American brand-name company Levi Strauss's recent decision to move its jeans manufacturing operation overseas underscores a disheartening trend that suggests the USA label on mass-manufactured goods may someday soon become obsolete. But mass-market companies focus on delivering quality products faster and cheaper than the competition. The demand for high-quality low-cost products coupled with the need to reduce costs to increase operating profits is driving more companies to outsource manufacturing overseas and implement global logistics strategies.
While the outsourcing trend may be unnerving and hotly debated, it isn't surprising. Outsourcing is analogous to what happened years ago when manufacturing companies realized the efficiency and cost savings of assembly line production. Skilled professionals that made products from start to finish couldn't produce products fast enough and cheap enough to compete. Assembly line production became the norm.
While primarily a trend with high-volume, multinational companies, outsourcing is a signal of a larger shift in the importance of improving global logistics, transportation management and supply-chain execution. What companies will gain through offshore manufacturing they won't want to lose through inefficient supply-chain execution.
Companies will need logistics network technology and management systems to support outsourcing efforts. Global trading partner management strategies and real-time global visibility into orders, shipments and inventory will become paramount. Integrated transportation management will be essential to manage the most efficient and cost-effective movement of goods from source to consumption. Universal standards and emerging technologies such as radio frequency identification (RFID) for tracking products will become increasingly important.
Outsourcing demands increased real-time collaboration among supply-chain participants; visibility alone provides minimal value. Typically, more than half of a company's variable cost is driven by decisions external to the organization. Collaboration is often perceived as "too big to do" because there are multiple integration issues between business systems, suppliers, factories, transportation providers, and third-party logistics providers. However, collaboration is the key to outsourcing. Companies must unlock the inherent value in the extended supply chain by opening the multiple channels of information exchange and facilitating the flow of logistics information and process integration among partners.
In an outsourced network, companies are challenged with dealing with a dispersed group of trading partners that can vary by many factors, including size, geographic distribution, ownership and business arrangement, number of customers they serve, IT capabilities, and penalties for non-compliance. With such variation, companies need solutions that require minimal IT infrastructure and can be used for all suppliers. Companies must take a "think strategically and implement tactically" approach to outsourcing. They'll need to ensure that they have end-to-end visibility across their factory, distribution and store processes, supply-chain event management response systems in place, and inter-enterprise process integration.
For example, suppose that a major private label retailer has an apparel manufacturing facility in Singapore, a receiving port in Long Beach, Calif., a consolidation hub in Dallas, and two distribution centers, one in Secaucus, N.J., the other in Atlanta. Typically, the company ships from Singapore to Long Beach and on to its warehouses. Without real-time collaboration among trading partners, if the company receives a customer order on the West Coast, they will have no way to reallocate goods once they have been sent from manufacturing. The customer will have to wait until the goods are received in the DC in Atlanta and then have them shipped back to the customer on the West Coast. This approach adds unnecessary time and transportation costs to the outsourcing plan and reduces customer satisfaction.
If the retailer has global inventory visibility and collaboration across its trading partners, then it can track manufacturing as it occurs. The company can automatically order substitutes for shortages and create advanced ship notifications (ASNs) and labels as needed. It can generate alerts to the California-based buyer if the shipment will be late, short or altered. With this insight, the company can act in real time and allocate closer to the consumer. For instance, it could use a 3PL in Long Beach to divert shipments directly to the customer on the West Coast and ship only unallocated inventory to the Atlanta warehouse.
The value of real-time trading partner collaboration to an outsourced organization is tangible and significant. It provides constant real-time accessibility to data that allows for a proactive response to issues in the supply chain. This responsiveness proliferates savings across the organization, eliminates manual process and improves many operational areas, including receiving efficiency, inventory error reduction, cross-docking opportunities, and fill rates. It also offers opportunities for savings within planning by lowering safety stock levels, improving en-route allocation and maintaining better drop shipment accuracy. In addition, it provides the collateral benefits of increased customer satisfaction, stronger trading partner relationships and less frequent contingency costs. By improving the metrics of error reduction, receiving efficiency and cross-docking capabilities alone, average-sized companies can save close to a million dollars a year.
In concert with global inventory visibility and real-time collaboration, companies must minimize transportation costs. Outsourcing complicates the transportation process because it requires companies to deal with "mixed mode" transportation, which may entail coordination of international air shipments, domestic trucks and small parcel delivery carriers. Companies must determine the appropriate balance of point-to-point direct deliveries versus more large-volume efficient "hub and spoke" transportation networks where they can consolidate the initial legs of shipments prior to final distribution by a parcel carrier. Either way, they need to once again have a measurement analysis of the carrier options, reliability and performance to deliver the goods most cost-effectively each time.
For example, an electronics manufacturer may have an electronics components and systems factory in Shanghai and a customer request for a computer system in Detroit. Typically, it would consolidate goods for the whole Northeast U.S. region and ship it on an international flight to a company-owned (or carrier-owned) hub in Chicago. From there, it would induct packages into a parcel network to do final delivery from that point. In order to optimize that transportation process so that they can pay less and make money, companies would need to know how long it would take to get product from the Shanghai facility to Chicago and then from Chicago to the customer. They would also need to tie that in with their fulfillment process in order to determine which orders would be ready and could be consolidated while maintaining the customer service level.
In order to better manage the global transportation network, companies need to have sophisticated integration and real-time sharing of data between their transportation network and fulfillment time process. They need to have a transportation-aware technology system that connects their warehouse management systems with their transportation network information and resources to provide real-time planning and optimization of these costs.
In terms of technology, outsourcing will drive universal standards progress. Companies that outsource will need to choose their partners wisely. They should make sure that their technology suppliers are taking a long-term global strategy as it relates to technology standards rather than a local perspective.
For example, Wal-Mart's RFID compliance initiative has created a huge demand for information on RFID application among the thousands of suppliers who feed the supply chain of the world's largest retailer. RFID is a promising technology to help track and monitor goods across the supply chain and reduce unnecessary human intervention. However, at present, RFID technology chips utilize one frequency in the U.S., a second frequency in Europe and a third in Asia. A global organization must take these differences into account and implement and drive technology solutions that will be compatible across their network now and in the future.
It remains to be seen how the outsourcing trend will continue to unfold. While we don't have much control over how outsourcing affects the economy, we can manage how it affects businesses. Outsourcing may not be as transformative as the advent of the assembly line, which launched the industrial revolution and spurred American innovation and production, or the internet, which changed the face of business and communication dramatically and irrevocably. But, it will change business dynamics.
Outsourcing will force businesses to focus on supply-chain execution and operate smarter and more efficiently to realize the anticipated business benefits. Operational execution will no longer be a tactical afterthought; it will be the focus for companies to overcome business, organizational, and process execution challenges. When goods are manufactured offshore in other countries, defining the optimal global strategy for coordinating logistics and fulfilling orders is more important than ever. How well outsourced companies optimize and manage supply-chain execution performance will be a key factor in determining their long-term offshore business success and profitability.
Eric Peters is executive vice president of strategy and business development for Manhattan Associates. The Atlanta-based company is a major developer of supply-chain execution and transportation management solutions.
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