Outsourcing's sticking points
For Net.com, Stratex, and others, outsourced production carries concrete collaboration burden
By Roberto Michel, editor -- Manufacturing Business Technology, 1/1/2004 12:00:00 AM
The tough part about managing outsourced production, says Jeff Range, isn't so much the actual manufacturing—it's being able to keep a loose network of contract manufacturers and their suppliers in sync with your priorities. Range, who is VP of Operations at Network Equipment Technologies, says being able to manage that network effectively unlocks a whole range of benefits, from timely order fulfillment to reduced inventories and lead times.
The Fremont, Calif.-based company—which does business as Net.com—sells high-tech networking equipment that telecommunications carriers, government, and the military use as building blocks for high-performance, wide area networks. Its gear—which includes packet gateways and switches—typically is sold as configured platforms, says Range, so while production is outsourced to a couple of key partners, Net.com handles functional testing and systems integration in-house at its Fremont facility.
"We receive back 'in-circuit tested' product," says Range. "In our industry, the outsourcing of the basic assembly and test—that's a given. The trick is being able to manage and harmonize the supply chain." Net.com has a solution for supply-demand matching, and is deploying other systems and processes to bring greater efficiency to its outsourced operations. These include an application that enforces and executes inventory consumption and order priorities for its outsourced production chain, and a new system for product life-cycle management (PLM). Simply put, the company is taking concrete steps to exert greater control over the virtual model.
Carlos Alvarenga, managing director with consulting firm BearingPoint's Operations Performance Management practice, says smoothing out communication between partners is the biggest challenge in the outsourced model. "One of our clients did an analysis and found that with 60 percent of quality failures, those failures could have been avoided with better information sharing."
But it's not just quality issues that are addressed. Under the virtual model, says Alvarenga, intercompany collaboration spans product development all the way to service management. "Service management is becoming a bigger source of demand," he says. "Many companies still think of services as an asset—not a source of demand—but that's changing."
The service management applications offered by customer relationship management and ERP software vendors can help close the loop between service and demand management, says Alvarenga. PLM software—with its ability to manage the product record—also supports the virtual model, as do collaborative applications that oversee direct materials execution between contract manufacturers and component suppliers.
The outsourced model, however, can be fraught with danger. One of the biggest concerns is that OEMs will lose the ability to excel at lucrative after-sales service without ready access to information about how products were built, configured, and serviced. Additionally, order fulfillment can't be allowed to suffer, even when the manufacturing piece is being outsourced to a specialist. As Net.com's Range puts it, "There is a significant benefit to being master of your own destiny in how you manage orders."
Coordinate the virtual
In April 2003, says Range, Net.com went live with a system from Valdero that helps it manage order-fulfillment priorities. The company implemented two modules: one for supply-demand matching, and one for multitier supply visibility.
Range says the rules engine in the supply-demand matching module helps Net.com prioritize which orders—given available supply—should be given precedence by contract manufacturers. While Net.com uses an ERP system from Oracle Corp. as its main transactional system, Range says Valdero's rules engine "allocates our supply to demand based on business rules, rather than using MRP [materials requirements planning] logic to look at due dates and quantities, and pushing out demand to meet the supply."
Some of the rules, he adds, are set to give priority to "government rated" orders, generally followed by the most profitable orders. Before the Valdero implementation, says Range, setting such priorities was a painstaking, imperfect process that involved putting order information into a spreadsheet. Ultimately, says Range, it was impossible to fully set the right priorities without an automated system.
The visibility piece, says Range, is able to tap into information from Net.com's ERP system—as well as data from the ERP systems of its contract manufacturers—and gauge whether there is "exposure" related to excess or obsolete inventory building up in the supply chain. In essence, says Range, it helps Net.com enforce best practices in direct materials procurement, even though the contract manufacturers are the ones directly executing the procurement. "It's difficult to manage the execution on the supplier side of the OEM-contract manufacturer relationship, and that's what this module addresses," says Range.
Since the Valdero system went live, it has helped Net.com cut its book-to-ship lead time by 25 percent, and there's also been a 58-percent improvement in order to delivery by customer-requested date. The company also is in the process of implementing a PLM system from Agile to improve management of the product record, says Range.
Sarvesh Jagannivish, director of electronics and high-tech marketing for Agile, says electronics manufacturers have been leaders in furthering the outsourced model, and as part of that, have become more adept at opening up access to the product record. "The product record is your repository for product information across all life-cycle stages," he says.
Electronics manufacturers use PLM solutions to get contract manufacturers and components suppliers involved in early-stage design considerations—especially those concerning component cost and "sourceability," says Jagannivish. The next step for many electronics OEMs, he adds, "is to capture quality and service information during the life cycle, and use the product record to feed that information back into design so you're not designing bad quality into new products."
Leaner internally
Stratex Networks, a San Jose, Calif.-based provider of digital radio systems, is another high-tech industry OEM involved in outsourced production. It also uses an Oracle ERP system and Agile's PLM system, as well as a CRM package from Siebel Systems.
Robert Schlaefli, VP of Global Operations for Stratex, says these systems have helped the company in its transition to the greater use of manufacturing partners, but an overhaul of Stratex's own operations was vital to support for the virtual model. With the overhaul, Stratex created a new group focused on managing the entire execution process, and, as Schlaefli puts it, "We flattened the organization a bit, and tightened up our internal communication."
As part of the reorganization, the interaction between the company's customer order management, planning, and procurement functions was fixed by moving the groups closer together within Stratex's headquarters. Additionally, since tactical-level procurement is handled by manufacturing partners, says Schlaefli, Stratex's buyer role has become more of a planner/buyer role, looking at broader demand fulfillment considerations.
"There have been several other key changes," Schlaefli says. "Our order fulfillment function is closer to our sales function, and our demand planning process is totally cross-functional."
The CRM system, says Schlaefli, helps establish and communicate an accurate demand picture, which in turn gets order fulfillment off to a strong start. With outsourced production, he adds, an accurate demand picture helps the contract manufacturer be more efficient in its scheduling and component procurement. "We had to make sure we had the tools in place to communicate customer requirements on through the supply chain," says Schlaefli. "Along the way to doing this, we've made greater use of tools like Siebel to drive our demand management process. As soon as our salespeople understood that, they became better adopters of the technology."
Schlaefli says that Stratex had the Siebel and Agile systems in place before moving to the virtual model, but the shift has changed the way the tools are used. For instance, with Agile, the company now provides access to the system for some external partners. "That's been extremely useful in communicating parts lists, engineering changes, and other authorizations," says Schlaefli.
Next up, Stratex will look to more fully automate the sharing of schedule, order-status, and inventory information between its ERP system and those of its contract manufacturers. But at the same time, Schlaefli says, systems aren't the whole answer.
"We had some strong best-of-breed systems in place, so for us, the systems weren't a hindrance," Schlaefli says. But, he adds, "The critical thing is having the right business processes in place."
Web collaboration
Most of the newer systems that aid in streamlining outsourced operations have Web-based capabilities. Systems offered by Agile and Valdero, for instance, are Web-based. ERP vendors, however, also offer supplier- and partner-facing portals that can smooth the virtual model.
"First you need the right backbone for supply and demand planning, but for communication, a portal is the key," says Joe Marino, a VP with ERP vendor MAPICS. "The portal allows an OEM and its contract manufacturers to see what their schedules look like, and to organize all that activity under what amounts to a My Yahoo page for managing the outsourced relationship."
The MAPICS portal, says Marino, also allows launching XML-based document integration between partners, wherein a manufacturer using the MAPICS system could send an XML document, such as a purchase order, and have it accepted by the partner system on the other side. Such integration, concedes Marino, would depend on how sophisticated XML use is in the partner's enterprise system, but potentially, "it's like a one-off EDI via the Web."
Kids II, an Alpharetta, Ga.-based manufacturer of "play to learn" toys and products, uses a MAPICS ERP system, and is opening up system access to its contract manufacturer partners via the portal. "The portal will serve as a key element in the ongoing effort to improve collaboration with our 25 contract manufacturer plants," says Grant Gunnigle, VP of management information systems. "Soon, our suppliers will key production planning data in through the portal, eliminating spreadsheet-based plans and reports, and the redundant data-entry work required to import the data into our system."
In some circles, manufacturing outsourcing has become closely equated with the move of component manufacture to Asia. While that is undoubtedly occurring in electronics (see charts, page 16), executives such as Range point out that not all outsourcing goes to countries such as China. For instance, says Range, to obtain certain government contracts that carry guidelines for buying products made in the U.S. or a North America Free Trade Agreement country, Net.com uses manufacturing partners in the U.S. and Canada.
In any case, says Range, once the decision to outsource has been made, the task at hand is to gain the benefits of outsourcing without order fulfillment or other processes suffering. "Contract manufacturing is attractive because it reduces your asset base and gets [component] orders off your books," says Range. "The challenge is to retain influence over the supply chain that sits on the other side of your contract manufacturers."
