In today's turbulent global economy, manufacturers seeking the refuge of offshore markets to trim labor costs are severely underestimating the requirements for the ongoing management of their outsourced processes. Anyone who doubts this assertion need only look as far as the 2007 headlines about Mattel and other U.S. companies that were bitten by defects in products outsourced to China and other "low-cost" countries.
"Manufacturers need to understand that their work is just beginning at the time the outsourcing contract is signed," says Vinay Gupta, founder and CEO of Ann Arbor, Mich.-based Janeeva, a provider of outsourcing relationship management (ORM) software. "Outsourcing, by its very nature, breaks the management infrastructure — no more 'managing by walking around' — and outsourcing breaks the IT infrastructure as companies are not able to rely on a captive enterprise environment and on-premise software tools."
Outsourcing is a complex business relationship, one that can't be fully automated. And while no one claims that technology is a panacea for fixing all of the problems associated with outsourcing, manufacturers can benefit greatly from the strategic deployment of technologies designed specifically for managing outsourced processes. Conversely, those that fail to properly automate may continue to suffer debilitating setbacks.
According to Gupta and other outsourcing experts, manufacturers are still attempting to manage complex outsourcing operations using simple desktop tools, such as e-mail, spreadsheets, file sharing, and a host of other applications. However, these simple tools generate data that is already obsolete by the time reports are generated. In some cases, manufacturers have tried to adapt legacy ERP and MES systems to do the work. While better than desktop tools, legacy systems can be cumbersome and expensive to manage, and they are not readily able to interface with offshore data sources or provide the type of capabilities that outsourced processes mandate.
Julie Fraser agrees that there is a fundamental mismatch between existing enterprise systems and outsourcing. "Existing systems really aren't well-designed for it," says Fraser, a principal and industry analyst at Industry Directions. "It's not to say that they don't play a role. But core capabilities are missing, such as collaborative planning and, more importantly, replenishment and communication capabilities — or some mechanism to trigger vendor-managed inventory transactions. Manufacturers need to be able to manage that relationship to specific contract terms with that specific partner."
How the outsourcing relationship is managed and the tools required to properly manage it are critical to the success of the endeavor. "The available research all points to a tremendous amount of value being at risk in how the relationship is managed — as much as 30% of the annual contract value," says Danny Ertel, founder and director of Vantage Partners, a firm specializing in negotiation, relationship management, and conflict management. "A well-functioning relationship delivers additional savings, agility, innovation, and better customer satisfaction, and frees resources that can be focused on other things," he says. "A poorly functioning one wastes resources through conflict, escalations, duplication of efforts, slow decision-making, lack of follow-through, and more."
Clearly, a gap exists between the requisite tools for success and the use of desktop software and legacy systems for managing these relationships. Some experts believe the answer may be found in software-as-a-service (SaaS), a software application delivery model in which a software vendor develops a Web-native software application and then hosts and operates the application for use by its customers over the Internet. SaaS originally gained traction in functional areas outside manufacturing production, such as CRM, HR/payroll, and financials.
"There are many advantages to the SaaS delivery model," Janeeva's Gupta says. "This is the only delivery/technology model that makes sense for companies that are working with external service providers."
High-Flying SaaS Model
Aerospace leader Boeing certainly seems to agree with Gupta about the benefits of the SaaS model for managing global outsourcing relationships. Chicago-based Boeing's well-publicized 787 Dreamliner is at the center of an important outsourcing story. In many ways, Boeing became a role model for SaaS proponents when the aerospace giant leveraged an SaaS-based supply chain management solution to minimize waste in the supply chain while managing on-time delivery to the end customer. In October, however, Boeing announced that it was delaying delivery of the 787 Dreamliner due to a shortage of fasteners used in assembly.
"Boeing is heavily reliant on a SaaS solution for multi-echelon supplier integration," Vantage Partners' Ertel says. "Boeing is an interesting story. The company used to own 100% of the manufacturing and assembly process, which was as much as 18 months long for an airplane. Now the amount of the process they physically own and control, in terms of the assets, can be counted in days. Boeing illustrates how the need to orchestrate across echelons of the supply chain has gone up exponentially."
Boeing turned to Exostar for a solution to manage processes executed across multiple tiers of its supply network. The manufacturer uses the Exostar Supply Chain Management Solution, powered by E2open software, to manage the complete order lifecycle and returns process across multiple partner tiers, while also tracking planning schedules and consumption, and managing replenishment for the Boeing Partner Managed Inventory program with tier-two partners.
The Exostar solution is designed to let Boeing and its partners collaborate on planning schedules, issue purchase orders, track purchase order changes, exchange shipping information, manage returns, track shipments, and manage inventory consumption across the multiple tiers involved in the manufacturing process. The system also monitors events and process exceptions that occur between partners, and it evaluates the impact of these events against the master schedule using synchronized time-sequenced information. The software includes reporting capabilities that allow Boeing and its partners to track the supply chain's overall performance.
Exostar's SaaS delivery model and existing network of connectivity into the A&D supply chain enabled Boeing to go live with the solution in less than 90 days from project kick-off. Exostar's enterprise system was configured to meet Boeing's current process requirements, and it can evolve as process requirements or partners change over time.
Multi-partner relationships, like the ones that Boeing enjoys, are among human beings, not technology, says Vantage Partners' Ertel. However, outsourcing relationships succeed or fail based on the technology as a scaling factor.
"The ability to manage complexity is huge, yet the real success that translates to a competitive advantage is the combination of two factors: the ability to scale and somebody sitting down in a top-to-top discussion and agreeing on how the risks and rewards will be shared in the relationship," Ertel says. "Both parties must also agree how they will measure each other and hold each other accountable for performance. Clearly, the Mattel example is a case where that was not done to the degree necessary, but Mattel was just one of many. It is really the exception rather than the rule that companies are actively, at the senior-most levels, sitting down to decide how are they going to mitigate risks like the ones experienced by Mattel."
Like Mattel, Mercedes Benz was hurt by a poor outsourcing relationship, according to Joe Barkai, practice director at Manufacturing Insights, an IDC company. In 2006, Mercedes' initial quality rating plummeted to 139 problems per 100 vehicles, well in excess of the industry average of 124 problems per 100 vehicles. The majority of the initial quality problems were caused by electrical and software problems in the cars' electronic systems.
What caused Mercedes to slip so badly in the JD Power quality ratings?
"The automotive industry is an example of complex systems. The modern car is probably 70% built by tier-one and tier-two suppliers," Barkai says. "The brand owner does relatively little but integration; many items are manufactured elsewhere. So, the brand owner — the integrator — is dealing with an issue where they have to integrate and interface many components, which is very complex. And not only do the systems have to work together, they have to fail together, in a graceful fashion, so as not to cause catastrophic failure. Mercedes fell into this trap: Small failures in their outsourced electronics systems led to more failures."
In such a fragmented environment, in which the company is dealing with specifications distributed to a variety of outsourced contractors, the spec does not include issues such as function interfaces and ways to ensure that the components would fail gracefully. Each component, built to spec, may work fine alone; the outsource partner may have manufactured what it was contracted to make. However, when the components come together, they don't work as required.
As the Boeing and Mercedes examples illustrate, a tremendous amount of an outsource contract's value depends on how the outsourcing relationship is managed. To build what Janeeva's Gupta calls "loosely coupled" organizations like the one Boeing uses, Gupta's company has begun to focus on ORM software designed to extend the manufacturing enterprise.
"It turns out that outsourced manufacturing operations have the same management challenges as financial services firms, in terms of getting real-time visibility into their operations in a way that's easy to tie into any technology infrastructure anywhere in the world," Gupta says.
"Outsourcing relationship management is the new class of technology that directly and uniquely addresses outsourcing issues faced by manufacturers," Gupta says, referring to a category of software of his own invention. "There are point-solution technology subsets of ORM, such as SLA management, issue management, and collaborative document management tools. As customer awareness increases and technology providers more directly address requirements, manufacturers can expect that robust ORM tools will be accepted — or maybe even taken for granted, as CRM is today — as part of the corporate infrastructure."
According to Vantage Partners' Ertel, ORM tools like the ones Gupta describes provide manufacturers with a variety of benefits, including the following. The tools:
- Allow organizations to make better choices about when and where to "dial up" or "dial down" the activities they are outsourcing.
- Allow greater transparency for internal stakeholders, and between buyer and provider, around the factors that tend to cause problems — recurring issues, lingering requests for new services, and performance problems and their root causes. By allowing these issues to be identified early, they become easier to discuss and address effectively.
- Allow for greater discipline and auditability. When a manufacturer specifies what is to be measured, when it is to be reported on, and who needs to be part of the approval and review processes, the company has much clearer expectations and much cleaner interactions between buyer and provider.
- Allow for the collection of data in a structured tool instead of using e-mail and spreadsheets. This approach also allows for process improvements. For example, analyzing the frequency and types of issues raised leads to opportunities for process improvement; recognizing patterns in change orders can suggest when a contract amendment will produce savings; and sharing trends in performance problems or in the health of the relationship facilitates better dialogue.
The best tools integrate all of these functions, so that, over time, the organization can develop even more useful insights and improve processes by looking at cause and effect, outcomes that fall between performance levels, issue resolution, the health of the relationship, and the financial impact of changing consumption levels.
"Doing all these things across multiple providers without some automation would be very time-consuming, if not impossible," Ertel says. "Doing all these things with tools that outsourcing customers can buy 'as a service' without a lengthy implementation process allows them to leverage automation best practices — always using the latest and greatest versions of the tools — and focus their time and energy on using the tools to manage the service provider."
Many companies are not realizing the benefits they had expected from their outsourcing operations, Gupta says. "Some are mistakenly looking for the solution in renegotiating vendor contracts, changing providers, or giving up altogether." However, manufacturers are increasingly realizing that technology solutions are available that will address their unique challenges. "Ideally, this progression will continue and companies will no longer be taking the tactical, 'I've got a headache' approach; rather, they will treat the technology as strategic, much the way that the adoption cycle has happened in the other SaaS sectors," he says.
There are emerging best practices and an emerging corps of professional outsourcing managers. "There is also growing awareness among top executives that they can, and should, embrace the extended enterprise strategy and succeed," Gupta says.
See Managing Outsourcing: Ensuring Quality Across Oceans