A proud new iPhone owner in 2008 was surprised to find this photo on his brand new device. This young girl, who looks around 13 years old, works in the Foxconn plant that assembled the phone.

With the rising emergence of automation in the manufacturing world, brought on by increasing global competition and reinforced by events like Foxconn’s plan to integrate over 1 million robots into its assembly lines, it’s easy to forget that the vast majority of our electronic products are still largely assembled by hand.

One Foxconn plant in Shenzhen, China, referred to as Foxconn City for its massive size, is particularly well known for its use (read: abuse) of manual labor in the assembly of products for popular companies like Apple, Sony, Dell and more. The plant employs over 340,000 workers and has had dozens of workers commit suicide due to intolerable working conditions. Just recently, 150 workers threatened suicide over a severance pay dispute, and one worker passed away after completing a 34-hour work shift.

One Apple lover’s journey inside Foxconn

Last week, Ira Glass from Chicago Public Radio’s This American Life shared an excerpt from a monologue performed by Mike Daisey, a self proclaimed “lover of all things technology,” who ventured into the factory that assembles so many of his beloved products.

Disguised as a businessman, Daisey witnessed firsthand the bleak working conditions in the Shenzhen Foxconn plant—and came out of the experience with a profoundly altered view on, as he says, everything.

Below are a few poignant excerpts from Mr. Daisey’s recount of his visit to the plant:

Industrial spaces with 30,000 workers in a single enormous space. They can exert a kind of eerie fascination. There is a beauty to industrialization on such a massive scale, you don’t have to deny it. There is a wonder to seeing so much order laid out before you.

They work on the line, and the line only moves as fast as the slowest member. Each person learns how to move perfectly as quickly as possible. If they can’t do it, there are people behind them watching them and there are cameras watching both sets of people and people watching the cameras. They lock it down. They sharpen it, to a fine sharp edge.

The dormitories are cement cubes—12 foot by 12 foot. And in that space, there are 13 to 15 beds. They are stacked up like Jenga puzzle pieces all the way to the ceiling. The space between them is so narrow. None of us would actually fit into them; they have to slide into them like coffins. There are cameras in the rooms; there are cameras in the hallways; there are cameras everywhere.

As a consumer, where do you draw the line?

Manual labor is still an attractive option for companies like Foxconn because, in countries like China, the cost of labor is effectively zero and the efficiency of these factories is unparalleled. But many activist groups around the world are protesting the consequences of pushing human factory workers to the level of productivity that our vigorous modern consumer buying cycles demand.

In this excerpt, Daisey questions who ultimately carries the responsibility for change:

In my first two hours of my first day at that [Foxconn] gate, I met workers who were 14 years old, 13 years old, 12 years old. Do you really think Apple doesn’t know? In a company obsessed with the details? With the aluminum being milled just so; with the glass being fitted perfectly into the case? Do you really think it’s credible that they don’t know?

Or do you think that they’re just doing what we’re just doing? Do they just see what they want to see?

The truth is, factories like Foxconn turn a blind eye to underage employees, bypass commonly accepted working hours, and foster an oppressive work environment because, well, they can. There are enough gadgets being ordered by companies and demanded by consumers to keep Foxconn’s production lines running 24/7.

How Apple sees it

For companies like Apple, going overseas feels like their only option to staying on top of the demand. When Apple redesigned its iPhone screen in the last minute, for example, it needed a factory that could pull off an assembly line overhaul—waking 8,000 workers in the middle of the night to start a 12-hour work shift fitting new glass screens into iPhone frames. Only a place like Foxconn City can deliver this kind of efficiency and speed.

And while it’s true that factory wages in China are less than what American factories would be required by law to pay, the decision to outsource is not just about Apple saving money. For Apple CEO Timothy D. Cook, the decision to outsource assembly to Asia came down to two things—factories in Asia can “scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S..”

Jennifer Rigoni, Apple’s worldwide supply demand manager until 2010, explains Apple’s logic like this: “They [Foxconn] could hire 3,000 people overnight. What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

So what do you think? Is this our new reality or is there a way to bring factory jobs back home?

Listen here for the entire monologue of Mr. Daisey’s trip to the Foxconn plant in Shenzhen.

For more information:

What the robotic age means for U.S. manufacturing

Foxconn’s planning to hire 1 million robots

Mr Daisey and the Apple Factory

In recent years, we have seen an interesting shift in the Netherlands. Traditionally logistics-focused companies are beginning to expand their market reach to take on larger pieces of the supply chain, and an increasing number of companies are in need of a way to manage product data as it moves through its lifecycle. Fortunately, this is the specialty of our new partners at ProductStream, a Netherlands-based company that helps European manufacturers better centralize, organize and share product data.

ProductStream, founded by ERP/PLM specialists Ard Zonneveld and Johan Bax, is quickly gaining a reputation as a company that’s fully focused on supporting product development processes. ProductStream specializes in streamlining the product development cycle, so manufacturers can move more quickly from the initial idea to the final product release.

ProductStream has been particularly successful with companies looking to expand their participation in an international supply chain. According to Ard, this is a growing trend—as many Netherlands-based trading companies are looking to become more integrated in their approach to business. “In particular, we’ve seen a growing number of trading companies evolve into ‘integrated importers/wholesalers.’ This means that they grow vertically in the supply chain, taking over backward and forward activities to strengthen their market position. This development is in most cases combined with the production of their own or third party labels, and results in a scenario where design and product development is done locally, but manufacturing is outsourced to Asia or East-Europe.”

As we work with a variety of Netherlands-based organizations (like IRX) we look forward to a long and successful partnership with ProductStream. As more success stories from Dutch manufacturers come our way, we will be happy to share them with you.

About ProductStream

ProductStream was born when Ard and Johan, who worked together as ERP /CRM consultants, saw the growing number of companies unsuccessfully trying to manage their product record with pencil and paper, email and excel. According to Ard, “In the average corporation, there are several disciplines involved with product development—in addition to the internal teams, companies may work with agencies, designers and contract manufacturers.  Between these many outsourced players, companies who have a collaborative and centralized platform for product development are the most likely to be successful.”

To learn more about ProductStream (in Dutch!) visit their website, or get in touch with Ard and Johan on LinkedIn.

For more about manufacturing in the Netherlands

The Netherlands in manufacturing

The Netherlands-location, size and other stats

I recently spoke with Kate Vitasek, a faculty member at the Center for Executive Education at the University of Tennessee, and co-author of Vested Outsourcing: 5 Rules That Will Transform Outsourcing, about how a Vested Outsourcing approach can help manufacturers develop better outsourcing relationships, and cut outsourcing costs.

Alex: Tell us about your work at the University of Tennessee and what led you to Vested Outsourcing.

A few years ago, the University of Tennessee asked me to lead a project to identify best practices in outsourcing. My team looked at a lot of deals, and saw what worked and didn’t work. We looked at the research around outsourcing relationships, research done by Nobel-prize-winning economists that showed why certain elements of outsourcing deals work, like behavioral economics and transaction cost analysis. We wanted to help people understand not just the how but the why.

With my two colleagues, Mike Ledyard and Karl Mandrodt, I wrote a book that came out in early 2010 called Vested Outsourcing: 5 Rules That Will Transform Outsourcing. This past summer, we published a second book, The Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing Agreements. We also introduced an online course and a suite of education and consulting services to help people implement Vested Outsourcing deals.  It’s been truly amazing and exciting to see how much interest there is.  A lot of people are struggling and unhappy with their outsourcing deals, and Vested Outsourcing shows them a better way.

Alex: What is the Vested Outsourcing model?

Kate: Vested Outsourcing is a hybrid model that combines outcome-based thinking with relational economics and shared value principles. It’s about creating business agreements where both the buyer and the service provider collaborate to solve business problems—creating a vested interest in each other’s success. In a Vested Outsourcing partnership, partners focus on transformational initiatives that generate value, rather than what it costs for the service provider to perform an activity.

Focus on transformational initiatives that generate value, rather than what it costs for the service provider to perform an activity.

Kate Vitasek
Center for Executive Education
University of Tennessee

We’ve identified 10 elements of a successful outsourcing relationship, using the term “vested” because these deals provide both parties with a vested interest in helping each other be successful. In a Vested Outsourcing partnership, working together is absolutely critical. If you allow your outsourcing relationship to become adversarial or positional, you squelch the potential for transformative solutions that can reduce costs and improve service in ways you could not imagine.

What makes Vested Outsourcing different from other outsourcing models?

Most new outsourcing efforts are driven by a desire to reduce costs, and companies just venturing into outsourcing start from the mistaken premise that reducing price automatically means reducing costs.

Sure, if your sole driver is a lower price you can achieve short term cost reduction, but if you’re not collaborating with your service provider, you’re going to miss out on the opportunities for innovation and total cost reduction through process transformation.

And think about what happens when you shop your deal to see if you can get a better price. There are the transaction costs. You spend resources on the RFP process. Your service provider does the same. Then you have transition costs, which can go way beyond the dollar cost when you consider the disruptive effects on your supply chain or your customers.

So, in many deals, focusing on price just isn’t the smartest way to go about it. In a Vested Outsourcing model, you work together with your service provider to transform your processes and find the value, and this ultimately leads to greater cost reduction.

What are the top risks in outsourcing, and how can Vested Outsourcing help?

I’d say the number one risk is transaction-based pricing. By that, I mean defining a scope of work based on activities—picking, packing, shipping, answering calls, storing servers, etc. We call this the activity trap. If you pay your service provider for every activity, there is no incentive for the service provider to become more efficient.

Now you say you want cost reduction, you say you want transformation in your supply chain, but what did you just buy? You bought activities. You didn’t buy creativity. You didn’t buy innovation. When you just pay for activities, you provide your service provider with absolutely no incentive to innovate. An improved process to reduce activities means lower revenue for the service provider. Why would any service provider voluntarily give up revenue?

When you just pay for activities, you provide your service provider with absolutely no incentive to innovate.

Kate Vitasek
Center for Executive Education
University of Tennessee

A Vested Outsourcing deal structures the pricing model in such a way that the buyer and the service provider both have financial incentives to innovate. One example of this is margin matching. If you (the service provider) figure out a way to streamline a process, than I (the buyer) will pay you your margin on the activities you’ve eliminated, plus a reward for innovating. Additionally, I will cover the costs of the technology required to implement the innovation.

This is an example of the win-win situations in Vested Outsourcing—the buyer ultimately comes out ahead, and the service provider is incentivized to improve the process, which leads to better end-user satisfaction. So everybody wins.

What are some outsourcing problems that Vested Outsourcing addresses?

The most amusing problem Vested Outsourcing addresses is what I call the “Watermelon Scorecard.”  This situation occurs when you build your contract around activities, set your KPIs and SLAs, and watch what happens.

Usually, even if your service provider’s scorecard is green, you’re unhappy—red on the inside—because you’re not getting what you really want. (All too often buyers think what they want is a green scorecard—and once they get it they realize they really wanted business outcomes.) To fix that, you have to step back and clearly communicate what you really want, then build an agreement that provides the proper financial incentives to your service provider to give you what you want.

Another issue Vested Outsourcing addresses is the distrust that sometimes occurs between the buyer and the service provider.  Distrust is a clear symptom that the deal isn’t right, and the big challenge here is breaking down the buyer and seller’s win-lose mental habits and adopting a collaborative approach. This way they can work together to reduce cost structures and drive efficiencies.

When one of the parties is larger than the other, we sometimes see what we call the “800 Pound Gorilla Syndrome.” This happens when buyers try to irrationally squeeze the service provider on pricing. Buyers don’t always realize that if they keep squeezing, it actually poses a threat to the service provider’s viability.

Remember, if you strip the service provider’s margin, the service provider will get it back one way or another. They have to—they have EBITDA requirements just like you do!

How does Vested Outsourcing help organizations manage change and reduce costs?

There are two key principles of Vested Outsourcing that can really improve how you manage change and cut costs.

First, work with your partner. I can’t emphasize this enough. If you are unable or unwilling to collaborate, you’re shooting yourself in the foot unless you are 100% certain that you have all the answers.

If you are unable or unwilling to collaborate, you’re shooting yourself in the foot unless you are 100% certain that you have all the answers.

Kate Vitasek
Center for Executive Education
University of Tennessee

Second, be clear about what you want to accomplish. We call this “defining your desired outcomes.” From the desired outcomes, you sketch out what needs to happen to achieve those outcomes. We have developed a tool we teach in our classes called the Requirements Roadmap. The Requirements Roadmap is a great way to help companies rise above thinking about activities and service levels.

How might manufacturers apply key principles of the Vested Outsourcing model to improve their outsourcing relationships?

First of all, I highly recommend manufacturers educate themselves about the economics of outsourcing and the literature on what makes outsourcing deals succeed or fail.  They can start with the white papers we have on our site which are free as downloads.

Most people think outsourcing is all about price, so they think getting a good deal means getting the best price. But there are serious flaws in that approach when you need your service providers to be smart and help you respond to the constant changes in the marketplace. If you need innovation in your supply chain, it is just plain stupid to outsource purely on price. You have to shift your focus to value.

How do you define the value you need in order to be successful? Which outsourcing partner is best qualified to help you succeed? Notice I said best qualified, not cheapest.

Does Vested Outsourcing work across all industries?

Well that’s a very interesting question because in principle, yes, you can apply the concepts of Vested Outsourcing in any industry, but not every deal needs to be a Vested Outsourcing deal. Let me explain.

In our research we have seen Vested Outsourcing deals in almost every type of service and industry. However, just because you can do a Vested Outsourcing deal does not mean it is right for your business.

If you’re buying pure commodities, you really don’t need to use a Vested approach as long as what you are buying is already extremely efficient and you feel you are getting value from letting the market set the price/value equation. Vested Outsourcing is best suited when you want your service provider to be smart and creative and help you put a solution in place that can add incremental value or doesn’t yet exist.

The simple litmus test I have for a company is this—do you have any desired outcomes?  A desire is something you want – and an outcome is a business result.  So if your company has desired outcomes you are not currently getting from your service providers, Vested Outsourcing may be a good fit.

Any other thoughts?

Well I just want to thank you for asking the questions.  And to the COO or CFO or Chief Procurement Officers, I would say asking questions is a good place to start. Question your assumptions about what makes outsourcing relationships work. Look at the research. Consider alternatives to conventional transaction and price-focused approaches. The “I-win-you-lose” approach is really outdated if you are trying to create value—and that is the name of the game in the 21^st century.

It is imperative that companies create outsourcing deals that provides financial incentives to both the buyer and the service provider to collaborate and innovate to create breakthrough solutions.  This will mean changing practices, changing mental habits, and re-learning, but our research shows it pays off.

For more information

Kate Vitasek’s approaches and insights have been widely published with more than 200 articles in respected academic and trade journals, including the Journal of Business Logistics, Supply Chain Management Review, Inside Supply Management, Forbes, Chief Executive Magazine and Aviation Week. She is also a columnist for Outsourcing Magazine and Procurement Leaders Magazine.

Vested Outsourcing website

Vested Outsourcing: Five Rules That Will Transform Outsourcing

The Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing Agreements

Findings from the 2011 Arena Solutions Manufacturing Outsourcing Survey

The PDX file standard—an easier way to share BOMs with your supply chain

Where has all the red paint gone?

Why does supply chain diversification matter? Take Ford’s recent fiasco following the natural disaster in Japan. Because of the auto manufacturer’s reliance on a supplier affected by the tsunami, Ford was unable to source key pigments that went into the paint for certain models. That is why it’s much harder to buy “royal red,” “red candy, “red fire” or “tuxedo black” vehicles today, and why you should consider diversifying your supply chain.

Questions to ask before adding supply chain vendors

If you’re considering adding supply chain vendors to mitigate your overall supply chain risk, there are many aspects that must be considered before you take the leap. Ask yourself the following questions:

• Are you at a sufficiently stable point in your product life-cycle? (Can your current handle a disruption?)
• How will you manage your supplier relationships through the transition?
• Can you afford or somehow mitigate new supplier implementation costs?
• How will you cut the ties to suppliers you no longer care to work with?
• What is your internal/external process for change management? (Do you have one?)

A clear, smooth process for managing change is crucial

This last consideration is extremely important if you are diversifying your supply chain—what is your process for change management? This includes defining what changes matter, what requires an ECO, who signs off, etc., as well as implementing systems that allow you to effectively and quickly communicate changes with internal and external partners.

When adding more complexity to your supply chain, the ease of production is directly proportionate to the quality, depth and availability of your documentation, so make sure your processes for revision control and data-sharing are up to par. (And if you have questions, here is an article on revision control.)

Diversification should not mean overproduction

If you’re moving ahead and adding supply chain partners, it’s also important to recognize that a diversified portfolio has more moving parts than a simple linear supply chain—because of this, managing inventory levels can be difficult. As you work with your various suppliers, keep in mind that excess inventory is a waste of both time and money. Make sure to keep your supply pipeline full, but don’t fall into the trap of over production.

Having tunnel vision in your manufacturing process can mean disaster for your product and company, so it’s good to be on the lookout for opportunities to diversify. Just be aware that diversifying increases your complexity as well as your operating and management costs upfront—so run cost analysis before diving in, and proceed with caution. Although a diverse supply chain takes an initial investment and adds complexity, if you are in a position to do it, it can really pay off in the long run.

For more information

Managing supply chain risk—are organizations doing enough?

Tips for developing a supply chain risk management strategy

Tips for managing supply chain risk from Global Supply Chain Solutions

Can sustainability help mitigate supply chain risk?

Most companies outsource in some capacity—whether it’s working with an external call center on the sales side, or paying a team in China to manufacture the whole thing—but deciding what to outsource can be tough. While it may be an easy decision to outsource something like custom part manufacturing, when it comes to core business processes like purchasing, inventory management and assembly, the decision gets a bit trickier.

The benefits of outsourcing purchasing, inventory and assembly

If you are thinking about outsourcing major processes like purchasing, inventory and assembly, there are definitely benefits to this approach. In offloading some of these processes to a contract manufacturer (CM), you free your in-house team up to focus on design and engineering. In many cases, this is a smart move because it allows your in-house team to develop strength in specific areas. Because purchasing and inventory is resource-intensive, assembling and training a team to manage it in-house can distract from product maintenance, development and other organizational priorities.

For some companies, outsourcing purchasing, inventory and assembly leads to significant cost savings. You may be able to reduce sourcing and shortage issues—since your contract manufacturer team is building the product, it can be synergistic to task them with finding and purchasing the parts as well. Plus, when you outsource the purchasing and inventory piece to a contract manufacturer, there is considerable potential for cost-reduction. Contract manufacturers often do similar work for multiple customers using the same components—if your parts get lumped in a volume purchase, economies of scale can save you some money.

When does outsourcing purchasing, inventory and assembly make sense?

While there are benefits in outsourcing purchasing, inventory and assembly, it’s not the right decision for everyone.

To help you decide how much of your production process you should outsource, start by asking yourself the following questions:

• What is your company trying to do? (If you are trying to develop core competencies or a competitive advantage in a certain area, you probably shouldn’t outsource it!
• How important is it to protect your IP? Can you take chances with an unknown supply chain partner—is there someone you trust?
• What are your priorities as an organization? Does outsourcing more to a CM free you up to focus on competitive differentiators and core competencies, or are the additional management responsibilities distracting?
• What is your tolerance for dependency? When you outsource major parts of your manufacturing process, you become more reliant on vendors and can increase your vulnerability.
• What is the cost of purchasing errors and rework? Are you willing to risk occasional miscommunications and errors by working with an external team?
• What is your system for managing BOMs and change—some of the outsourcing risks can be mitigated if you have an air-tight solution for collaborating with outside partners.
• How efficient are you operationally? Can your in-house team manage purchasing, or are they too focused on other business aspects?
• What’s your budget? (Everything has a cost!)

Once you get an idea of your business reality, you can begin to weigh your options, and decide if outsourcing purchasing, inventory and assembly is right for you.

A final word on outsourcing partnerships

If you ultimately decide to turn over purchasing, inventory management or assembly to a vendor, make sure you only work with people you trust! As with any outsourcing decision, selecting reliable vendors who supplement your internal skill sets and industry knowledge is key.

For more information

Is there a one-size-fits-all manufacturing strategy?

Share BOMs more effectively with the PDX file standard

How small manufacturers can establish better outsourcing relationships Pt. 1

How small manufacturers can establish better outsourcing relationships Pt. 2

Tips and resources for managing your outsourcing relationships

5 steps to scaling your business when your competition stumbles

As I mentioned in a previous post, it seems that some manufacturers are making calculated decisions not to invest in risk mitigation, believing that cleanup is a more manageable cost than prevention. Other organizations want to invest in risk management, but lack the time, resources and know-how to do so.

For those that are looking to adopt risk management strategies in 2011, here are some considerations from JDA Software that I found particularly useful for both manufacturers and retailers, as well as links to a few other articles I found particularly relevant.

And if you have a favorite article or go-to-resource for supply chain risk management, please share it in the comments.

When creating a plan for minimizing supply chain risk . . .

1. Make sure your supply chain risk management strategy allows for frequent plan updates—you never know when political conditions, tariffs, labor costs and other factors may change.
2. Create contingency plans by mapping out “what-if” scenarios and running business simulations to assess the potential impact of a disaster.
3. Make sure your backup production and distribution plans include 2-3 different options for sourcing materials, components and vendors.
4. Clearly communicate your risk management strategy to operational and tactical employees. Running “what-if” scenarios in advance at the tactical level can help reduce the business impact of a supply shortage.
5. Monitor and understand daily operating conditions so you can anticipate regular spikes in demand, seasonal weather patterns such as droughts, hurricanes, tornadoes and floods, and short-term performance threats as much as possible.
6. In times of crisis, monitor supply chain activity and make sure your promotional teams are prepared to adapt campaigns as product availability changes.

Additional resources for managing supply chain risk

Supply chain risk mitigation moves to the C-level suite

When Disaster Strikes: Avoiding A Hit To Your Supply Chain

Managing supply chain risk—are organizations doing enough?

Tips for managing supply chain risk from Global Supply Chain Solutions

Risk Mitigation Strategies for Supply Chains from 200 to 10,000 Miles

Paul Peck, CEO of GSCS, had a lot of really great insights that you shouldn’t miss—so check it out.

Some highlights from the presentation:

• Suggestions for managing common manufacturing challenges including: rapid development cycles, critical sole-sourced components, aggressive unit cost objectives, lengthening lead times, shorter component life cycles and supply chain disruptions and uncertainty

• Tips for developing and leveraging comprehensive product definitions, change management strategies and collaboration tools that can save time and prevent wasted time down the road

• Tips for creating well-managed BOMs that help you better understand your business, analyze potential blind spots and reduce lead time risk

I’m working on getting the video embedded into this post, but until I work through some technical issues, you can watch the recording here. Thanks to GSCS for letting us share this video with our readers!

About GSCS

Founded in 2000, Global Supply Chain Solutions (GSCS) delivers solutions to improve flexibility, speed to market and profitability through greater control of materials. GSCS offers Managed Materials, Turnkey and Product Data Management solutions to support organizations at each stage of the product lifecycle—early production, fast growth and high volume production.

The webinar, which will be held Thursday, June 23^rd, at 10am PST, will offer advice on how to:

• Prevent product delays from sudden component supply shortages
• Construct a robust supply chain that can withstand changing conditions
• Manage your EMS and other supply chain partners to gain maximum visibility into risks and potential delays

The webinar will be led by Paul Peck, a seasoned operations expert who specializes in outsourcing, new product introduction and supply chain development, and who has nearly thirty years of experience at companies like Menara Networks, ADVA Optical Networking AG, Navini Networks (acquired by Cisco Systems), and DSC (acquired by Alcatel).

I’m really excited about this webinar—not only is the topic timely, but it is a perfect companion piece to the Manufacturing Outsourcing Strategies & Trends survey we conducted earlier this spring. Results are yet to be published, but early findings indicate that supply chain risk management is on manufacturers’ minds—about 70% of respondents said their bottom line was negatively impacted by global events like the Japan earthquake and tsunami, rising oil prices and severe weather. More than 60% are considering making changes to their supply chains in the coming year in response to such events. Based on these findings, it seems that GSCS’s recommendations couldn’t come at a better time, and we’re excited to hear what Peck has to say.

About GSCS

Founded in 2000, Global Supply Chain Solutions (GSCS) delivers solutions to improve flexibility, speed to market and profitability through greater control of materials. GSCS offers Managed Materials, Turnkey and Product Data Management solutions to support organizations at each stage of the product lifecycle—early production, fast growth and high volume production.

For more information:

• Three tips for managing your supply chain in today’s uncertain market
• Managing supply chain risk—are organizations doing enough?

Survey says: supply chain risk mitigation is not top-of-mind or top-of-budget for organizations

A recent Chainlink survey revealed that 45% of companies devote less than $50,000 each year to “assessing and auditing supplier and supply chain risk.” And as we begin to analyze data from our Manufacturing Outsourcing Strategies & Trends Survey, we are seeing some interesting initial results that indicate major gaps when it comes to managing supply chain risk.

For example: as the crisis in Japan showed, an entire supply chain can be destroyed in minutes, so it pays to have multiple sources for your components (especially critical ones). Yet more than two-thirds of our survey respondents revealed they rely on a single source for a critical process or component, which admittedly puts their supply chain at risk. And what’s more interesting to me is that in spite of the current global supply chain instability, only one-third of respondents plan to look for additional or alternate sources for parts in the next year.

Of course sourcing is just one component of a comprehensive supply chain risk mitigation strategy, but of those we polled, about 40% are not thinking any differently about their supply chain than they were prior to the earthquake in Japan. And for me, that was surprising to hear.

The realities of supply chain risk mitigation—why it can be a struggle to manage

From an analyst’s perspective, world events suggest that it is a perfect time to shore up your supply chain, but there are many reasons why implementing change in this area is easier said than done.

For one thing, many manufacturers are hoping that the worst is over. And who can blame them? The idea of another global crisis occurring on the heels of the most recent disaster is scary.

But if you are viewing these sorts of disasters as rare and improbable occurrences and adopting the mindset that “it won’t happen to me,” you may be setting yourself up for trouble. Nigel Issa, a European supply chain practice leader at Opera Solutions LLC, said in a recent Financier Worldwide article, “Many global supply chains have developed over the last 20 years based on the assumption of a stable world order with unlimited access to resources dominated by western firms.”

In that climate it made sense to believe that major disruptions were rare, ‘black-swan’ occurrences that can’t be predicted or planned for, but those days are behind us. In today’s interconnected world, geographical disasters and political unrest can impact businesses anytime, anywhere.

Another reason manufacturers neglect supply chain risk management is the constant pressure to cut costs. Organizations are increasingly being pushed to lean-up the supply chain by cutting spare inventory or “extra” talent, moving non-core services to lower cost providers and reducing suppliers. While consolidating inventory and job roles, leveraging single-source suppliers and accessing suppliers and customers in geopolitically, socially and environmentally riskier environments will certainly cut costs, these actions also increase sourcing risk.

Unfortunately, when faced with improving short term ROI versus investing in supply chain security, manufacturers who are being asked to do-more-with-less may very well decide to cut costs and hope for the best.

Even if manufacturers want to invest in shoring up their supply chains, many organizations have delegated supply chain risk management so far down the chain that the authority tasked with the job lacks any budget to invest in it. For about 80% of companies, according to the Chainlink survey, supply chain resilience is only a priority at the executive level if the executive is directly responsible for supply chain functions. Although C-level executives get involved after a crisis—when, as one survey respondent put it, it’s “all hands on deck”—in normal circumstances supply chain risk management is handled by lower-level managers. This means even the most well-intentioned manufacturing department may lack the authority or budget to make supply chain risk mitigation a priority.

Are organizations taking a calculated risk?

With so many organizations choosing not to invest in a Plan B, the last point to consider is that organizations aren’t overlooking supply chain risk management, they are making a calculated decision to not invest in it. Perhaps organizations feel cleanup is a more manageable cost than prevention, or that in times of large disasters someone will step up to fill the market need (think about the UPS strike where FedEx filled in the gaps).

Depending on the industry, there may also be considerable pressure to mitigate risk when it comes to governance, compliance and market demand—and in some cases that may be required. It could be possible that once the requirements are met, the costs of developing additional supply chain risk management processes are too great, and a choice is made to take the chance, relying on quick iteration ability and damage mitigation skills to meet demand in another way.

The future of production in an unstable world

Natural disasters, events in the Middle East and the recent rapid growth of China and India have made global supply routes less secure, and organizations need to examine the possible impact on their supply chains.

Issa warns that stability is a thing of the past—at least for now—and that organizations should be aware. “Globalization, pervasive connectivity, an increase in natural weather catastrophes, a shortage of natural resources and the expansion of the have/have-not chasm have created enormous volatility in the geopolitical and social landscape.” So although there is a lot of pressure to focus on creating value, shoring up your supply chain is increasingly important. And depending on your industry, a low-risk operational structure can even be a competitive advantage, so use it to your benefit if you can.

What do you think about investing in supply chain risk management? Do you see it as a necessary expenditure, a wasted cost or something you’d like to do if you had the resources?

I will be paying close attention to this topic over the next few months, so if you have any thoughts, please feel free to post a comment below.

For more information

• TalkingPoint: Supply chain risk management
• 2011 Supply chain risk survey results
• Manufacturers not investing in supple chain risk management
• No capacity for capacitors: How world issues impact product development and supplier selection
• Supply Chain Issues Are Top Risk to U.S. Tech Industry, According to BDO Study

The seminar, Consider Onshoring—New Choices in Supply Chain Design, will focus on why some of the best companies are moving part of their supply chain back to the U.S. from Asia, and discuss the realities of offshoring and the hidden costs associated. As many manufacturers have experienced first-hand, the lowest part price doesn’t always equal the lowest total cost of ownership for many businesses.

Seminar Details

Offshore vs. Onshore—New Choices in Supply Chain Design will be held Thursday, May 12^th from 11:30am-1:30pm PST at National University in San Jose, California. Speakers will include Barb Roberts, President and CEO of Wright Engineered Plastics, and Sandeep Duggal, CEO of Extron.

Can’t make it to the live seminar? Don’t worry—you can still sign up to attend the (free!) online webinar.

Get more information or sign up now.

If you are involved in the outsourcing of physical products and interested in learning how to leverage the latest supply chain trends to be more competitive, I urge you to attend this seminar. I will be participating via webinar and tweeting key insights @arenasolutions, so if you can’t make it, be sure to follow along!