How Manufacturing Organizations Can Regain Control Of Their Supply Chain

Sudy Bharadwaj

According to ChainLink Research, organizations outsource about 30% of their manufacturing on average, and that amount will continue to grow as firms shift the production of certain items to contract manufacturing organizations (CMOs). The good news is that the outsourcing organizations can refocus their energies on core competencies. The bad news? They surrender control over key components of their supply chain.

Depending on the industry, this loss of control can present formidable challenges:

  • High-tech: The responsibility to manage inventory may shift to members of the supply base, but it remains on your balance sheet – you own it, but it is effectively under your supplier’s control. Any mistakes on your supplier’s end can cost you.
  • Life sciences: While responsibility for certain inventory remains with the lead enterprise, compliance requirements fall on the entire supply ecosystem.
  • Consumer goods: Product safety and quality issues need to be managed along every link of the supply chain.

The outsourcing of manufacturing presents challenges as unique as the industries that rely on it.

Loss of control can yield poor results in terms of higher inventories or cost of goods sold (COGS, sometimes referred to as cost of sales). While there may be other financial metrics, these two are most prominent affecting shareholder value.

Gaining control over these financial metrics requires close collaboration with suppliers. Visibility and control over the flow of materials, dollars, and information can contribute significantly to improving these metrics. E-mail and spreadsheets for these purposes have been around for decades, but these tools offer limited capabilities:

  1. Cycle time: The time to obtain crucial information and react. This can involve a commitment to an external manufacturer, an exchange of forecast requirements from the external manufacturer, or a purchase order. Working collaboratively to reduce this cycle time can unlock tremendous value. For example, if a forecast-commit collaboration between your organization and external manufacturing organizations takes 4 weeks, an improved process leveraging cloud-based network technology reduce this to 2 weeks. This can create efficiencies such as making the wrong thing for only two weeks versus four. The shift to external manufacturing may have sacrificed four weeks of control over the cycle, but technology can help cut that loss in half.
  1. Richness of information: Information that must be shared with external manufacturing entities and the teams within the outsourcing organization can be vast and overwhelming. Methods such as e-mail and spreadsheets offer limited insight. In contrast, a cloud-based network can benefit the ecosystem by shedding light on additional factors: time, locations, detailed bill of materials, etc. Spreadsheets also present the challenge of version control: Which one contains the most up-to-date information? A network offers real-time metrics for the entire ecosystem – internal team members and external entities alike. Ultimately what it offers is accountability for all parties involved.
  1. Management by exception: By including such information in a sophisticated and collaborative framework, those parties responsible for external manufacturing can focus on specific problems. Where there are no problems, no time need be wasted. When an exception occurs, the system can flag it, and the organization can rectify it immediately while devoting the bulk of its attention to important, high-priority issues.

Organizations need to ascertain their limitations and capabilities and those of their trading partners. A cloud-based network enables them to gain control over both. To do so effectively, the organization must work with its external manufacturing partners and invest in the appropriate capabilities to create a collaborative rather than adversarial relationship. All parties need to realize the benefits of enhanced visibility and the teamwork it enables.

Learn more about how digital transformation can impact your supply chain operation. Visit our value calculator and analyze the impact and generate your own customized reports.

Sudy Bharadwaj

About Sudy Bharadwaj

Sudy Bharadwaj has over 25 years experience in helping businesses transform operations in a variety of areas and industries. Sudy's current focus for SAP is helping organizations transform direct spend leveraging supply chain and sourcing competencies.