SCP Applications Tend to Be Critical to Achieving Business Objectives

Unless a manufacturer is in the enviable position of having no competition, or demand that far exceeds supply, its ability to deliver the right product at the right time and the right price will help separate it from the competition. That means it must be able to coordinate the performance of its entire supply chain.

The term supply chain implies a fixed, linear set of entities aligned to manage the sourcing, production, and delivery of products and services. However, today's supply chains are more like networks than chains. Customers are located around the globe, which means a company's distribution network must be similarly located. Outsourced manufacturing (i.e., contract manufacturing) may be used to handle peaks in production, or entire lines of product. Multiple manufacturing locations may be involved in producing a single end item. The supplier base may span the globe as well. Maximizing the performance of these supply networks is impossible without systems and tools. The complexity of the network is more than a planner working with spreadsheets and rules of thumb can handle. This is why advanced planning and scheduling tools have become strategically important.

Forecasting, scheduling, and planning tools linked to transactional data in enterprise requirements planning (ERP) systems can have dramatic impacts on customer service levels, inventory costs, production costs, throughput, and administrative costs. When the solution is well designed and well implemented, the impossible becomes possible. Finished goods inventory turns can rise while service levels improve, throughput can increase while work in process falls, and output can improve without investment in capital equipment. These become the sources of true competitive advantages in an industry. Understanding how to maintain these solutions to optimize the supply chain is something that should reside within the control of the organization. Otherwise, the ability to sustain any competitive advantage is at risk.

Failure to properly design and execute a supply chain solution can have disastrous results. The well publicized case of Nike's supply chain systems rollout in 2000 is a good example. An error in the demand plan published to Nike's suppliers cost Nike an estimated $100 million (USD) in lost sales, and a 20 percent drop in its stock price. On the other hand, this did not derail Nike's supply chain system implementation. Over the next four years, they made significant progress in reducing production lead times from nine months to six months. Nike believes that its supply chain strategy is a vital link in maintaining its leading position in the industry, and has stuck with the project despite the initial glitches. (Koch, Christopher. 2004. Nike Rebounds.

Criteria for Evaluating Outsourcing Potential

At a high level, there are a number of frameworks for evaluating outsourcing decisions. The graph below is commonly used during supply chain assessment projects. It uses alignment of a process with the business strategy, and the current level of performance (relative to industry leaders), to classify processes.

Business processes which are not crucial to achieving an organization's strategic objectives, and which are performing less efficiently than processes a leading outside provider could deliver, are typically the best candidates for business process outsourcing. This corresponds to the low performance-low strategic importance quadrant of the graph above. Payroll and accounts payable are prime examples of processes that fall into this category for many companies. The customer typically does not see or interact heavily with these processes. On the other hand, outside providers have the scale and expertise to perform these functions for a lower cost, with a high degree of reliability.

Processes rated as having high strategic importance are central to achieving the mission and objectives of a company. To compete effectively, these processes demand a high level of performance. When these processes are underperforming they must be reengineered or outsourced. Outsourcing may be appropriate when there is limited opportunity for differentiation and competitive advantage. Common examples include shipping and logistics. A number of third-party logistics providers exist who can provide a level of service and economy of scale that would not be possible for many individual companies.

Strategic processes that typically provide greater opportunities for differentiation include forecasting, master scheduling, production scheduling, and order promising. Handing the operational development and maintenance of these strategically important business processes to a third party decreases the level of control over performance. It also requires sharing supply chain strategies with a third party. Both of these factors may impact the ability to maintain a competitive advantage over the long term.