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“Supply Chain Manger, Outsource Thyself” –Socrates

One upon a time, companies implemented “MRP” systems. They used these systems to plan the entire materials and manufacturing cycle; from forecasted demand, through procurement and assembly, to shipment out the door and delivery to the customer. About 15% of these companies succeeded with excellent financial performance, while the balance plodded along… either as “average” or failing miserably in their results.

Then MRP became MRPII by integrating finance; and still later MRPII became ERP by integrating everything else. With integrated financials and the incessant crooning of the software industry, the fiction was created that “information systems” was synonymous with “financial reporting”. Operations became marginalized in the system selection process and the sales pitch from ERP vendors continued further down the path of finance and financial reporting. This left finance in the precarious position of being responsible for an “IT” project they knew little about.

Thus, IT departments at many companies found themselves reporting into finance with their priority being financial reporting. IT protested with an “information age” marketing campaign that fought not only to preserve their own autonomy, but to elevate IT to a functional peer of the CFO. The board-level position of CIO was invented; along with  its byproduct of information management for the sake of information management… not accountable to sales, operations or even finance. With a gold-plated job title and a seat at the board of directors, expensive IT projects and preserving and repairing the network became more important than executing business plans and delivering cost-competitive quality products on-time to customers. Do I exaggerate? Compare the size of IT professional staffs including consulting budgets against Operations professional staffs (indirect labor). Within manufacturing companies, IT used to be 10%-20% of operations. Now it is often equal-to or greater-than. [Note: we are comparing IT to operations at manufacturing companies, not businesses that exist primarily as a website and their web strategy is their business strategy.]

And even today, the core MRP planning & execution functionality continues to decline in relevance compared to the ability to create spiffy financial reports or staff large, complex IT project organizations. In fact, many companies are now saying “why bother” to the MRP engine and the vestiges of operational planning and execution systems. We now see a whole generation of ERP products where manufacturing, operations and execution are add-in modules; optional and poorly designed bolt-on functionality.

Nowadays, even if operations is consulted on system requirements for the planning, execution and control of the order to fulfillment process (supply and demand chain), there are few left within its ranks who could even define this. The current generation of operations managers has come to the helm in the age of outsourcing. Many have never managed the actual manufacturing processes they are held responsible for. Fewer still have managed any materials functions beyond purchase orders, contracts and a bit of inventory. They admit freely that this is not their expertise, and see the end-to-end supply chain as a project management problem to be controlled with MS Project, Excel, PowerPoint, KPIs, Metrics and Dashboards. But when that little line on the dashboard wiggles into the red zone, they don’t know what to do other than call a meeting and have the “other” person commit to yet another project plan to get back on track; with of course the inevitable rolling commit date. This is what currently passes for “management”.

Project Management has triumphed over operational knowledge, impeccable execution of business objectives and resolute accountability. KPIs, dashboards and metrics matter more than business acumen, technical expertise and process depth. The blind lead the blind, with the senior management team seeing operations as a necessary inconvenience that stands in the way of traveling the road to greatness demonstrated so clearly in their slide ware. History would prove them right: Few companies have ever run MRP-centric operations & supply chain functions well, and reaped the full benefits that the tool set offers. But this does not eliminate the need for the tools.

In this environment, astoundingly few people can dig down to the fifth “Why?” of causation, and propose game-changing solutions or radical process integration. With the outsourcing of manufacturing, OEMs are no longer staffing the problem-solving and solution-generating positions of material planners, production controllers, master schedulers, and the ops engineering functions… industrial, manufacturing and component. Instead, everyone is a program manager hiring program managers to manage ever increasingly more complex programs. The “how-to” brain trust is decimated: “Supply Chain Manger, Outsource Thyself” –Socrates.

Even the consulting industry has bought into the model. Many consultants recommend software solutions that in turn require the maximum number of consultants to implement; and then they recommend never-ending consulting projects to sustain the software: Are SAP, Oracle and Dynamics really the best one-size-fits-all solution; or simply the best revenue stream for the outsourced operations industry? Does it matter to even ask this question since no one on staff is capable of arguing with the outsourced experts or proposing viable alternatives?

Needless to say, for every dollar a company spends with a software company to buy its ERP program, it finds itself paying another six to a management consultancy to adapt the program for its factories. No wonder these consultancies speak of ERP in reverent tones.

–The Economist, July 5, 2001

In reality, outsourcing hasn’t reduced indirect overhead expenses; it has simply shifted the budget dollars from operations to the triad of finance, IT and consulting. These three groups have taken the budget and tool set; bloating their staffs and leaving the VP of Operations without the resources to be effective. Add to this that Operations has been out-politicked at the executive level by the greater prestige of every other function… sales, marketing, finance and engineering. They all have a professional mystique that when compared to operations makes it seem dirty; the least desirable and most trivial of functions— only worthy of further outsourcing and budget cuts. Disagree? Check out executive compensation for publicly traded companies by job title.

The trade press and scholarship say that we are in the age of globalization, the competitiveness of supply chains and the best end-to-end business processes. How does this match up to the organizational clout, salary compensation and operating budgets of operations & supply chain management when compared internally across functions and externally to benchmarked “best in class” competitors?

Like every other resource and expense a company has, too much or too little operational capability will not make the customer happy. Operating costs go up with too much; performance (schedule, responsiveness, product cost and quality) goes down with too little. Applying the correct amount of operations resources to the most innovative and efficient process delivery systems is what the winning supply chain is all about. If Lean teaches us anything, it is this.

To summarize so far…

  • An operations and supply chain management group must have sufficient resources to hold the supply chain accountable for performance, and to be held accountable themselves. If senior management starves operations, then accountability will be outsourced and excuses will prevail.
  • Ultimately, it is more fun, less stressful and pays better to crank out financial models and product marketing plans for other people to perform to than to execute them yourself. Operations however must execute flawlessly within the constraints, plans and wish lists of every other organization. Good Ops people are an unusual breed; possessing both technical knowledge and the competitive drive to innovate and succeed. If you meet them, they are worth remembering. Organizations staffed with such individuals will triumph over those that have atrophied into the program management model of outsourced accountability.
  • The fully integrated supply chain must have functional experts capable of recognizing and driving innovation and world-class change. Reengineering, Lean, TOC and Six Sigma solutions may temporarily improve some existing business processes; but they regress from “culture” to “project” without a team capable of ownership and an ongoing spirit of creative problem solving. If you are a hardware product company, are you “in the game” or out? If nothing is to be your core competency, fixed cost or strategic advantage; then you have regressed to a marketing channel that selects ODMs for your products. Please call yourself what you are – a retailer. Or, to paraphrase Henry Ford in a moment of sarcasm, “Why don’t we close all of the factories down. Think of all the money we will save!”

All of the original TPS/JIT/TQM/Lean companies from Japan and the U.S. that are held as examples par-excellence use core MRP functionality to estimate component volumes, communicate forecasts to suppliers, negotiate current and forward pricing, plan product transitions and determine medium to long term capacity. Even without the internal factory, MRP remains the essential operations simulation tool for managing the supply chain. But how do you convince a project manager of this? The rarest of jewels is a VP of Operations from the program management / KPI generation that is convinced of this imperative and capable of winning this budget & capabilities argument with finance, IT and the board.

But perhaps the days of “big” ERP systems are behind us. If we don’t need core MRP functionality integrated into “ERP” software, per se; then finance buys a finance package, engineering buys a lifecycle package, sales buys a customer relationship package and ops buys a simulation, planning, execution and control package. With the number of excellent third-party applications increasing and the prevalence of ODBC, API and data warehouse integrations; the best of breed parts are probably greater than the currently bundled whole. With or without a core ERP system, operations will need the extensive simulation planning and measurement capabilities of MRP. Unbundled systems may fill this requirement in modeling flow, capabilities and execution through highly integrated supply chains. It is this process flow that makes us money and retains loyal customers.

For most of our history, executive management managed the performance of functional silos and the handoffs between silos. Then, we recognized that it was the process of adding value itself that needed to be managed. When that process of adding value was extended from within the four walls to the suppliers; supply chain management was born. And since the process isn’t over until the product is in the customer’s hands and the money is paid, the supply-demand “chain” or “network” came to be.

Our understanding of the situation has been deepened by this new perspective, while our ability to execute ever more reliably and cost effectively has atrophied due to the herd mentality of outsourcing everything down to the brand. Few are left who can drive the train of planning, execution and control. Fewer remain who understand how to apply the brakes or switch tracks. Fewer still foresee the game-changing innovations before they become me-too solutions… dumbed-down and pre-packaged with everything you need, except for the knowledge and tenacity to implement them. Who is left that understands why these “lose 20 pounds of inefficiency without dieting or exercise” solutions have failed repeatedly at their own company and across their industry? But from the seller perspective, that’s a buyer problem.

Every nation, every culture and every person places pride on innovation. We inherently trust that innovation will save us and our children from hamburger-and-haircut jobs that can’t be outsourced to low-cost countries in this globalized world. Yet we go to work each day outsourcing our brain trust; and expecting to be rewarded for it.

We have broken the trust that Henry Ford so eloquently expressed: When asked by a reporter, “Why do you pay your workers so much?” he replied “So they can buy the cars I make.” From the early days of the industrial revolution forward, it was recognized that if you simply made a worker do more for the same money, or eliminated jobs thanks to their improved productivity; an implied contract was broken and workers would cease to be the source of productivity improvements as change would be against their self interest. For a number of decades, productivity improvements translated into an increased standard of living for the average American. This is no longer true. The standard of living has continued to decline since the 1970s.

When the age of globalization arrived, the rules changed. Businesses could now take the position, “accept a lower wage for increased productivity, or the job can be moved to another country.” We preached worker empowerment while practicing a psychological war of coercion. In this spirit of fear, and sometimes blackmail, we have drained trillions in profits and livelihood from this country unnecessarily.

Why do I say unnecessarily? Because while U.S. automakers were outsourcing to China; Japanese automakers were increasing production in the U.S. with zero Chinese content. Let’s see… cost, quality, profit; hmmm. The death of American manufacturing was largely a creation of the trade press, me-too academics, outsourced manufacturers, for-profit consultants and inept management that lacked the expertise to argue back in total cost models, innovative process changes and customer satisfaction. Ultimately they succeeded in destroying our capacity to hire domestic talent capable of competing with overseas talent.

We tell our children to go to college for a better life; while going to work and outsourcing our engineering, finance, legal reviews and medical diagnostics to low-cost countries. We emulate “successful” companies that have outsourced everything right down to their IP and innovation (ODM model); and exist as nothing more than an empty shell of a brand, a web page and a sales channel. Eventually, someone else will figure out that a new brand name launched with a half-billion dollar marketing campaign and a web sales channel will take away the remainder of the jobs and profit. Throwing rocks at empty shells is only a matter of time. Dell… you’re next.

We must win the battle of prosperity wages for the average worker (buyer) and reasonable returns for corporations (seller). Productive sellers and qualified buyers are what create an “economy”. In this globalized race to drive everything to a uniform poverty level, we must compete on innovation; not simply cost. As someone once said, “If we all go shopping at Walmart, we will create jobs at Walmart and our children will work at Walmart.” Too many of our businesses have copied bad practices in the name of best practices; short-sightedness in the name of long-term goals. Cost is important. So is economic prosperity, human potential and viable corporate existence. We can achieve this.

Abandoning the fight for intellectual property and innovation will not save us. Outsourcing the competency to manage outsourcing will not save us. Threatening our workers with their jobs and our countries with abandonment will not save us. Retail, hamburgers and haircuts are not a viable end-game for a new American economy.

We are in a battle for the executive mindshare of corporate America. To-date, we’ve trained ourselves to expect failure from insourcing and nearsourcing instead of demanding greatness from each other. Nothing remains our core competency; everything is for sale. After all, shouldn’t everything be outsourced and variable cost? No it shouldn’t: we’ve abandoned our friends, neighbors and children while in blind pursuit of reducing the American engineering & manufacturing economic machine down to three program managers and their PDAs… with direct deposit tax-free to the Grand Caymans.

I have worked in contract manufacturing and competed successfully for U.S. production against China and Mexico. Frankly, for many products, it just isn’t that hard to win. What is lacking is the will on the part of management to question the wisdom of the trade press, gain expertise on the alternatives and intelligently, creatively pursue opportunity. My first boss kept a plaque on his desk: “Luck: when preparation meets opportunity.” If we no longer prepare, we can’t recognize an opportunity that runs counter to the herd mentality de jure. We can’t be “lucky”.

Why does localized manufacturing make sense?

  • The U.S, dollar will continue to decline against growing economies; therefore imports will cost more over time.
  • Materials are largely at a worldwide commodity price. Offshoring holds no advantage on globalized material costs.
  • Offshore is slower to respond to market changes and the demands of key end-customer accounts; leading to lost profits, higher inventory and more frequently upset customers.
  • Freight, fuel and offshore labor costs will continue to rise in absolute and dollar-denominated terms.
  • Financing four weeks inventory on the water or paying for that 747 shuttling parts back and forth. You pick.
  • Duties, Tariffs, etc.
  • The ongoing cost of flying technical staff and management to the site.
  • Time matters: customer lead time, customer demand change responsiveness, cash cycle, etc. Building near the end-customer market achieves speed and responsiveness without inflated inventories or long manufacturing and transit times.
  • Reducing leadtime is the ultimate fix to forecast error and its consequences: lost sales, slow turns and high excess & obsolete. Predicting demand for the coming week is inherently safer and more profitable than committing against the coming quarter or the coming year.

The only meaningful advantage to offshoring is labor content; which is typically a minor portion of the total cost. This is more than offset by all of the other cost components above in all but the highest volume consumer products, where fractional pennies matter. Material and equipment are the same globalized cost. Facilities (including taxes and fees) and a few artificially subsidized commodities may be cheaper; but much of this “benefit” is achieved by avoiding U.S. environmental regulations. This will become more difficult and less acceptable to corporations and their customers in the “green” age. Environmental standards will increase around the globe and become more uniform. Prices will become more uniform.

Ultimately, we are moving into an age were factories will be built near the markets consuming the product rather than in a low-cost country removed from the end market. Fuel, transportation, logistics, and “movement” itself (muda) must be performed locally for service to increase and inventory related costs to go down. The “Global” supply chain will have the glamour of a gas-guzzler when fuel costs double, and double again.

Maybe Henry was right: Products will once again be built in local markets and provide well-paying jobs to local people who can then afford to buy them. Perhaps a good idea can be reused once every hundred years or so. Or as Bill Clinton more famously said, “It’s the economy stupid.” An economy requires sellers that are profitable competing for buyers with disposable incomes. It is in the interest of everyone to achieve both.

© 2009 David Ginsberg

3 Comments leave one →
  1. Mark Hoekstra, CPIM permalink
    July 1, 2009 5:46 am

    At the risk of sounding like an APICS “homer” – this is an excellent piece of work.

    I have experienced the cycles you describe first hand. I have focused on SCM solutions all of my professional life and have watched with sadness the results of not being able to grab the executive mindset. The bankruptcy of GM should be a high water mark for us all (I am from Michigan and worked for a supplier). I have always said, in a service economy, who are we going to service – service companies? Solutions today are IT focused and Steve Jobs is lucky!

    I believe your term – Localized Manufacturing – should become part of the economic recovery lexicon and the leadership must offer incentives for us to take a risk. And that young, bright engineers with traditional and green solutions that make sense with not think China first, but local, low cost, short lead time, high quality manufacturing models that are quick to market and leverage solid business plans. My early APICS training taught me that the only way to really increase wealth in a country is to convert raw materials into products that have market driven demand.

    My observation is that with lines forming to buy the new iPhone, we have a long way to go.

    Thanks you for your contribution.

    Mark Hoekstra, CPIM
    Grand Rapids, MI

  2. July 4, 2009 8:32 pm

    From: Lean Enterprise United Kingdom

    Yes I tend to agree. I’m a project manager for the implementation of said systems, and many of the problems stem from the lack of communication between both management and staff – ie they dont fully understand their job processes fully when it was manual (or have a vision how to improve efficiencies) – then implementing it into an IT environment compounds the problem.

    Cheers Fran

  3. July 15, 2009 8:10 am

    Well done. A couple of supporting data points: In 1985 Mexico was at $2/day. Now the fully burdened rate nears $12/hour on the border. In the Southern US, we can achieve $16/hour. $4/hour gap and closing. Divide that by the 16 minutes of labor in a product such as a PC and you get….? (not much).
    Regarding the outsourcing mythology, one should look at the EMS market itself. The two leaders (Foxconn and Flex) rely on vertical integration to achieve reasonable financial performance, while all the other and former Tier 1’s without vertical content are sucking wind or have run aground and been bought. Meanwhile there are plenty of highly profitable Tier 2-3 EMS companies within the high cost geographies doing well because they focus on unique value add and higher service levels. Foxconn can give away the EMS labor if there is enough Foxconn component content. In other words, they are starting to look like an OEM (Foxconn brands coming to a retailer near you…watch out to their OEM customers!) Net, net, the Tier 1 EMS outsourcing model, without vertical content and no unique value add is unsustainable. Look at the market caps of some of these companies! We ran to China for P&L benefit and are getting murdered on a Total Cost basis. Some of us are old enough to recall when the Phillipines was the low cost location…then Malaysia and Singapore, then Taiwan, now China…next? Africa? There is already significant upward salary pressure in China and if the currency is ever allowed to truly float…watch out. What happens to your supply chain when China isn’t low cost labor anymore?

    Rightsourcing instead of Outsourcing

    Joe Joy
    Managing Partner
    Empresa Partners

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