Supply Chain Outsourcing in the Era of On Demand
An increasing number of companies are seeing the supply chain as the front line to grow revenue and reduce their costs through improved operations in a global economy. Here’s a look at some of the hurdles global businesses must mitigate to grow their businesses from the perspective of a practitioner who has helped transform IBM’s supply chain.
Truism: Progressive companies know that reduction in complexity is a priority for success – and in some cases, survival.
Globalization has increased the complexity of maintaining a competitive logistics practice. According to a recent study by Forrester Research, U.S. exports increased by four percent between 1999 and 2003, compared to a 23 percent increase in imports. That suggests that about one in five containers heading to a U.S. port will return empty to its origin resulting in a $5 billion annual expense worldwide. This expense comes directly from the bottom line of global importers and exporters. In addition to these expenses, the complexity and importance of designing lean and responsive supply chains encourages firms to look more critically at how they should operate internationally, including the role of freight forwarders and logistics integrators. Although every company thinks of its supply chain as a vital activity that is fundamental to success, 51 percent of firms recognize that their supply chain activities are not a core competency, according to a study published by leading analyst firm IDC. Meanwhile, according to the same study, 70 percent say they would pay a premium for help integrating their supply chain. Help could come both from implementation and process consulting, or with activity outsourcing.
Outsourcing logistics is not new. Today, many firms turn to outside experts, such as logistics network managers/3PLs, or banking or financial service managers to operate supply chain functions and processes. However, as Forrester Research points out in a report titled “Adaptive Trading Networks”, supply chain managers are often constrained by the information technology (IT) heritage of their 3PL providers which has often resulted from combinations of acquisitions with disparate IT infrastructures. The financial service providers, on the other hand, often lack the physical supply chain expertise. Today’s complex global supply chains require what Forrester Research calls a Global Trade Orchestrator (GTO) to pull all the pieces together under one provider. More specifically, a GTO is defined by Forrester as a global service provider that synchronizes trading partners’ financial, information, and physical flows within an adaptive trade network to deliver efficiency and flexibility gains across multiple supply networks. The study suggests DHL, IBM, and TNT Logistics as potential GTOs.
For example, in its efforts to ship computer equipment to distant and often dangerous countries such as Bosnia, Republic of the Congo and mozambique, one international peace keeping organization turned to IBM to outsource its logistics. The organization outsourced the shipping of millions of dollars of new IT equipment to IBM to overcome several logistical challenges such as security, a lack of local transportation and limited flight and dock schedules. Outsourcing the hardware logistics to IBM has resulted in 100 percent delivery success and saved the organization $5 million of uplift expense that would have resulted if a typical 3PL was used. As a GTO, IBM provided the outsourcing, consulting, and in this case, also the hardware.
IBM’s Supply Chain Business transformation Outsourcing practice is similar to the GTO were we take experienced logistics practitioners from our internal supply chain – people who have lived through our own logistics transformation – and pair them with the client in a peer-to-peer relationship. In many cases, the clients are in the same situation IBM was 10 years ago. They understand that by working with an experienced partner they will benefit from the 10 years and more than 10,000 man-hours IBM has invested to develop its global logistics network, which is today an optimized, highly variable, asset-free network that has saved the IBM Corporation $1.1 billion. Without a GTO, completing a similar delivery would require two to three service providers. The use of a single firm to act as a logistics orchestrator is very unique and is a viable alternative to keep operational costs down.
Forrester believes that GTOs are unique in that they can:
• Reduce friction in the network by helping to reengineer business processes;
• Optimize IT infrastructure to improve multi-vendor collaboration; and
•Offer network-centric risk management to minimize disruptions and build resiliency.
IBM calculates that, out of the $3.4 trillion spent on supply chains this year, $340 billion will go to outside service providers. Until now, firms have spent most of this money on asset-heavy services such as manufacturing outsourcing, warehousing and freight services, and information technology. Chief executives see outsourcing as one way to differentiate their firms – and even as a new source of revenue growth. Increasingly, firms want help in integrating the entire supply chain, not just with manufacturing, procurement, or logistics alone. Not only do they need to integrate their entire supply chain, they need to do so in a way that preserves flexibility; opens their enterprise infrastructure to new inventions, expertise and networks of others; and lets them reduce supply chain assets that can be better managed by partners. IBM estimated that demand will increase by 10-15 percent a year.
Supply chain management is far from a non-core, commodity business process. Most organizations view the promise of supply chain optimization as a real-time, data-driven central nervous system which serves as the catalyst of a highly responsive, intelligent enterprise. The outsourcing of a supply chain isn’t a one size fits all nor is it for everyone. However, many firms will focus on natural pain points such as logistics and direct procurement and look to service providers for assistance. To thrive in this new market, service providers will need deep business knowledge, applied technology skills, hands-on engineering know-how, and proven supply-chain intellectual property and physical assets. Only a few companies today can combine all of these components into a truly integrated supply chain process to reap the potential benefits.