Cover Story: Rising to the Challenge of the Outsourced Supply Chain

Back in mid-2003, SafeView, a Santa Clara, Calif.-based start-up, didn't have any production facilities and hadn't shipped a single unit of its next-generation security portals, which use a patented noninvasive "active millimeter wave scanning" technology to detect non-conventional weapons, explosives and just about any other object people might be concealing on their person.

Now, two-and-a-half years later, SafeView has shipped more than 20 of its complex portals to customers around the world in countries like Mexico, Singapore and Israel. But the company still doesn't have any production facilities because, rather than building its own manufacturing capacity, the company elected from its very inception to adopt an outsourced supply chain model.

"From a strategic business standpoint, right from the beginning we had decided that we would outsource the manufacturing," says Karen Ann Meyer, vice president of operations with SafeView, "simply because in this day and age it just doesn't seem like a good business decision to add manufacturing capability when there is so much of it available."

The Outsourcing Trend

Outsourcing — using external suppliers to design, manufacture, ship and service products or components (as distinguished from offshoring, which refers specifically to shifting production to foreign suppliers) — has been a growing trend in recent years as original equipment manufacturers have sought, among other things, to divest themselves of production capacity (and the inherent risks associated with owning capital equipment), lower their labor costs and maintain greater flexibility in the face of ever-shrinking product lifecycles. Moreover, the forces driving increased outsourcing appear to be accelerating the trend: AMR Research reported in the study "Contract Manufacturers at a Crossroads: Brand Owner Need for Visibility," released earlier this year, that "the average 37 percent of cost of goods sold (COGS) represented by contract manufactured items will rise to 43 percent" over the next two years.

AMR analysts Bill Swanton, Dineli Samaraweera and Eric Klein, authors of the study, note that the relationships between OEMs, or what they call "brand owners," and their outsourcing partners typically run deeper than the "arm's-length" relationships that companies traditionally have had with their suppliers. The OEM-outsourcing partner relationship, they write, normally involves: "Long-term relationships to manufacture a family of parts or products; close working relationships on design, production engineering and quality; [and] collaborative inventory planning at multiple tiers of the supply network, with visibility into and influence over the supplier's supply chain operations."

Given the particular nature of the bonds that tie an OEM to its outsourcing partners, supply chain executives are finding they must take a different approach to managing those relations than they have in managing their more traditional suppliers. As a company built from the ground up on an outsourcing model, SafeView's experience offers insights into the success factors that can make or break an OEM-outsourcing partner relationship.

1. Identify the Skill Sets SafeView was founded in 2002, but the company got its first round of funding only in May 2003. At that point, the company's flagship product, the screening portal dubbed SafeScout — which can be used, for example, to screen passengers in an airport, fans at a sports arena, visitors to a prison or employees at a manufacturing plant — did not exist at all, except as a technology that had been developed at the U.S. Department of Energy's Pacific Northwest National Lab. Meyer says that, as a new company, it made little sense for SafeView to seek funding to build its own production capacity. "Venture capitalists are hesitant to invest in a hardware company to begin with," she notes. "And they would be even more nervous about putting a few million dollars into a manufacturing operation." In addition, the company's management knew that SafeView had a limited window of opportunity — about a year — to prove the technology and prove the market, which meant ramping up fast and quickly getting the product into customers' hands, before the venture funding ran out. Thus, the company made the decision from the start to outsource its supply chain to the maximum extent possible.

It probably didn't hurt that the company's senior management was quite familiar with the contract manufacturing world. CEO Richard L. Rowe, a longtime Honeywell veteran, also was formerly the chief executive of MCMS, a $550 million global electronic contract manufacturer (CM) that was sold in January 2002 to Plexus Corp., an electronics manufacturing services (EMS) company based in Neenah, Wis. And Meyer, with 25 years in industry, had spent 20 of those years in the contract manufacturing world.

Drawing on that experience, Meyer says that the first thing SafeView did as it plotted its outsourcing course was to identify the skill sets that would be necessary to bring its product to market. "The way that I approached it was to understand what our needs were going to be," Meyer says, "because the way I looked at it, either I had to hire a skill set or a contract manufacturer had to hire that skill set." Understanding the skills requirements is fundamental not only to selecting an outsourcing partner, but also to communicating expectations to the partner, both at the start of a project and, as important, as the project evolves, requirements change and the outsourcing partner has to bring on new capabilities.

2. Focus on the Relationship Of course, technical requirements, capabilities and skills sets are, ultimately, something that either your own company or your outsourcing partner can acquire. So while these attributes are not unimportant in selecting among potential partners, the synergy between an OEM and its contractors should be the top priority, Meyer believes. "To me, one of the most important criteria in picking out partners was a strong relationship that would withstand all of the unknowns," she says.

In SafeView's case, the unknowns were plenty, since the company was building a unique product that had never been brought to market before, and they planned to do it within a very short timeframe. "We were embarking on this incredible experience, we had this journey ahead of us and we had no clue what we were going to find," Meyer recalls. "So having a really good relationship was key." After reviewing its options, SafeView elected to work with Plexus, a well-established EMS that has facilities around the world, including a Boise, Idaho-area plant that was selected to build the SafeView product.

Working with Plexus, SafeView designed and delivered the first Beta version of the SafeScout in February 2004, just nine months after receiving its initial funding. In short order, the company delivered another five Beta units to its customers. With units now in the field, SafeView began to receive a tremendous amount of feedback from its customers on the initial units, much of which had to be translated into engineering changes for the next generation of the SafeScout. "I think that we as a company weren't prepared enough for the level of design activity and change that was going to happen driven by customer demand," Meyer says.

And this is where the focus on the relationship with Plexus became critical. Because SafeView was looking to have a long-term alliance with its contract manufacturer, the company took the approach of acting as a filter for all the feedback coming back from the field, rather than just throwing all the design changes over the wall and expecting Plexus to contend with all the necessary engineering changes that had to be made. "So many start-ups go through the initial phase with their contract manufacturer, and by the time they're ready to go into production, right at the moment when the start-up needs its CM the most, they hate each other's guts and the customer is leaving for another CM," Meyer says. "And it's not the CM's fault; it's just the nature of the beast of going through a product-development cycle. So we tried to filter as much as possible and keep as much churn out of the relationship in the supply chain."

3. Communicate, Communicate, Communicate As with any good relationship, the key to a healthy OEM-outsourcing partner alliance is communication. "It's very important to have an open and honest dialog," Meyer says. "You both have strengths and weaknesses, and everybody knows what they are. We're going to try to leverage the strengths and work around the weaknesses, but we're not going to pretend they don't exist."

For example, Meyer believed going into the relationship with Plexus that, given the complexity of the SafeScout — about 80 percent of the parts on the product's bill of materials (BOM) are custom built-to-drawing, built-to-spec parts — and the level of engineering change that could be expected in bringing a new product to market, SafeView should initially handle prototype materials buying, again to help keep the "churn" out of the relationship with Plexus. Meyer was up front with the EMS, from an early stage, about her plan to hire a new product introduction (NPI) buyer to handle this process. Plexus would have preferred that the operation be entirely turnkey, but Meyer's frank dialog with them on this aspect helped them understand SafeView's point of view from the initial phase of the relationship. So when SafeView hired the NPI buyer, and the buyer began sourcing prototypes and then handing the identified suppliers off to Plexus, the EMS was fine with the process. "They understood that's the way we had to do it," Meyer says. "And I promised them that once we got through the process and the product was stable, I would hand it over to them, turnkey. But if I had not communicated with them, it could have had an impact on our ability to get through that first part of it and now move into production with a very healthy relationship."

4. Put the Tools in Place Early With communication a top priority and a precondition for maintaining the kind of healthy relationship that Meyer sought with her company's supply base, she says that she recognized early on that SafeView would need to put in place the necessary tools that would enable the required level of interaction between the OEM and its outsourcing partners. But SafeView also wanted to ensure that it had the technology in place to protect its intellectual property even as it worked collaboratively with its partners to develop and produce the SafeScout security portal. "I had originally thought that one of the advantages of outsourcing is that you could leverage the tools that your CM already has," Meyer explains. "But I realized fairly quickly that that was a risky proposition, to have your whole product documentation package managed by your CM, just in case things didn't work out and you needed to take the product elsewhere."

At the time, Meyer's technology options seemed quite limited. "I didn't have an IT group. I didn't have an IT infrastructure. I didn't have a database. I didn't have anything with which to work. We had our laptop computers, and that was it," she says. Moreover, SafeView's leadership knew that once they got their first round of funding, they only had 12 months to bring their product to market, so they would have to hit the ground running and could not afford to invest months building an IT backbone and deploying complex software packages.

While reviewing potential software packages, Meyer came across a company called Arena Solutions (formerly known as bom.com), which offers a Web-based, "on-demand" product lifecycle management (PLM) solution. The Arena PLM solution seemed ideally suited for a start-up outsourced manufacturing model, since it allowed an OEM to give any number of outsourcing partners controlled access to online BOMs using nothing more than a Web browser. Meyer initially thought that she would have Arena PLM be the platform for her internal engineering staff to work with the development staff at Plexus, including for part numbering, but the CM already had its own tools in place, and Meyer was unwilling to force a change in Plexus' processes because of the tight timetable for moving the SafeScout into Beta production. Instead, she began using the Arena solution to build the Beta BOM, loading design specs, drawings, instructions and digital pictures into the system and making them available to Plexus' production staff on the manufacturing floor who were building the prototypes. In this way, SafeView maintained control over the documentation package for the SafeScout while giving production staff access to the latest design information.

Once SafeView got its second round of funding, had put Beta units out into the field and started down the path of redesigning the product, the company expanded its use of the Arena PLM solution. By this time, SafeView had assembled its supply base, with seven key suppliers, mostly based in the U.S. Northwest so that they could do just-in-time and a Kanban material pull in conjunction with the Plexus production facility outside Boise. With SafeView's engineers acting as filters for all the design changes coming back from customers, the company's internal staff used Arena to build revised BOM structures and then released the design to the suppliers and, in turn, to Plexus.

Michael Topolovac, CEO and founder of Arena Solutions, points to the advantages of implementing PLM tools at the start of the development process, rather than waiting until a product is already headed for the plant floor. "What SafeView realized early on was that, starting from ground zero, PLM naturally becomes part of the institution and the culture, and all the data's clean from Day One," he says. "If you do everything manually up until the day before you want to ship, then you're going to discover when you try to actually get that data into a tool like Arena PLM that a lot of the data are wrong or they're not complete. PLM is really what enables you to get that product to production."

5. Be Flexible Looking back on the whirlwind of the last two years, Meyer says that one of the big lessons she has taken away from the experience is that OEMs must maintain a degree of adaptability at each stage of an outsourcing exercise. "What you're prepared for is usually not the problem," she says flatly. The uncertainties in market conditions, the complex dynamics of relationships with outsourcing partners and the many other "unknowables" in an outsourcing exercise place a premium on an OEM's ability to bend with the wind, when necessary, to keep the process moving forward rather than stopping to try to fix every glitch that comes up along the way.

In SafeView's case, that meant hiring an NPI buyer, for example, or acting as a filter for design changes coming back from Beta customers. The bottom line is that, while an OEM can outsource many separate functions, it cannot outsource management responsibility for a project, and the OEM must be prepared to apply the same degree of executive-level involvement in an outsourced project — or an even greater degree of involvement — than would be the case for an internally manufactured product.

Would SafeView ever consider taking its manufacturing in-house? Not likely, says Meyer. "Actually," she concludes, "when I went out to find our facilities, I deliberately looked at places that I knew didn't have enough room for manufacturing. So it was a very definite decision that we would outsource manufacturing from the start."

Sidebar: Five Success Factors for Procurement Business Process Outsourcing

Procurement business process outsourcing (BPO) is a growing trend but continues to represent a small number of engagements; Forrester Research, in a July report titled "The Mixed Procurement BPO Opportunity," estimated that about 60 companies had signed procurement outsourcing agreements as of June — double the number from a year ago, but still suggesting a relatively immature market. Major providers of procurement BPO services, as highlighted in the Forrester report, include Accenture, Ariba, A.T. Kearney, IBM Global Services and ICG Commerce. Other companies offering procurement BPO services to one degree or another include EDS (of which A.T. Kearney is a subsidiary), ePlus, Global eProcure, Infosys and Prorizon.

Based on his four years of experience in the BPO space, Jason Gilroy, vice president of procurement outsourcing at King of Prussia, Pa.-based ICG Commerce, offers these suggestions for ensuring procurement BPO success:

  • Understand where BPO can, and cannot, help. Gilroy says that procurement BPO typically is not a budget reduction move but rather involves a value-creation business case — BPO might not help a company reduce its procurement headcount, since the goal is more typically to shift current staff away from less-value-adding work on various non-core indirect material categories and toward projects involving more strategic categories that can help a company differentiate itself in the marketplace.
  • Don't be too prescriptive in the relationship. Build flexibility into the relationship — and the contract — with the BPO procurement provider from the start. "If the initial scope of work is built too rigidly, it makes it very difficult for the relationship to move cohesively together as the customer's business changes," Gilroy says.
  • Establish a structure for tracking results. ICG runs monthly cross-functional savings councils with its clients to ensure not only that they are reporting on realized savings to the procurement sponsor but also that a senior finance representative on the council can validate the methodology used to arrive at the reported savings and attest that the savings are actually hitting the company's bottom line.
  • Ensure senior-level executive sponsorship. It's very easy, he says, for the procurement staff executing the relationship with the outsourcing provider to get hung up on micromanaging how the BPO service provider is doing its job, rather than focusing on whether the provider is achieving the goals of the program. "It takes a strong executive sponsor to be able to pull people back and say, ‘Hey, remember, that's not why we're doing this. We're not trying to say that we did it with six heads, so we want [the service provider] to do it with four people. We don't care how many heads they can do it with, but whether they can deliver this much more value than we were going to deliver.'"
  • Look for a partner with genuine operating experience. Managing procurement activities and spend on a long-term basis for multiple large companies is not the same as providing sourcing and procurement system implementation services on a one-off consultative basis. Further, it requires an entirely different infrastructure than that required to manage a procurement department internally. Make sure you "check under the hood" to ensure your provider offers a proven and well-tested procurement operation that allows you to leverage and benefit from the learnings and scale that comes from their work across multiple companies. You should expect to be able to tap into an adaptable procurement operation that integrates deep category and process expertise, a transaction processing infrastructure and most importantly, the market data, best practices and benchmarks gleaned from working day-in and day-out across multiple companies.

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