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Table of Contents

The Big HRO Deal Is Back. Thankfully, It Has Grown Up

Q&A with Zach Lonstein, Infocrossing CEO: The Beauty of a Business with Recurring Revenue

Taking the Sting Out of Nondeliverable Email Addresses

Offshored Manufacturing Brings Inevitable Supply Chain Logistics Changes

No Need to Change Systems When Outsourcing F&A Processes

Phil Fersht's Predictions for 2006

CIBC: How To Put Together A Successful Governance Program

HRO Buyers Advisory Board Members See Change in Future Outsourcing Engagements

Second HR Outsourcing Venture is a Charm for SMB, Producing 85 Percent Savings

Intensifying Competition for Talent Causes Employers to Turn to Outsourcing for Benefits Programs

What do you need in order to reduce energy costs?

Reduce risk and improve productivity through efficient record-keeping

Using Predictive Analytics to Drive Customer Value

Avoiding Blind Spots in ERP: Risks and Strategies Mid-size Companies Need to Know

Transformational Offshoring: Why and How?

Retailers Leveraging Outsourcing to Drive Value

SLA Management for Utility-Based Computing: A Case Study

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When a company decides to send all or part of its manufacturing offshore, the greatest shock and the source of highest concern often surrounds the timely delivery of goods to its customers. It makes little difference if those goods are a finished product or part of someone else's supply chain. The opportunity for confusion and disruptive events grows dramatically, not to mention the loss of anticipated savings that inspired the outsourcing decision.

"You're shocking your supply chain," says Mike Atwood, President of Manufacturing and Retail for the Everest Group. He notes that the changes for your organization and your customers can be profound, and an unhappy one if you don't understand them.

"The key to success," according to Eduardo Saavedra, Director of Logistics for Offshore International (OI), a shelter services firm for American manufacturers in Mexico, "is to accept that there are inherent inefficiencies in cross-border shipping. There are going to be delays; you can't avoid them. You must anticipate and build them into your supply chain lead times."

There are several ways to mitigate this change and the shock it can bring. According to Atwood, the issue is still about how much is in your supply chain pipeline. "Ideally, you want as few goods as possible. You try to build to order when you can, especially when you're dealing with smaller lots."

However, when shifting to the longer distribution times found in offshore models, Atwood notes that manufacturers often must keep more stock (inventory) at a few strategic points within the chain to accommodate quick fulfillment when necessary. "The buyer must recognize how much and accept how such strategic placement can make the chain more responsive to market demands, even though generally, there might be less product in the supply chain."

He cites an example of a significant engineering adjustment or new product diminishing the worth of the on-hand inventory, which can force the owner to sell at a loss just to clear it out. Atwood sometimes wonders if firms take this portion of their new supply chain strategy into account. "This economic reality drives home the point of why the outsourcing buyer must assume greater responsibility for managing its supply chain efficiently," he adds.

Benefits Come With Tradeoffs

Just as companies might not understand the complete ramifications of the supply chain on the cost side, many may not initially see the total benefit of manufactured offshoring across their organizations other than reduced labor. OEMs that outsource universally report savings on real estate, insurance, and utilities. Outsourcing also creates cash from the sale of unnecessary production equipment since the manufacturer no longer needs it.

But in a sense, that same OEM often trades one hat (less manufacturing) for another (greater and more sophisticated supply chain responsibility).

Tim Minahan, Aberdeen's Senior Vice President of Value Chain Research, notes that before beginning this journey, "a company must devise a comprehensive plan for deployment as well as clearly defined goals and milestones for supply chain improvements and success."

"But that level of participation might require both carrot and stick," according to Minahan. "The most successful companies have overcome this challenge by using a mix of incentives and demands."

Atwood predicts a hard road for such firms and is amazed at how many "purchasing agents" magically become "supply chain managers" as companies develop and execute these plans. "It doesn't happen everywhere. But where it does, it suggests more people have strategic competencies when, in fact, many of them only know a small portion of the tactical answer. Such misplaced trust is a huge mistake because often these people have little understanding of the total shift in supply chain strategy resulting from offshore manufacturing."

Often the savings in manufacturing costs alone will outweigh those higher logistics costs, according to Saavedra. "But you still have to understand what your landed costs (actual shipping, handling, and import fees) and customs practices at the border are going to be and make certain that your customers are either making the same adjustments or account for them in your delivery times so no one's negatively affected. It isn't always easy and requires a larger amount of planning and oversight until everyone learns the ropes."

Restaging Inventory for Just-in-Time Delivery

Atwood notes there are three possible locations for inventory in an offshored manufacturing environment: "You can stock it yourself, have supply chain partners stock it at distribution points along the way, or have your customers do this." But he suggests these customers have the warehouse space and infrastructure to support greater inventory before making this suggestion to them.

"The most successful companies have overcome this challenge by using a mix of incentives and demand," says Minahan.

Atwood adds that if there are multiple inventory location points, the supply chain is more stable and can respond to a customer's sudden needs, which occur from time to time.

Verne McPherson, President and Owner of Minnesota-based Tolerance Masters, outsourced some of his manufacturing to Mexico in 2005. He agrees that the changes to inventory management took some getting used to.

"We found that our lead time, due to border crossing, customs, etc. increased by about three weeks. This is significant, since we worked very hard to reduce this process down to a total of four weeks before outsourcing, then had to build additional inventory to cover transit time. Initially, this had a negative impact on our just-in-time delivery. But after a couple of cycles, things settled down."

"Before deciding to outsource manufacturing offshore, companies do some hard thinking and analysis as to where they want to go to--not only country, but city," says Atwood. His advice: Analyze how sustainable your total supply chain will be. Then, hire a firm over there that knows how to set things up and make it work. "Because no matter what you think of, there are things you'll miss. Plan your work and work your plan with good help," he says.

Lessons from the Outsourcing Journal:

• When outsourcing manufacturing offshore, your longer supply chain must function much more efficiently than before, since delivery times will at least double.
• Staging finished goods at several points enables your lengthened supply chain to respond faster to short notice or unusual customer needs.
• An effective, often sophisticated strategy must be the first element of your new supply chain logistics process in order to realize the full measure of anticipated savings from your outsourced offshore manufacturing venture.

Publish Date: March 2006

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Copyright © 2006 - Everest Partners, L.P.

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