Global Logistics and Supply Chain Strategies - June 2008 - (Page 34) us in a highly dispersed way to convene on a problem with laser focus,” he says. There will be direct savings as a result, but more important will be changes in the relationship, says Harrington. “It will show up in our ability to make faster and better decisions, it will show up in productivity which will impact margins, it will show up in faster time to market and it will show up in better product quality.” All About Relationships Experts agree that true strategic relationships are at the heart of all successful outsourcing initiatives. Companies need to understand that they are not merely divesting production investments, but rather trading one kind of investment with another, says Aberdeen’s Benchmark Report on Manufacturing Outsourcing. “Instead of owning and optimizing assets, they must turn their attention to owning and optimiz- manufacturing and other types of business outsourcing. These arrangements often “turn into nothing more than outtasking, where a third-party performs the activities that the customer would have provided for itself, under similar basic conditions,” he says. One problem is that the contract manufacturing industry remains largely focused on cost-plus or rate-of-return models, which result in negligible strategic benefit, he says. “When well executed using a true strategic sourcing model, outsourcing should deliver customers with value-driven results that they would likely never be able to produce on their own. Strategic outsourcing involves the outsourcing vendor utilizing its scale, purchasing power, and lower wage locations to reduce its own costs as well as the vendor capitalizing on its ability to perform functions in a more efficient and effective manner by deploying tech- ing relationships. Enterprises that fail to grasp this will find that their outsourced manufacturing strategy is fundamentally not very different than a supplier strategy nor is it any more valuable,” the report says. Being “strategic in name only,” is a failing of many outsourcing arrangements, says David Rutchik, a Washington, D.C.based partner at Pace Harmon, an advisory firm specializing in contract nology, methodology, and leverage across multiple customers.” Eric Larkin, chief technology officer and co-founder of Arena Solutions, Foster City, Calif., agrees that companies need to be prepared to make a significant investment up front in order to develop a strategic relationship. “Fundamentally, manufacturers should approach contract manufacturing and outsourcing with an economic expectation that in some ways is similar to the way they approach the problem of tooling for a product,” he says. “You are aiming to achieve a reduction in the variable cost of each unit of product and typically you may spend $100,000 or $1m, depending on the complexity of the product or part, to purchase the tooling. With contract manufacturing, the same scope and scale of investment has to take place up front in order to end up with a successful relationship.” Arena provides on-demand product lifecycle management (PLM) software. As part of its PLM suite, Arena offers a costing model that can help companies better understand the economics of outsourcing. “Working with a tool like Arena PLM, companies can selectively share views of the product design with contract manufacturers, who can then provide them a costed bill of materials with a rollup to the total cost,” he says. “They can then review that against their own internal sourcing methods to make sure they are seeing a reduction in the end unit or variable costs that are in line with what they expect.” This is an area where PLM “is a very valuable tool because it enables companies to establish a shared truth about the product with the contract manufacturer up front that is clear and unambiguous,” Larkin says. “In outsourcing manufacturing you are asking a remote party to do something very complex,” he continues. “PLM removes any ambiguity around what the contract manufacturer is supposed to be doing or building today. This is important because ambiguity leads to mistakes or errors that can end up being very expensive and chew up the cost reductions that you were expecting.” Larkin says an Arena survey shows that contract manufacturers like it when a customer uses a PLM tool for just this reason – “it removes the ambiguity around the relationship and makes the process of resolving the real dollar questions that have to be resolved substantially easier. Ambiguity is expensive and tools and business practices that reduce the level of ambiguity in a relationship end up yielding very substantial benefits in terms of being able to achieve the outcome expected,” he says. Risk Management Another of the advantages of Arena’s solution is that it ensures the communication of accurate product data and requirements to 34 JUNE 2008
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