Abstract Number-003-0175
An e-enabled Approach Facilitated in the Outsourced Supply Chain
Sixteenth Annual Conference of POMS
Chicago, IL, April 29 – May 2, 2005-2-18
Name: Yan Zhang
Institution: e-Business Research Centre, University of Liverpool Management School
Address: 10 Duke Street, Liverpool, UK, L1 5AS
e-mail:
Phone: 0044-151 795 0125
Fax: 0044-151 795 0111
Abstract
Outsourcing has become a trend in manufacturing, which also extends the whole supply chain length and operation management coverage scale. A key factor in the chain is to ensure the real-time information transferred accurately and order processed timely. This paper reviews e-enabling technology support and its application in the remote supply chain improvement.
In this paper, the e-support supply chain development is briefly blueprinted in line with the presently reachable e-business support. Emerging e-enabled relationships achieves to support multiple simultaneous business models and communication media to realise the full benefits of the business.
A case study in aerospace industry is introduced in order to demonstrate the theoretical approach of supply chain control development, describing an Internet-based remote system which is regarded as a strategically integrated package to rationalise the manufacturer’s supply chain with the upstream and downstream collaborative partners.
Keywords
e-enabled, outsource, supply chain
Introduction
Supply Chain Management (SCM) considers both upstream and downstream collaboration within the production process (Slack et al, 1998). In an outsourced supply chain, it is more vital to ensure the real-time information transferred accurately and order processed timely. e-enabled sourcing applications target strategic outsourcing processes that most significantly affect the value drivers: improvements in supply chain responsiveness. The unique capabilities provided by these applications include, among others, spend analysis, supplier risk analysis, raw material/component optimisation, request for proposal (RFP) and request for quote (RFQ) generation, and contract administration (Accenture, 2003).
Outsourcing partnerships provide businesses with a viable solution to the productivity problem. Corporations can develop flexible outsourcing partnerships and programs designed to meet their unique needs and culture (Runnion, 1993). Indeed, most outsourcing contracts target a minimum 15 percent cost savings, sometimes between 20 to 25 percent. To attain such goals, it is essential to have multi-year agreements so the economies of scale and cost-cutting measures can take effect. Contracts are usually multi-million dollar deals signed for five years or more with performance clauses built in (Manion et al., 1993). According to the survey by Accenture described as below, the potential in the supply chain functionally related show a huge trend in the near future.
Figure 1: Percentage of companies outsourcing part of or their entire operation
Source: Accenture, 2004
Figure 2: Current and future use of PSP (Procurement Service Provider) services
Source: Accenture, 2004
Nowadays technologies have become inextricably linked with business issues and supply chain strategies -- critical to remaining flexible, responsive and competitive. Providing centralised, skilled and cost-effective infrastructure support is just one concern. A new paradigm has emerged in the customer-supplier arena - the support chain (Hammer, 2001). Manufacturers approach their technology investments much like they would an investment portfolio-- appropriating certain portions for lower costs, higher competitiveness, and to bring the enterprise closer to suppliers.
Systematic infrastructure between the Original Equipment Manufacturer (OEM) plays an increasingly pivotal role in gauging and assuring the overall state of their business. A more recent phenomenon, however, involves e-business participation in the management of the information systems (I/S) function. Since information is a principal resource in most businesses today, the consequences of external control of a firm's information system must be considered carefully. The formulation and management of the service contracts with information services suppliers are critical issues (Behara et al., 1995). There are three central characteristics of a support chain, typically stochastic, highly interdependent and dynamic. This high degree of variability in production demand enforces the need for flexible and responsive organisational structures and business processes. Technical support is also closely internal-controlled in terms of supply chain relationships and information flows.
The complexity of the outsourced supply chain makes e-enabling support development a challenging research task. This paper identifies the importance of effective supply chain sourcing in the context of the support aspect and reviews the literature for e-business support and the potential application in a collaborative environment. To enable tactical mapping of production lines and manufacturing onto suitable suppliers, information technology based system has been developed to capture technical part information and supplier manufacturing capabilities. This was described with an aerospace case study to demonstrate the business model of partner communication in the outsourced supply chain.
Literature Review
2.1Outsourcing trend in manufacturing
Increasing pressures due to market globalisation, lean organisations and technological breakthroughs have stimulated independent firms to collaborate in a supply chain in order to gain mutual benefits. Coordination among independent firms is vital to attain the flexibility necessary to enable them to progressively improve operational processes in response to rapidly changing market conditions (Dawes et al., 2002).
Outsourcing is defined as the procurement of products or services from sources that are external to the organization (Lankford & Parsa, 1999). Outsourcing has been viewed as a form of predetermined external provision with another enterprise for the delivery of goods and/or services that would previously have been offered in-house (Elfing & Baven, 1994; Domberger, 1998; Kliem, 1999; Finlay & King, 1999). It is vision, function, and economics that drive the need for outsourcing (Harkins, 1996).
Outsourcing practice dates back to 18th century England and has been in continuous use in numerous industry sectors since it received impetus in the latter half of the 1980s and 1990s in the emerging service sector (Whang, 1992; Quinn & Hilmer, 1994; Reyniers & Tapiero, 1995; Cheon et al., 1995; Ang & Straub, 1998). It is suggested that competition yields savings where there is scope for greater efficiency to start with and where competition itself is effective (Ginsburg & Michel, 1988; Besenko et al., 1996). However, economic analysis has its limitations as it does not account for the leadership and management capabilities to structure and manage co-operative relationships crucial to the effective working of outsourcing arrangements (Kakabadse & Kakabadse, 1999).
Global competition, downsizing, the move to flatter organisation, the search for greater flexibility, rapid changes in technology, and the emphasis on concentrating on core competencies are cited as major drivers for the upsurge in outsourcing (Atkinson, 1985; Imrie, 1994; Huber, 1993). Cumulative experience in outsourcing enhances quality improvement, with simultaneous cost reduction (Ghemawat, 1986; Dyer & Ouchi, 1993).
In the recent years, manufacturing industry shows a trend in outsourcing capability to other business partners so that the whole supply chain increasingly involves an extended scale, in particular the upstream as well. The benefits of outsourcing, low operating costs, quick ramp up times, and ease of adding and dropping programs, services and markets, are substantial. The benefits are still greater when outsourcing to an offshore company. Outsourcing offshore can save 5% to 8% in Canada, and 10% in Mexico for Spanish-speaking Americans, compared with domestic outsourcing. The percentages jump to an eye-popping 20% to 40% when outsourcing to India, the Philippines and South Africa (Brendan, 2002). The higher offshore savings stem from lower wages and reduced turnover. Outsourcing has become a growing strategy to serve customers in other countries and outsourcers are responding by adding workstations, capabilities and markets.
Outsourcing offers advantages, such as enabling existing staff to concentrate on core activities on organisational specialisations, focusing on achieving key strategic objectives, lowering or stabilising overhead costs, and thereby gaining cost advantage over the competition, providing flexibility in response to changing market conditions, and reducing investment in high technology (Kliem, 1999; Quinn 1999). Crucially, outsourcing in manufacturing can provide companies with greater capacity for flexibility, especially in the purchase of rapidly developing new technologies, fashion goods, or the myriad components of complex systems (Carlson, 1989; Harrison, 1994). Small specialised suppliers often offer greater responsiveness through new technologies which have undermined the need for the vertically integrated organisation and have also helped achieve economies of scale (Quinn and Hilmer, 1994). A network of suppliers can provide any organisation with the ability to adjust the scale and scope of their production capability upward or downward, at a lower cost, to changing demand conditions and at a rapid rate. As such, outsourcing can provide greater flexibility than the vertically integrated organisation (Carlson, 1989; Harrison, 1994; Domberger, 1998). Furthermore, outsourcing decreases the product design cycle time, if the client uses multiple best-in-class suppliers, who work simultaneously on individual components of the system, as each supplier can contribute greater depth and sophisticated knowledge in specialised areas and thus offer higher quality inputs than any individual supplier or client (Quinn and Hilmer, 1994). Perhaps the greatest advantage of outsourcing is the full utilisation of external suppliers' investments, innovations, and specialised professional capabilities than otherwise would have been the case, which for any one organisation would be prohibitively expensive to replicate. However, transferring fixed costs into variable costs by selling assets to an outsourcing vendor is considered an advantage for many organisations. The company receives cash payment and transfers fixed costs into variable overheads (Currie and Willcocks, 1997).
2.2e-support in a collaborative supply chain
Portals can be defined asproviding internal and external users with customised access to information, applications, business processes, and people. “Portal” is a term that means very different things to different people. To most retail consumers, a portal is an Internet gateway such as Yahoo.com or AOL. To the average employees, if they have ever heard the term, they will believe it is the company intranet site where they check useful information. For the majority of business users outside the OEM, portals are any of the dozens of computer interfaces they use to access web-enabled applications or industry web sites.
The central idea for a collaborative supply chain is simple: Take IT applications in the manner of portal, host them on powerful servers, make them network-accessible, and allow users to run the application directly through the browser software on their PC or other network-enabled device. Applications can be deployed much more quickly, with far fewer up-front costs. And ongoing operational and maintenance headaches are moved from the client's organisation to the ASP. Because the corporation's users access the application over the network via standard browser software, the problems of PC compliance and software release upgrades, so typical today, go away. (Michael F. Corbett & Associates, 2004)
By implementing a portal, the OEM will be able to extract available-to-promise (ATP) information from the supplier’s supply-chain systems without regard to supplier location. In order to address the outsourced supply chain issues whilst the OEM adapts to the future customer and supplier needs catering for everything from online, sourcing and joint design and development of basic information flow must be considered. With the e-enabled portal support, more and more information will be wanted instantly and under the portal driven interface each party could have 24-hour access to reporting information if necessary.
Case Study
Introduction
This paper considers a UK-based aerospace OEM, which has made a strategic outsourcing move of the parts manufacturing capability to overseas suppliers. However, the company faced a major complication, namely efficient communication in order processing, technical sharing and production status with suppliers, which may be allocated in different places. The company strategy was to provide an integrated support chain for their customers, whilst reversing the traditional trend of rising cost of the extended outsourced supply chain which was characteristic of current service approaches to technical support.
The focus of the project has been to develop a proof of concept Supply Chain Management Portal to generate an overview and detailed understanding of what is needed to define a best in practice e-business solution for the company’s future requirements.
Problems Defined
OEM requires a better available-to-promise (ATP) capability. Traditionally, responding to ATP’s has been a mixture of manual and localised electronic data, which is often fed into the centralised systems, causing a protracted and time-consuming process. ATP queries to the portal can be submitted currently inquiring about whether the suppliers could meet the order commitments. Regularly suppliers’ capacity, material availability and throughput from various legacy systems have to be searched through reports. In a remote outsourced supply chain, traditional manual methodology will not be effective and accurate, so that a private portal may is expected to achieve as follows:
reduced transaction costs and paperwork
achieve greater leverage with key suppliers
standardised best practise procurement processes
access to dynamic business information and engage in real-time collaboration
improved lead-times and reduced risk to delivery
While conferring fewer strategic and logistic advantages than ownership, participation in the portal would cost less and still carry powerful benefits for suppliers. Through direct links with OEMs, suppliers can respond more quickly to the initial demands, manage supply chain and order processes more efficiently, and in general gain privileged access to their most important customers. The target of a private portal for the supply chain could be depicted as:
provide up-to-date on-line production information and price lists
ease of processing orders and status reporting
improve existing customer service levels
dedicated interaction channel with suppliers relative
leverage the Internet for increased productivity and improved efficiency
Portal Development Outline
The portal project has 4 distinct stages:
Stage 1 – Analysis of Requirements
Stage 2 – Prototype Development
Stage 3 – Pilot System Deployment
Stage 4 – Full Portal Integration
The scope of the project defines 5 separate portals as shown in Figure 3.
Figure 3: Supply Chain Portal definition and high-level schema
Source: e-Business Research Centre, University of Liverpool Management School, 2004
Research Methodology
The methodology relies upon rapid application prototyping. It has been adapted from the 3-stage methodology as found inFigure 4.
Figure 4:Three-stage development methodology
Source: e-Business Research Centre, University of Liverpool Management, 2004
The first stage comprises of an in-depth analysis of the “as is” or current business model, leading to the identification of problem areas. This is followed by the “to be” or e-proposition stage, where new e-enabled business models are proposed as a result of action-based mappings of material information flows and business processes. Furthermore, the second stage involves systems analysis the development of prototype applications to address the key issues identified from the above classification of information and process flows. The final stage of the methodology is termed e-analysis, where key questions raised during the previous stages are revisited. Additionally, a comparison analysis of the previous business model to the new e-enabled business model is carried out, followed by a qualitative analysis of business benefits and distribution of value across supply network.
Functionality Overview:
---- Supplier Capability
- Supplier can enter plant list and manufacturing capability
- Standard code is generated for each supplier from their manufacturing capability
- Search engine by a particular supplier to view all manufacturing capabilities
- Search engine by a manufacturing capability to view all potential suppliers
- The supply base can search by a manufacturing capability to view all potential suppliers
- Supply base KPi are measured automatically and made visible to OEM and the individual supplier
- Supplier-specific contact map
- Contact map of key supplier personnel
- Supplier marketing overview section allows suppliers to inform OEM of new investments and continuous improvement initiatives
- Suppliers can download current OEM documents
--- RFQPortal
- View Part standard code – commodity and risk classification
- View potential suppliers matched
- View supplier key performance measures
- View forecasted part demand
- View supplier capability, capacity and approvals
- Select suppliers that meet criteria
- Suppliers are automatically notified of new RFQ
- Supplier and OEM can view technical documents on-line
- Supplier completes quotation on-line, entering recurring costs, non-recurring costs and other costs for a range of quantity breaks
- Auto-reminder sent to supplier to complete RFQ
- OEM can make top-level comparison of supplier prices and lead-time or drill down into the quotation for detailed comparison of supplier price breakdowns or lead-time milestones
- Price maintenance –the supplier is notified to submit a new quote or maintain the existing quote after an agreed RFQ validity period
- Supplier RFQ reports auto-generated
--- Order Portal