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

Five success factors for outsourcing your 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.

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