how you can address this;

1) It’s more than just price – Look beyond the price point and consider the total cost of contracting with this company. If they are the lowest cost, perhaps there is a reason. Perhaps they achieve their low cost through shoddy quality, through unethical business practices or through irresponsible environmental behavior.

2) Hold the contract manufacturer to the same standards that you hold yourself. Remember, they are an extension of your brand. If you have environmental or ethical policies, make sure that your contract spells out that they are expected to follow these policies. Further, stipulate that failure to follow these policies would be considered a breach of contract.

3) If you are holding your contract manufacturers to your standards, make sure that you do periodic audits to ensure that they really are adhering to the standards you’ve set. At a minimum, go to the place where your product is being made and observe how things are done.

4) If there are environmental standards or certifications applicable to your industry, look for contractors that have achieved those certifications. This can make life much simpler as the certifying organization is now responsible for auditing.

When we close our factories and have product made for us by another company, we are giving up a lot of control. If you partner with the wrong company, it’s not just cost and delivery that can be hurt; it’s your company’s hard won reputation.

How do you ensure that your contract manufacturer is protecting the image of your brand? Comment back and let us know!

The trade off is cost versus speed as to how to get the goods from Asia to North America: via air or sea.  In an ideal world, and especially for bulky items, freight by sea is the most cost effective option and is used as the default shipment option.  Shipments by sea can take around a month or even longer to reach the destination.  Therefore, there are times when shipments need to be expedited to meet demand and air freight must be used.  This is a classic supply chain problem: how to balance transportation costs against demand and supply.

Once the decision to put the materials on a boat is committed to, these materials are basically unavailable for a month or more.  This can be a real problem to have this in-transit inventory tied up when these materials are needed to fulfill shortages or customer demand.

Many ERP systems have modules available to help manage transportation, and there are also third party logistics applications or Transportation Management Systems (TMS) on the market that can be “bolted on” as well to assist with transportation management.

However, some companies struggle with the issue of transportation, primarily because there are multiple considerations:

1. Which orders should be expedited to use air shipment?
2. Is the cost of the expedited shipment worth it?
3. How do you effectively communicate to suppliers which orders to expedite?

Related to item 1, we need access to planning information to determine orders that potentially are late to demand.  Adding in item 2, we need to be able to evaluate the cost of expediting against the additional revenue that can be realized in the current period with the expedited order.  This implies that some sort of simulation capability needs to be present to model the change in the supply plan and how that will impact the fulfillment of demand.  Item 3 has to do with the actual execution, purchase orders may need to be updated or at a minimum the change in shipping method needs to be clearly communicated to the supplier.  The considerations or dimensions of the problem can be summarized as

• plan/simulate,
• calculate cost, and
• execute. 

Many of the third party or extended modules available on the market today can only handle one or two of the three considerations.  Therefore, the above considerations require a “one to many” solution. The ideal solution is to have an application that enables all three of the dimensions: determining what needs to be expedited and the resulting impact on revenue and customer service; calculating the cost and benefit; and effective communication to suppliers and execution.

I am curious if you have any insights as to how you have (or suggested approaches) solved this multi-dimensional problem of transportation management?

There was an interesting article in Industry Week last month suggesting that the US was becoming a low-cost country for manufacturing.  Well, I guess it all comes down to how you spin it.  Let’s look at what’s happening;

• According to the article, Chinese wages are rising by 17 percent per year.
• The value of the Yuan is increasing.
• Many states are offering incentives to bring manufacturing into the state.
• Unions and workers are more willing to provide concessions in order to get back to work.
• The estimate from the article is that net labor costs in China and in the US will converge by 2015.

The article goes on to point out that several companies including Caterpillar, NCR, and Wham-O are bringing production back into the US from Mexico and China.

Given these factors alone, you might make the argument that the US is becoming a low-cost country for manufacturing.  I don’t think that is a fair assessment because the next logical step in the argument would be that if the US were becoming a low-cost manufacturing center, other countries will start manufacturing their goods in the US. I don’t think that is likely to happen. I think what really is happening is that China is pricing themselves out of the low-cost advantage they’ve had for years. As we start coming close to cost parity, other factors are making local manufacturing more attractive.

The on-shoring or near-shoring movement is gaining speed. This is the idea of bringing manufacturing back to where the demand is. A blog post in Plastics Today points out that according to management consulting firm Accenture, “Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers’ expectations across a wide spectrum of areas, such as being able to rapidly meeting increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs,” and that “managing supply operations that are separated far from where demand occurs has weakened their overall operational planning, forecasting and general flexibility, while in some cases driving up costs with the need for complex network management. In some cases, this situation has limited the companies’ competitive advantage.”

Let’s look at some advantages of putting manufacturing where the demand is;

• Time to market can  be significantly improved
• Less risk to intellectual property
• Lead times are reduced and are more consistent
• Given reduced and more consistent lead times means inventory levels can also be reduced.
• With fuel prices going through the roof, reducing the overall distance traveled for our manufactured goods can only help the bottom line.
• Reduced product travel also impacts the overall carbon footprint for the product, a factor that is starting to become more and more important in the eyes of the consumer and governments.

I’ve always been in favor of manufacturing near where the majority of the demand is (See my blog post from last year here). I think when companies look at the overall costs associated with offshore manufacturing, more will realize that manufacturing where their market is just makes sense (and dollars too).

Are you currently manufacturing offshore? Are you considering moving your manufacturing back to North America? Have you moved already? Comment back and let us know!

I am referring of course to the blog titled “Low cost of labor – How long will it last?” published by Monique Rupert, who is a good friend and colleague, in which she refers to an article by Dan Gilmour of Supply Chain Digest titled “Rethinking China.” It is tough to disagree with a friend and colleague, but I feel I must, but perhaps more so with the original article by Dan Gilmour. In his introduction Dan apologizes for being political in his column. I must too, though I would hope that both of us are more in search of solutions than being political. It is less the factual evidence Dan provides to which I disagree than the sentiment. For decades the US has railed against closed economies and through its dominance of the World Bank has enforced (I use the term loosely) its version of market economics on countries without the social and political structures to absorb the huge economic shocks and resultant social consequences on countries that had to come begging to the World Bank.

No, I am not a socialist. In fact I am a lot closer to a believer in market economics. But there are times when a less purist interpretation of market economics can lead to less human suffering. I know, I know: Market economists will argue that slow change is only postponed pain. Perhaps. But isn’t it market economics that Monique and Dan are arguing against?  The relentless rise and rise and rise of China as an economic power driven by the need to find ever cheaper sources of supply for the western economies?

I am a British citizen, so I am well acquainted with the slow and steady decline of power and influence. While my 15 year old daughter would be surprised to hear that I did not live during the Victorian era, which was the height of British power and influence, I have experienced the dramatic shift in the manufacturing power of the UK over the past 50 years. It is not an easy thing to live through and accept.  As late as the 1950’s the UK was the second largest car manufacturer in the world and the largest exporter of cars. One has only to look at the figures for the last 10 years to see the continued decline to the point that there isn’t a single UK based mass production brand left and the number of vehicles produced dropped 22 percent between 2000 and 2010.  You can just imagine what the combination of declining volumes and increased efficiencies have done to the employment figures.

Source: http://www.smmt.co.uk/reports-publications/industry-data/

And yet there can be no question that the general standard of living in the UK has increased tremendously over the past 50 years, largely driven by the financial sectors and entertainment, but also by the general growth of the world wide economy.  There is no doubt that many individuals have suffered tremendously over the past 50 years as the manufacturing base dwindled to almost nothing.  According to the World Bank the UK economy as a whole grew, very well in fact. In comparing the economies I used the value of “GDP per capita (current USD)” which the World Bank defines as:

GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars.

When we compare the US, the UK, and China over the past decades we can see that the UK experienced greater GDP per capita growth than the US, but China has lagged quite far behind until as little as 10 years ago. The GDP per capita growth is measured from the base of 1960, not the year-on-year growth because I wanted to illustrate the overall increase of the quality of life (using GDP per capita as a proxy) in the UK while the manufacturing sector has shrunk considerably during this period.  The second graph illustrates that the GDP per capita in China is still only about 10 percent of the GDP per capita in the US, despite the huge gains over the last 10 years.

http://data.worldbank.org/country

In other words, the emergence of China as a world economic power does not represent a zero-sum conundrum for the US and other western economies.  The average Joe in the street may still see an increase in standard of living while the relative economic and political power of the US is diminished.  One only has to read “Guns, Germs, and Steel” by Jared Diamond to understand the inevitable ebb and flow of power over the millennia to understand that absolute pre-eminence is difficult to maintain. It simply costs too much to maintain a country’s preeminence.  According to Wikipedia it won a Pulitzer Prize and the Aventis Prize for Best Science Book in 1998, so there are plenty of people in the US who thought very highly of the book.  There is also an excellent short discussion of the book on the PBS web site.

There is a great article in the December 2, 2010 edition of The Economist  titled “The dangers of a rising China” which probably requires a subscription to read on the internet. After discussing some of the threats posed by China, the authors go on to state that:

Pessimists believe China and America are condemned to be rivals. The countries’ visions of the good society are very different. And, as China’s power grows, so will its determination to get its way and to do things in the world. America, by contrast, will inevitably balk at surrendering its pre-eminence. They are probably right about Chinese ambitions. Yet China need not be an enemy. Unlike the Soviet Union, it is no longer in the business of exporting its ideology. Unlike the 19th-century European powers, it is not looking to amass new colonies. And China and America have a lot in common. Both benefit from globalisation and from open markets where they buy raw materials and sell their exports. Both want a broadly stable world in which nuclear weapons do not spread and rogue states, like Iran and North Korea, have little scope to cause mayhem. Both would lose incalculably from war.

Let us hope that “cooler heads” prevail on both sides of the US-China divide. Quite honestly I believe it is a matter of giving a little to get a lot, not only for the US and China, but for all western economies as well as the other BRIC countries.

But let us get back to more prosaic discussions of supply chain management. Yes, as Monique and Dan point out, it is at the heart of the manufacturing and economic power shift we are seeing. This is because an efficient supply chain makes it economically viable to use labor half way around the world and still bring the product to market more cheaply than before. Of course cheap labor costs make a huge difference, but if efficient supply chains did not exist this would not matter. Either the cost would be too high, eroding the advantage of a lower cost of labor, or the product would arrive in the market too late to capture changing trends in consumer buying patterns. But let us not forget that the rise of the British Empire was as much to do with the development of rail and the power of the British merchant marine fleet as it did with the Industrial Revolution. There is no doubt that the Industrial Revolution had an enormous impact on the efficiency with which raw materials were converted into finished products, but this would not have amounted to much if raw materials couldn’t be brought to the factories from around the world quickly and efficiently and finished products couldn’t be shipped to markets around the world quickly and efficiently. Of course by today’s standards the supply chains of the mid-1800’s were incredibly slow and inefficient, but at the time they provided huge leaps in productivity.

However, the UK wasn’t just a consumer market, it also controlled the means of production and the innovation that arose from that. As Dan and Monique point out, this isn’t the case for most western economies today, perhaps with the exception of Germany.  Only time will tell if this will lead to absolute decline rather than relative decline.  I know I am hoping and praying for relative decline.

I work with many large OEM’s based out of North America, almost all of which are publicly held corporations who must answer to Wall Street each quarter. That is why much of their supply chain is either outsourced or done in Asia. This is nothing new.  For years we have seen outsourcing in all types of areas to help companies improve their bottom line.  Being in the IT business for the last 20 years, there has been a huge trend to outsource IT services to India and the results have been mixed.  Companies were (and still are) willing to take some inefficiencies in effort because of the low cost labor force. For example, offshoring work typically requires more effort, perhaps up to two times than what it would take to get it done locally.  In fact, I noticed many companies being forced to use this labor force because it looked like a competitive advantage for their company.  If you weren’t outsourcing then there was a school of thought you were paying too much money for services and you weren’t using best business practices. Over time and with experience, many times bad, companies have tried different strategies to make it work, and it has for many companies.  But some companies have determined that they wanted less inefficiency and possibly higher quality so they bring some of the resources to North America to do some or all of the work which can be significantly more expensive. Many of the large Indian IT firms will propose a mixed model of some work onsite and some offshore. In addition, with the boom of the IT industry in India, the labor costs are increasing and those costs are being passed on to the companies.  So as the cost increases for Indian resources, there is a new quest to find the next low-cost, high skill labor pool.

The author of “Rethinking China” shows that over the last 12 years, the trade deficit between the US and China has increased by 400 percent. Wow, that is a staggering figure particularly when you consider that the majority of that deficit is China manufacturing finished goods and shipping them to US vs. commodities. Obviously, this has taken many jobs from the US economy, however, one could argue that our labor force can do higher value work. Much of the manufacturing that these companies have shipped to China is labor intensive work because their labor cost is so low. But perhaps as the Chinese economy grows, the labor force will insist on higher wages and better working conditions, which would likely increase costs to the North American based companies. Perhaps there is a difference in quality as well. I have noticed some companies trying more mixed manufacturing methods where they send some of their people to supervise the plants in China or take part of the manufacturing back in house.

It will be curious to see how the industry looks in ten years. Will companies be looking to other countries for low cost manufacturing labor costs as the labor costs rise? Which countries will those be? Will there be quality issues in manufacturing? Will there be consolidation of the manufacturing in China to a few high quality companies? Clearly the trend of outsourcing is here to stay but the model of who does it, how it looks, and where it happens may change over time. Will the IT outsourcing experience parallel the outsourcing of manufacturing? I am interested in your experience and predictions.

Having struggled for a week with, and been embarrassed by, my non-existent Mandarin, I am happy to report that I did see the future at the Shanghai airport while checking in for my flight to Frankfurt. Next to me was a 25-30 year-old German speaking in what I can only assume to be fluent Mandarin. I wish I could report that he was speaking Mandarin with a German accent, but I regret to say that I could not tell.  He was the first Westerner I had come across in my week in China who did not speak Mandarin like I speak French: With more hope than expectation of being understood. This reminded me of a guy I worked with in the mid-1990’s who now has a pretty fancy title with SAP in China. Nice guy, but not one that would have been chosen to be very successful in his yearbook. Turns out that he studied Mandarin at university in the early 1990’s. I wish I had his foresight, and that I had not underestimated him.

During the two day conference in Shanghai there was only one presentation in Mandarin; the rest were all in English. Based upon the simultaneous translation, it was a fantastic presentation by Haier.

I couldn’t understand the slides since they were in Chinese script, but wish I could have at least got the basics. According to OneSource Haier’s revenue in 2010 was about $14B, and likely to become the largest white goods manufacturer in the world in 2011 in terms of revenue.  They are already the largest in terms of units shipped. I had at least heard of them. One of my colleagues had not even heard of them. My point isn’t to pick on my colleague’s lack of knowledge, but rather to point out that in general there is a woeful lack of knowledge in the West of what is truly happening in China.

A few weeks ago, we had a visit from a friend who is a bigwig in the music industry and travels frequently to China looking for Classical talent. His opinion is that if items cost as much in China as they do in the West there would be much greater parity between China’s GDP and that of the US. He thinks China is already the world’s defacto leading economy and that we in the West are simply uninformed or have our heads in the sand. After this trip, I agree, even though the World Bank numbers indicate otherwise.

What is interesting in my friend’s statement and consistent with the Haier story is the emergence of China as a market, not just some place where nearly everything in the West is produced. Many companies, like Haier, are building brands little known in the West. There was also a presentation by Siemens, the giant German engineering company, on how much they have not only shifted manufacturing to China, but how much R&D they are doing in China, and how big a market China is for Siemens. What I see emerging is brands headquartered in the West with the majority of their sales, R&D, and operations in China. How long will it be before the HQ is deemed to be out of touch and moves to China?

I picked up Vinnie Merchandani’s book “The New Polymath” before I started on my journey. I wouldn’t put it into the same category as Tom Friedman’s “The World is Flat“, perhaps only because “The World is Flat” came first, but also because Vinnie is actually writing about something else than the emergence of the BRIC countries. But there are some fascinating sections on the manner in which competition from China and India is going to change how Western companies will do business. No, I don’t mean securing business as Siemens and other western companies did in the 2000’s through bribery but rather how they will need to win and deliver business through superior execution. He writes about how a factory in China, with living quarters for the workers above the factory floor, was designed in less than a week and how the contractor submitted a quote for construction in less than 24 hours. I am sure many readers will immediately smirk about safety standards and quality of build. Perhaps some of that’s warranted, but it also misses the point about the speed of business, and the associated costs. No Western company I know of could compete in the design and build business at this speed. We can question government regulation and oversight as much as we want, the reality is that this is the speed and flexibility required to do business in this area. Thankfully, Chinese software companies will likely have more business in China than they know what to do with for the next 10 years, giving us in the West some time to adapt. But as I reflect on my trip I cannot but wonder about the software companies in China and India about which I know nothing, and whose products may already be competitive with products from the West. Have you heard on the ERP system called Kingdee? Look it up.

Some months ago I was interviewed by our Marketing team. One of the questions was what advice would I give to young people entering the supply chain market, to which I replied “Go East young man”. I’d like to revise that to “Go East young man. Go NOW.”

I am not naive enough to think a week-long trip to China makes me an expert. There are real political, environmental, cultural, and economic issues that must be addressed in China. A Western education is still a prized possession in China, especially a graduate degree.  It is simply that I am staggered by how much I am out of touch with reality despite reading a lot about the rise of the BRIC countries, and China in particular. The wave isn’t coming, it is here, and it is a tsunami.

The entire Q&A along with PJ’s introduction and commentary on Kinaxis can be found here (free registration required).

PJ: Do you see a link between S&OP and multi-echelon inventory optimization (MEIO), and what do you offer in that regard?

TM: There is a wider link between S&OP and multi-tier visibility, planning, and control. S&OP has been traditionally seen as an internal process focused on getting consensus among different internal functions. But S&OP was conceived well before the advent of pervasive outsourcing and offshoring: a time when the manufacturing, let alone commodity management and procurement, were just ‘down the hall’—a time when most customers were in the same country and spoke the same language.

The intervening years haven’t reduced the level of visibility needed. In fact, offshoring has increased the need for multi-echelon visibility, while outsourcing has reduced multi-echelon visibility. So I am absolutely convinced that multi-echelon inventory visibility, and of course demand visibility, is closely linked to S&OP. How inventory levels will be set will depend on the contractual agreements between the original equipment manufacturer (OEM)/brand owner and the contract manufacturer. In addition, S&OP is often referred to as sales inventory operations planning (SIOP) and production, sales, inventory (PSI)—both cases emphasizing the inclusion of inventory management in the overall S&OP process.

RapidResponse provides ways to determine ideal inventory levels given the customer service level targets and historical demand and supply patterns. Scenarios can then be used to test the financial and operational consequences of changing safety stock or reorder point (ROP) values.

PJ: There is indeed a great deal of cross-functional cooperation and collaboration that is required for managing S&OP. How are companies enabling this, and are they doing it successfully?

TM: From a process perspective, it is difficult to get people to work across functional boundaries, let alone across organizational boundaries. In addition, technology is often a barrier when each function has its own data and systems for analysis. Not only are there arguments about the results, but also about the data. Another barrier is that often, particularly in outsourced environments, people don’t even know whom to call in another function or company to resolve an issue.

As discussed above, we enable cross-functional cooperation and collaboration by providing a solution that has a single data model, a single set of analytics, and a single UI. Naturally, we have a full security model and the ability to filter and aggregate the data to make it relevant to the person and their role. If anyone makes a data change that has a significant impact on someone else, the person affected will be alerted immediately and can then collaborate on resolving the issue. Naturally, more than two people can collaborate in a given scenario. Any changes are immediately visible to all participants in the scenario.

PJ: What is your take on the link between S&OP and collaborative planning, forecasting and replenishment (CPFR), and what are your customers doing in that regard?

TM: CPFR, in the strictest terms, has been a failure largely because it was a burdensome process and because of the expectation on the part of consumer packaged goods (CPG) manufacturing companies that it would improve the forecast accuracy of the retailers. If instead we take CPFR to simply mean a more collaborative and inclusive planning process between trading partners, then I would say it is on the rise. As already discussed, outsourcing of manufacturing has led to the need for CPFR between the OEM and the contract manufacturer by extending internal cross-functional cooperation and collaboration to contract manufacturers in particular.

PJ: If you had to name the top three priorities for a company looking to evolve their S&OP process, what would they be?

TM: I would say the following:

1. Do S&OP more frequently, preferably continuously.
2. Do S&OP collaboratively and consecutively, not sequentially through a traditional five-step process.
3. Understand that S&OP is one step in a planning continuum, and that all steps need to be synchronized constantly.

PJ: What role does exception management play, or should play, in S&OP?

TM: All planning, let alone S&OP, should be governed by the principle that execution against the plan should be monitored continuously. In addition, if there are major market shifts, a company must react quickly by regenerating the S&OP plan. But exception management is important not only in monitoring execution of the plan and market shifts, but also in detecting big changes in the plans being generated. But the exceptions need to be relevant to the person receiving the alert, and the supporting data needs to be packaged in a manner that is relevant to that person.

PJ: How and where do ‘what-if’ capabilities fit into the S&OP process? Is it a priority capability for an effective S&OP process?

TM: I don’t see how S&OP can be carried out effectively without strong ‘what-if’ capabilities. It is more than a priority—it is a core requirement! Humans are so much more creative than machines. What they need is a rapid way of testing alternatives and evaluating the consequences in a timely manner. If they have an effective manner to understand the effect of the decisions on financial and operational metrics, they will inevitably make the right decision, particularly when several alternatives can be compared side-by-side.

PJ: What is the role of master data management (MDM) in S&OP, and what is Kinaxis doing in that regard?

TM: Because of our long history in the outsource high-tech/electronics space, we have had to deal with MDM-like issues for a long time, particularly equivalent item numbering, including bill-of-materials (BOM) structures. We focus a lot of attention on data quality and have a number of workbooks that identify missing and incomplete data. Without a doubt, MDM systems do increase the quality of data, but I do not see any reason to delay the deployment of RapidResponse until the MDM system is in place.

Clearly, the business is being run with the existing data, and using the existing data in a more effective manner would only be beneficial. However, I would not recommend waiting for perfect data. If an MDM system or data warehouse already exists, we can integrate it.

PJ: Some S&OP/IBP players offer functionality (often via acquisitions) for DP, trade promotions, financial consolidation, strategic network optimization (SNO) (‘what-if’ simulations of networks), and even PLM capabilities for NPI/PPM. What is your plan of action for successfully competing with these much broader and strategic-level S&OP offerings?

TM: As stated above, we provide a single solution to satisfy many supply chain processes using a single data model, a single set of analytics, and a single UI. We believe we already have a broad and strategic-level offering. Our analytics either currently covers all of the capabilities you list above or will shortly.

We have a fundamental issue with the concept that S&OP can be satisfied effectively using an overlay solution that has a separate data model and analytics from other planning tools. How can NPI be separated from DP/forecasting, supply planning, and capacity planning? By extension, how can you finance these other functions? The relative importance of these adjacent capabilities will depend on the industry, and clearly we have broader coverage and deeper capabilities for the industries we focus on, namely high-tech/electronics, aerospace, industrial, and pharmaceutical.

PJ: Do you have any other observations and trends related to S&OP that haven’t been mentioned in the previous questions?

TM: Without a doubt, there is a trend to a broader description of S&OP, particularly in outsourced environments where the contract manufacturers, at the very least, need to be included in the S&OP process. But, this is not only broader in ‘geographical’ coverage, but also in departmental function and time horizon.

That’s it! Thanks for following along.

Degree of outsourcing

• In electronics there are many examples where 100 percent of manufacturing is outsourced. OEM’s (or as they often call them in pharma ‘sponsors’) have shed all overhead from their manufacturing environments.
• In pharma most OEM’s outsource a portion of their manufacturing. They still see manufacturing as a core competency.
• Electronics have made a noble effort to create a strategic relationship between the OEM and the outsourcing partner. The same exists with pharma as it is very difficult and costly to change partners.

Governance

• In electronics, agreements are created with rules around upside/downside flexibility, firm commit zones and cancellation policies.
• In pharma, regulations have forced a far more comprehensive approach to a partner agreement. Agreements can be up to 300 pages!
• The need for a well defined agreement may be a lesson learned from pharma. During the downturn many electronics companies were exposed with ‘weak links’ in their agreements that did not clearly define the liability associated with demand decreases and inventory levels.

Capacity

• A majority of electronics companies have adopted elements of lean manufacturing. Kanbans and supermarkets are used frequently, and postponement strategies are the hot topic of the day.
• Capacity is important in both industries but the cost associated with pharma capital equipment is much higher. Utilization is very important in pharma. Pharma are considering lean and see the benefit of reducing inventory levels but there is a constant struggle between capacity utilization and pull based lean principles.

Material

• For many electronics companies, material can represent up to 90 percent of their cost of goods. Much time has been spent stratifying inventory, adopting various days of supply policies based on value/volume and min max replenishment programs.
• In the bio pharma conference they spoke about the need to mitigate their supply chain risk through various inventory strategies to eliminate shortages of low dollar items like vials. I sensed that more attention is required in this area.

Fulfillment

• Electronics companies struggle to maintain on time delivery objectives and when the product is not on the shelf they may face perishable demand where the consumer goes elsewhere
• In bio pharma, on time delivery is mandatory. Lives are at stake. When there are debates about inventory or delivery , delivery has to be the priority. This makes supply chain management very challenging in this industry. As pressure to reduce cost increases, it can never compromise delivery.

Distributed supply chain network

• The challenges here are very similar between both industries. Both are struggling with disparate data from different systems, and mergers and acquisitions.
• Both have complex integrated supply chains where their vertical network can span many levels with many dependencies.

Risk Mitigation

• Once again I saw many similarities here. Both industries agree that evaluating opportunities and risk in demand changes, or product launches or supply issues can better prepare them for the future. This requires the need to continuously plan, monitor and respond.

During the conference high tech electronics was often referenced as a role model for the bio pharma industry. I came away with a great deal of respect for the challenges of the pharma industry but also an enthusiasm for the opportunities for improvement and the increased level of attention directed to the supply chain.

There is, however, a second required element for successful outsourcing. It’s the human aspect, which sometimes proves to be more challenging than implementing software. In fact, various research indicates that chief among the barriers to globalization are: lack of supply chain flexibility, lack of internal competencies to manage external partners and a reliance on partners who are unable to meet flexibility requirements.

A recent SupplyChainBrain article reports on a new paper that goes even further, asserting that for outsourcing to truly be effective, an organization must not rely solely on contracts with suppliers. Instead, companies must also work to foster an informal supplier-buyer relationship.

Chwen Sheu, Paul Edgerley Chair in Business Management, professor and interim head of the department of marketing at Kansas State’s College of Business Administration, studied how nearly 1,000 companies worldwide manage outsourcing, and co-authored a paper—“What makes outsourcing effective- a transaction cost analysis”—along with John Wacker from Arizona State University and C.L. Yang from Chung Hau University, Taiwan.

Data was collected and analyzed from 970 manufacturing firms in 17 countries, and the researchers found that most of those organizations depend on both legal contracts and an informal supplier-buyer relationship. Sheu says both methods are effective, but informal relationships with suppliers deserve more attention from management since in outsourcing, it’s impossible to cover every risk and outcome contractually.

When an unexpected event occurs, and the contract doesn’t specify how to respond, it’s imperative to be able to sit down and resolve the issue with suppliers, Sheu says. This is really a trust and information sharing issue, which allows both parties to deal with unforeseen risks and uncertainties more effectively. In a truly trusted relationship both parties recognize that all decisions need to be mutually beneficial in order to achieve success.  The people are the difference between a satisfactory relationship and an exceptional one, where both parties will over achieve to ensure their partner’s success.

It’s important to note that not all of a company’s suppliers need to be involved in this level of collaborative discussion. Instead, it’s really only necessary to closely communicate with a few, trusted suppliers. For instance, your company may purchase a number of commodity components from several suppliers. It isn’t necessary—or appropriate—to closely collaborate with all of them.

On the other hand, you should collaborate closely with those few key suppliers that represent the majority of your spend on components, supply components used in products that represent a major portion of your company’s revenue, and supply long lead-time components—especially when there is a potential for excess and/or obsolete inventory.

Successful outsourcing requires developing better relationships with long-term, key suppliers. When that’s done, the brand manager and supplier can share business strategies, mutually evaluate risks and threats, and jointly investigate opportunities. In the end, that allows both companies to realize significant benefits.