Addressing Supply Chain Risks In Contract Manufacturing And Fulfillment

Leah Knight

Many firms use outsourced manufacturing to increase agility and reduce costs. And with the growth in e-commerce sales, many retailers have also jumped on the outsourcing bandwagon – for example, by relying on suppliers to handle direct merchandise shipping and logistics. Chances are that product you ordered last night from a big-box website will be drop-shipped directly from the manufacturer to your home, saving the retailer tons of money and ensuring your product reaches you earlier. It’s a win-win, right?

But contract manufacturing and fulfillment also introduce an entirely different set of business risks than yesterday’s retailers and vertical manufacturers ever faced. Let’s take a closer look.

Supplier selection errors

Starting with the supplier selection process, risk is introduced through complex requirements and lack of visibility into granular supplier qualification criteria. For example, OEMs may need to qualify suppliers by region, commodity, and even by plant. In some cases, they need to mitigate the risk of cross-contamination across materials such as chemicals, which means sourcing items from approved suppliers by plant. This requires a sourcing process that supports vendor analysis down to this level of detail.

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Sourcing, contracting, and planning disconnects

Once award decisions are made, companies need to create contracts quickly, safely, and in a compliant way. Each and every contract also needs to be signed, stored, and easily accessed for purchase order execution purposes. But when sourcing and contracting systems aren’t integrated with ERP systems, much of this work is manual, slow, and inefficient – or worse, the pricing and terms negotiated during the sourcing process may never be uploaded to the material requirements planning (MRP) system, which results in contract leakage and increased cost-of-goods sold. In addition, today’s managers aren’t tied to their desktops, ready to approve contracts; they are on the go and always connected via iPads and smartphones, so contracting systems must be mobile-ready or approvals will be slow.

Bill of materials complexity

And then there’s the challenge of sourcing for complex, multilevel manufacturing bills of materials (BOMs) – for instance, for the assemblies (and components of those assemblies) needed to build high-tech devices such as a PC or mobile phone. The more complex the BOM, the harder it is for the commodity manager to ensure that the right suppliers are selected for all items in the BOM – and at the right price and other terms.

Order accuracy issues

New selling and fulfillment models in the retail world – such as online retailing and drop shipping – are competitive necessities today. The perfect example is drop shipping, a huge trend where the retailer sends customer order and delivery details directly to suppliers stocking goods, and the supplier fulfills the order directly to the end customer. In many cases, retailers want to hide this fact, preferring to execute “blind shipping” (when goods are shipped without a return address) or “private label shipping” (when goods are shipped from the wholesaler with a return address customized to the retailer).

This outsourced fulfillment model drives great cost savings, but it also requires very seamless order handling between parties. And this, in turn, creates new technology requirements that many companies still can’t support. First, disparate technologies across trading partners must communicate with each other in real time so that shared order details can be transferred to the supplier and executed. Second, the information shared must be clean and 100% accurate; if a supplier fulfills an order incorrectly, the costly returns process kicks in, and customer satisfaction is impacted – a lose-lose situation for all parties involved.

Lack of visibility

As the product manufacturing process moves into planning and execution mode, supply chain systems and processes are often disconnected from data sources that reveal the ability of suppliers to meet requirements; this, in turn, limits visibility into the availability of supply, which must be reliable to meet tight production deadlines and customer demands. When memory, casings, and keyboards, for example, don’t arrive on time, production lines stop, stock-outs and missed shipments occur, revenue and stock prices fall, and customers are lost. To hedge against this, the only logical option is to add buffer stock as insurance, which few companies can afford to do in the age of lean and just-in-time manufacturing.

Innovation is the key to mitigating these risks

Each one of these supplier sourcing and collaboration issues can introduce real risk into your operations – and undermine the very goals you wanted to achieve through outsourcing. And simply throwing more people, inventory, and spreadsheets at them isn’t the answer either. It just allows you to perpetuate a way of working that’s high risk, inefficient, unable to scale, and a barrier to innovation. Given the speed and agility of digital innovators today (think Uber and Amazon), can you afford to perpetuate old ways of working?

Leading manufacturers and retailers understand this and are pushing to innovate real solutions. And the time is now – because digital competitors unencumbered by manual processes and legacy systems are rising quickly, ready to overtake market dinosaurs. The foundation of any solution is establishing a connected, digital-direct procurement process that tightly integrates people, information, and processes – and enables unprecedented collaboration between departments and with suppliers. This will require connecting a company’s backend systems to all of its suppliers.

When every part of your outsourcing strategy is connected through a shared digital platform that reduces complexity, reduces costs, and accelerates business collaboration, you can orchestrate network transactions and information hand-offs effortlessly and seamlessly. Transparency is built in. And the information your business shares with partners comes from a central source of trusted information. So everything runs faster, smoother, and with minimal errors.

Want to learn more? Check out this point of view document, which discusses these issues in more detail.


Leah Knight

About Leah Knight

Leah Knight is senior director, solutions marketing at SAP Ariba, the marketplace for digital business. Leah leads the solution marketing efforts for SAP Ariba’s direct materials solutions in sourcing and collaborative supply chain planning and execution.