With the rise of the BRIC countries – Brazil, Russia, India, China – we hear so much about manufacturing outsourcing and off-shoring. Of course with wage increases in these countries, ever relatively cheaper manufacturing countries such as Vietnam are being sought. Even in industries such as automotive, where outsourcing is less prevalent, the portion of the components used to assemble a car that are bought rather than produced by the OEM has continued to increase, in some cases representing as much as 75%.
The pharmaceutical industry has an ever more complex supply network in which they may buy one active pharmaceutical ingredient from a supplier, which they then package and sell, and sell another active pharmaceutical ingredient to the supplier, which in turn packages and sells the 2nd pharmaceutical ingredient. Of course some of the greatest degree of manufacturing outsourcing occurs in semiconductor and high-tech, where, in many cases, the OEM does not manufacture any of the finished products. The same is true of apparel.
The key point I want to emphasize is that we are all aware that over the past 20 years the brand owner in the western world is doing less and less of the manufacturing, whether or not they are completely outsourcing manufacturing or buying more and more of the value of the competed item from suppliers. What I find intriguing, especially in the case where a brand owner has either sold off its manufacturing to a third party or started a subsidiary, is that the relationship that exists between the buyer and supplier is exactly that.
In other words, it is driven by a procurement mentality that emphasizes cost rather than supply chain flexibility. This should not be a surprise since outsourcing is itself driven by the need to reduce assets on the balance sheet in order to reduce financial risk in the long term and improve financial performance in the short term. Admittedly, there has been a maturing of the approach to outsourcing in that many companies will now assess the total landed cost of supply, not just the manufacturing cost. But it is the relationship between the OEM and the supplier/contract manufacturer that I want to address in this blog.
I would like to see this progress to a more mature relationship in which risks and rewards are shared. In other words, to a collaborative relationship. Let's investigate this loaded term “collaborate”. According to the Merriam Webster online dictionary, it is defined as follows:
col•lab•o•rate \kə-ˈla-bə-ˌrāt\ intransitive verb col•lab•o•rat•ed col•lab•o•rat•ing
Definition of COLLABORATE 1: to work jointly with others or together especially in an intellectual endeavor 2: to cooperate with or willingly assist an enemy of one's country and especially an occupying force 3: to cooperate with an agency or instrumentality with which one is not immediately connected
In my experience most companies follow the 2nd definition in their approach to collaboration with suppliers, largely because it is driven by a narrow procurement mentality, not from an end-to-end supply chain value and effectiveness perspective. Therefore the relationship is mostly distrustful and adversarial. In some cases the discussions move from the 2nd definition to the 1st and get bogged down in endless meetings with little tangible progress. In some cases progress is made to the 3rd definition, which is what I mean by collaboration. In a blog titled “Time to Broaden the Knot on your Bow Tie?” Lora Cecere discusses her experience with collaboration over many years of working in industry or as a supply chain analyst. Lora writes:
My goal of this blog: stop the madness. Reset expectations. Stop fooling yourself. What most people call collaboration is really data sharing. Collaboration can only really happen when you have a lasting win-win value proposition; and in this changing world of power structures, constraints, and demand volatility, this is harder than ever.
According to the Business Dictionary, Lora is spot on in her statement (my emphasis).
Collaboration 1. General: Cooperative arrangement in which two or more parties (which may or may not have any previous relationship) work jointly towards a common goal. 2. Knowledge management (KM): Effective method of transferring 'know how' among individuals, therefore critical to creating and sustaining a competitive advantage. Collaboration is a key tenet of KM. 3. Negotiations: Conflict resolution strategy that uses both assertiveness and cooperation to seek solutions advantageous to all parties. It succeeds usually where the participants' goals are compatible, and the interaction among them is important in attaining those goals.
Let’s not be naïve though. The Japanese Keiretsu has its legitimate detractors, as does the South Korean Chaebol. Clearly there needs to be some level of tension between the brand owner and contract manufacturer, otherwise there would be no point in manufacturing outsourcing. But let us take the best part of the Keiretsu concept, which is about true collaboration between partners, and discard the less attractive financial aspects of cross holdings, which meant that poor supplier performance was often tolerated beyond what was reasonable.
From a technology perspective, what caught my attention initially was Lora’s statement that “What most people call collaboration is really data sharing.” EDI was a fantastic innovation in its time, but it is time to invest in the future based upon internet technologies. We have so often confused raw data with information. EDI only supplies raw data. How many phone calls and emails are required to supplement the EDI messages so that the buyer or seller has a full picture? Lead times as malleable. Due dates are malleable. A lot of supply chain data is malleable, but if all we receive is a binary/digital signal from a trading partner, we can only respond in a binary manner – yes or no. Lora goes on to state that
Broaden your Bowtie: Conceptually, this approach has been around for a long time, but it has been difficult to execute. Just too time consuming to connect trading partner warehouse managers, traffic managers, customer service personnel, etc. Not anymore. Use social technologies like Lithium and Jive as a core on partner extranets to connect people to people. Complete with pictures, interests, microblogging, instant messaging, and fan pages. Who says that supply chain cannot be more social?
There is no doubt that social media is catching on within companies to facilitate all manners of collaboration within the company. Why not leverage social media technology to transform data into information, adding all the nuances and subtleties of meaning and intent? But if you are using social media to add the additional content, why not exchange the raw data using social media too? While using social media for supply chain collaboration is possible, it still does not go far enough for me. It most certainly helps to elevate data to information. But why not provide key suppliers, especially contract manufacturers, and customers limited access to your planning systems so they can participate directly in the decision process?
You will have then elevated raw data exchange (EDI and transaction systems) to information exchange (social media) to true decision collaboration. This is possible today. (Don’t look to your ERP vendor for this technology. Their focus is inside out, not outside in.) Leave the final decision to the EDI messages and transaction systems, but the communication and collaboration required to reach a decision should be carried using internet technology.
Decisions cycles are shortened dramatically in the examples where I have seen direct participation of key suppliers in the decision process. This is not nirvana. It is possible today. And a few innovative companies are taking advantage of this capability.
What do you think? Am I smoking an illegal substance? Do you have collaboration stories to share? What were the barriers? How did you overcome these?
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