Guest Commentary

In this latest guest post, Douglas Macbeth of the University of Southampton School of Management argues that western economies can no longer afford to pursue a strategy of relentless offshoring - the costs and the risks are far too high...

Let us start with a few propositions which, in my experience, describe the majority of our manufacturing organisations – as well as many others.

• Procurement isn’t well understood at board level;

• There are not enough CPOs who are able to influence board direction and strategy;

• Short-term financial myopia drives decisions;

• Manufacturing is no longer seen as core to western economies – services are more important.

For many years, western companies have been moving away from manufacturing and have chased the world to find the latest low-cost country from which to source everything from materials to complete products.

But why has this happened?

To some extent there is a certain logic – labour and social costs are initially much lower in developing countries. But does anyone really know how to calculate the total cost of acquisition (far less the total life-cycle cost) of anything? And if not, what data is the decision maker using? While the concepts might be easy to grasp, extracting meaningful data out of ERP or traditional accounting systems is enormously difficult. Add multiple divisions and legacy information systems, and the quest for the Holy Grail looks simple in comparison.

Add to this the fact that the proportion of total cost which is accounted for by labour tends to be very low, and it is slightly puzzling why the trend for low-cost sourcing is so prevalent.

The reality is that the difficulties of offshoring are now well recognised. There is often a shortage of appropriate skills in the target location; infrastructures for physical logistics and legal structures to conduct western-style business transactions may be in short supply; time zones, culture, behaviour and attitudes are likely to require careful consideration and it will often be necessary to pay the costs of ex-patriot managers to help in the start up phases at least.

The alternative to the latter is to train up locals – a form of technology transfer which can create competition much quicker than you would like. And while some companies try and limit this by only transferring some of their capabilities, the same supplier might be building up skills across multiple orders. Who, apart from the supplier managers (and in some cases their governments), would have any view over the whole supply chain to see this pattern?

When we add to this the experiences we have just been through with the global financial system meltdown and we have the makings of a real catastrophe which will challenge the perceived wisdom of offshoring.

One major lesson for me from the banking crisis is that not enough people saw how interconnected the world’s financial systems were. Equally, no one had the appetite to perform a proper due diligence and risk assessment on the nature of the assets that were supposedly underpinning the whole house of cards.

However, before we criticise the bankers too much, how many of us can define our extended networks of suppliers and customers and have done a detailed assessment of where the critical risks are located and what mitigations are needed?

Wwe seem to be in the midst of a perfect storm. Some organisations are replacing bank lending to suppliers with their own financial support just to keep transactions moving, there are issues around currency fluctuations which are difficult to hedge against and the recent threat to business credit insurance threatens to further restrict the fluidity of supply chains. Without trust – or at least, insurance – how can any trade function, especially across international borders?

In addition, while there is talk about avoiding the threat of protectionism in international trade, the levels of taxpayer investment, and therefore future taxation, is at mind-blowing levels. It is no surprise that politicians are trying to control the effects of their investments to derive local benefits.

In the midst of all this, the environmental message seems to be getting heard more clearly. One of the features of this, however, will be measurement and concerns about carbon footprints and the true costs of transportation.

The opportunity for procurement to take centre stage here is clear – no other function has the potential to contribute so much. Risk assessment has always been part of the procurement process, but now we have to extend its horizons beyond the suppliers we are directly contracting with and into our extended networks more explicitly. We also need to be involved in the redesign of products to meet the challenges of extended life, reuse and repurposing that the green agenda will drive.

The fundamental need is to restructure supply chains to support these networks, which might still be international in part rather than simply chasing headline price reductions. It might also be necessary to repatriate some activities closer to customers to reduce the risks and costs of international transportation – companies might have a mixed model with different supply solutions for different channels of customer service, for example.

So, this article started by focusing on manufacturing rather than services. Surely we must by now recognise that the reliance of an economy on invisibles is inherently flawed – we must rebuild a balanced portfolio of activities. Of course we still need an effective and reliable financial services sector but we also depend on goods producers, transportation providers, energy and water providers to live our normal lives.

While some of the information and entertainment industries may be less concerned with some of these aspects since their dependence on physical location is less critical, for the rest, physical location must be a mix of close to source and close to consumer. And let us do that in a more considered way, informed by a vision of a more interdependent future.

And while I’m not suggesting that we should head for a state interventionist system (although that seems to be what is happening) rather, we need to redefine and then persuade our societies’ stakeholders that we need a more enlightened model which recognises and can work with interconnectedness and diversity in a dynamic and entrepreneurial way.

Are procurement leaders up to the challenge?

Professor Douglas Macbeth is director of business development, MSc global supply chain management and supply chain research, as well as professor of purchasing and supply chain management, at the University of Southampton School of Management.

PLM - Product Life-Cycle Management

A relatively new software-based technology—product life cycle management (PLM)—has been adopted by numerous manufacturers because it allows the collaborative design of products from anywhere in the world. Developers can tap into a central workspace and get access to part designs, bills of material, product specifications, production schedules, and other data. PLM includes elements of earlier computer-based technologies, such as computer-aided design, engineering, and manufacturing (CAD/CAE/CAM), as well as product data management (PDM), but PLM is much more of a supply chain solution because it allows the sharing of product information not only throughout a company's many offices but throughout the offices of supply chain partners and suppliers as well.

The Joint Strike Fighter (JSF) program, for instance, is a prime example of supply chain collaboration. This multibillion-dollar initiative to build a next-generation aircraft for both the American and British militaries includes Lockheed Martin as the lead contractor and fellow aerospace and defense manufacturers Northrop Grumman (U.S.), BAE Systems (U.K.), and Fokker (Netherlands) as major subcontractors. Product experts from these companies can tap into Lockheed's virtual workspace platform to work on their own piece of this massive international project. As many as 1,500 engineers can access the virtual workspace as heavy users, and another 3,000 can tap into it on a more limited basis.

Product life cycle management (PLM) technology enables manufacturers to manage and share complex design and production information across an extended enterprise, with the goal of streamlining the product development process.

Like aerospace companies, automotive and high-tech manufacturers have also been early adopters of PLM software because of the complex nature of their production process. However, given the increasing importance of developing new products and getting them to market as quickly as possible, consumer packaged goods and pharmaceutical companies have also turned to PLM as a supply chain best practice because, when properly deployed and managed, it can help reduce costs while increasing efficiency. Here are some examples:

Playtex Products, a manufacturer of personal care consumer products, outsources 70 percent of its manufacturing to seven facilities throughout North America. Tracking document routing and product record data was increasingly difficult because this information was maintained on any number of electronic systems, or in some cases, on paper. By standardizing on a common PLM platform, Playtex enjoyed a 98 percent improvement in its document routing time. Time-to-market improved significantly as well, contributing in part to added revenues in the neighborhood of $20 million annually.

Regulatory requirements from the FDA as well as legal bodies in Europe have become more demanding for pharmaceutical manufacturers such as Roche Diagnostics. Roche was having difficulty stepping up its quality management processes because its quality data were scattered among a dozen nonintegrated systems, with much of that information being shared via fax machines rather than over a computer network. By implementing a PLM solution throughout the company, Roche has been able to automate its documentation process, which helps the company manage its growing product lines as well as satisfy the government audits.

At Eaton's Hydraulics Division, a maker of hydraulic products for farm and construction machinery, it frequently took up to 10 days to distribute CAD files throughout the company. The process began with the transfer of completed drawings to microfilm, which were then sent to the main library and duplicated so they could be sent to other sites' libraries. Not only did it take too long, but the error rate was as high as 6 percent at some of the libraries. A PLM solution capable of storing and retrieving more than 70,000 imaged documents has not only made the microfilming system obsolete, but it has also shaved the wait time from 10 days down to a mere three hours.