Supply Chain Operations Outsourcing: A Strategic Approach to Creating Significant Economic Value

The next generation of business process outsourcing will focus on outsourcing "central" supply chain processes (i.e., demand management functions) as a strategic approach to create significant economic value, with central supply chain processes defined as the demand management functions (supply chain planning & execution) that help determine customer demand which in turn drives the supply chain. If a company performs these functions better than its competitor, it can create a dominant advantage. Consequently, outsourcing these capabilities also carries the biggest risk perception.

Companies may ask themselves, "Is the work too strategically important to outsource?" For many organizations whose core competencies do not include demand management functions, the work is too strategically important not to outsource.

I. Value of Demand Management

Demand management consists of processes that define how a company understands true customer demand and executes the supply chain to fulfill the demand. These processes are also an integral part of a sales and operations planning process (S&OP).

According to AMR Research, demand-driven supply chains have better performance than traditional networks which react to fulfill orders:

• 15% to 20% lower inventory levels
• 3% to 7% better customer service
• 5% to 7% better costs

In another AMR Research survey of 100 supply chain executives about the gaps between perceived performance and business importance of key supply chain functions, demand planning was described as the function having the largest gap. This suggests that demand planning is the supply chain process with the biggest improvement opportunity for many companies.

However, while many companies recognize the value associated with a demand-driven supply chain, their challenge lies in making it happen in a time and cost-effective manner. Outsourcing specific demand management functions is a highly viable means for moving closer to this vision.

Value of Outsourced Demand Management

Outsourcing specific demand management functions to a service provider with core competency in demand management - and commitment to industry best practices -- can provide value above and beyond increased business performance. And freeing your organization from the tactical execution of supply chain operations allows employees to focus on the big picture of steering the business and making smarter decisions.

As a result of the outsourced relationship, companies can reap significant incremental value.

Outsourcing Benefits	Value an Outsourced Environment
Quicker Time to Benefit	• Creation of a capability can be realized quicker by leveraging a service provider that has the process and supporting technical experience.
Capital Spending Avoidance	• Clients avoid a significant up-front expenditure by leveraging a service provider's tools, processes and infrastructure. • Clients can also save costs associated with maintaining legacy systems, or avoid costs associated with nonperforming package software investments.
Reduced Cost to Capability	• For developing a complex supply chain capability, outsourcing can provide a lower total cost of ownership than in-house development.
Frees up Internal Resources	• Outsourcing frees up internal resources and improves productivity. • Allows resources to focus less on operational execution, and more on operational management and other value-adding activities.

II. Why Now?

Relative to supply chain operational outsourcing, advances in process management and technology and improved understanding and management of key risks have made this model now more manageable - as documented in the following table:

Former Risks/Concerns	Mitigation Strategies/Reality
Relinquishing control to a service provider	• Relinquish execution but not control of key decisions. • Successful demand management outsourcing relationships are built by preserving client ownership of the supply chain processes.
Too much integration required	• Service providers can leverage existing supply chain data marts or create cost-effective alternatives to power the demand management solution. • The technical integration between a service provider and client can be as limited as publishing a demand forecast.
Unclear where to start	• Start small. • Engage with a service provider to manage a category, promotion or geography as a way of ensuring that both companies develop a proper partnership.
Outsourcing means a reduction in work force	• Demand management outsourcing is more about creation of a supply chain capability than a reduction in staff. • A program is initiated only when it is proven that the incremental benefits associated with the service provide a return that is greater than the incremental costs.

III. Determining Your Readiness for Outsourcing Demand Management

Outsourcing components of your demand management processes can be an innovative and strategic approach to maximizing supply chain value. However, it is not for all companies.

The charts below identify criteria by which companies can begin assessing the suitability of supply chain operational outsourcing as a means for achieving their goals. If your company meets several of these criteria, it is likely a good candidate for outsourced demand management.

Readiness Dictated by Supply Chain Structure

Criteria	Traits of a Good Outsourcing Candidate
Demand Variability	• Significant demand variability brought on by seasonality, consumer trends, economic conditions, etc.
Advanced Buy Requirements	• Procurement decisions that must be made months in advance of product need or use.
Promotional Activity	• Significant promotional activity that relies on timely supply chain operations.
Obsolescence Risk	• High risk associated with getting demand wrong. • Short shelf life and/or product life cycle, etc..
SKU Stability	• Significant introduction of new products.
Long Demand Planning Cycle Time	• Long information latency (lead time). • Business decisions based on out-of-date information.
Current Performance	• Current demand management-related performance does not satisfy business goals. • Current demand management capabilities cannot support advanced marketing events, such as limited time offerings.

Readiness Dictated by Technology Landscape

Criteria	Traits of a Good Outsourcing Candidate
Data Accessibility	• Reasonable access to the best available demand stream - POS, shipment history, etc.
Data Integrity	• Data accurately reflects customer purchase behavior. • Reasonable data quality.
Process Discipline	• Process-oriented company. • Downstream processes in place to leverage demand plans.
Management Support	• Existence of a strong champion within the company who can drive change. • Ability to manage and partner.
Competitive Culture	• Is willing to change, and eager to gain a competitive advantage.
Resource-Constrained	• Significant resource time spent on activities that don't add value. • Lack of sufficient quantitative resources and skills. • Employees' technical skills not fully developed.

IV. How to Start the Journey

As described earlier, one of the biggest challenges companies face in assessing the value associated with supply chain operational outsourcing is determining where to start the journey. Developing enhanced supply chain capabilities via operational outsourcing is a strategic decision, and provision of these services is relatively new. Your company needs to understand how the process will work and where the incremental value exists.

A focused opportunity assessment is a cost- and time-effective way of determining a fit for your company in outsourcing demand management functions. It's a non-intrusive assessment approach, which includes a combination of on-site interviews, process assessments and data analysis. The initiative culminates with a half-day on-site presentation of findings and recommendations. Experienced industry domain and technology professionals work with leaders in your organization to help determine:

- How well your company's planning processes are structured to execute a demand-driven supply chain.

- The specific benefits your company would gain by refining its approach to demand management.

- How your company's processes and approach compare to relevant benchmarks.

- Where the specific opportunities to drive additional value are and how much value a change could create.

- The impact to your company's data management.

- Your organizational, technological and business process readiness.

- A road map to realize operational excellence and competitive advantage through supply chain operational outsourcing.

Summary

The next generation of BPO is focused on outsourcing central supply chain processes as a strategic approach to creating significant economic value. The risks are manageable - and done properly, outsourcing sets your organization free from tactical execution and provides competitive advantage.

In fact, if your company does not have core competency in demand-driven supply chain management, the stakes are too high not to outsource. Economic conditions are reinforcing the mandate for tighter, more efficient supply chains. Yet so many factors (many of which are hard to identify, much less control) drive increasing supply chain complexity.

Managed service options and expertise are available to uncover those factors, accurately forecast demand, and apply the resulting insights to streamline the supply chain and improve profitability. Their managed service possesses the required blend of business processes, best practices, technology and skilled resources to properly synchronize an organization's disparate supply chain components.

Now is the time to explore your outsourcing options. The potential to improve business performance and accuracy - and achieve significant incremental value - has never been better.

Dave Kempka (dkempka@havigs.com) is vice president of demand planning at HAVI Global Solutions; Brian Higgins (bhiggins@havigs.com) is vice president of strategy at HAVI Global Solutions; and Jim Ferris (jim.ferris@sas.com) is director of global business consulting services at SAS.

Source: HAVI Global Solutions & SAS