Opinion: Co-sourcing emerges as a new option

Joe Stafford -June 10, 2002

It is a unique time in the electronics marketplace. In less than a two-year period the market weathered significant product shortages, followed by a drop-off in market demand that led to inventory overruns, massive write-offs, and record-breaking downsizing.

Thankfully, many industry forecasters predict the market's health to return during the next six to nine months. But with scars still fresh from the boom and bust of the past 18 months, OEMs are looking for new ways to stay a step ahead of the next business cycle.

Given the impact of supply chain issues on a company's bottom line, it is not surprising that the need for new approaches to procurement, logistics, and inventory management is a recurring agenda as management teams make plans and develop strategies for the months and years to come.

This is not the only operational trend. A recent survey from Bear, Stearns & Co. Inc., New York, reports that 87% of OEMs plan to increase outsourcing efforts in the coming year (EBN May 6, 2002). Combine these facts with a movement toward outsourcing, and supply chain functions emerge to fix everything. This is a line of thinking, however, that needs consideration.

Outsourcing for more than manufacturing is effective but often met with resistance from internal personnel who cannot justify the expense. In particular, the directive to use an outside company for supply chain functions such as procurement, logistics, and inventory control can send mixed signals to in-house staff.

Similarly, shifting to an outsourcing model can jeopardize strategic relationships with suppliers, trading partners, and internal contracts within engineering and manufacturing. And, due to the increasingly strategic nature of procurement functions and their impact on the bottom line, some companies believe that no outside service will ever be as focused on the OEM's profits as much as the OEM itself.

Resistance has led to the development of a different kind of supply chain partner relationship best described as co-sourcing. A hybrid distribution relationship that builds on the strengths of a company's internal staff, co-sourcing is becoming accepted as an excellent way to improve time-to-market and bottom-line performance while minimizing the risks associated with managing the supply chain during unpredictable times. Having full outsourcing and co-sourcing to choose from will no doubt spur far more OEMs to use outside services for various supply chain management functions. But it is still a choice. Should a manufacturer choose the co-sourcing model or opt for outsourcing? The answer, of course, is "it depends."

Decisions, decisions

An OEM's decision whether to outsource or co-source inventory and related functions is highly circumstantial and depends on internal resources and goals. Outsourcing, for example, is a solution for new companies, organizations with limited in-house procurement expertise, and those that have downsized supply chain support teams. Similarly, companies that have entered new markets or introduced products outside their normal realm of procurement expertise often outsource these supply chain functions with excellent results.

Co-sourcing, on the other hand, is best suited for companies that want to benefit from working with an outside procurement specialist but prefer not to relinquish supply chain management functions completely. Co-sourcing is used as a stepping stone to a total outsourcing relationship in some cases. The choice is completely up to the OEM.

When an OEM enters a co-sourcing arrangement, it forms a functional partnership with a procurement specialist that literally becomes an extension of the OEM's internal supply chain organization. The success of these relationships is highly dependent on the give-and-take between the two partners. In many cases, individuals working inside the OEM are paired with external experts from the co-sourcing company for tight operational alignment. Integrated IS systems can also be deployed for real-time needs analysis and inventory management decisions.

OEMs that have adopted co-sourcing distribution programs also report human resource benefits. Unless a company turns to outsourcing to support completely diminished procurement capabilities or enable new ventures outside the company's area of expertise, traditional outsourcing relationships can spur layoffs. This may or may not comply with corporate goals. In the same vein, decreased employee loyalty can be a risk.

Co-sourcing can also be seen as a threat among in-house staff. When the co-sourcing team is introduced, it must be made clear that the co-sourcing partner is there as a resource for the in-house staff, not as a competitor. If properly presented, co-sourcing can actually bolster employee morale. At the same time, it can meet corporate goals because it can help alleviate the need to add staff when increases in market demand require a surge in manufacturing levels and related procurement. Again, management must closely examine its long- and short-term goals before deciding between these two viable models.

Providing options

While the seeds of outsourcing and co-sourcing have existed in the form of close and growing relationships between distributors and their customers, the success of any externally managed or supplemented supply chain function inherently requires an independent distribution partner. Specifically, that means a distributor without ties to any one specific set of manufacturers or parts suppliers. The emergence of value-added procurement specialists (VAPS)-a new segment of the independent distribution market that is entirely focused on customer relationships and market intelligence-makes these concepts truly workable.

Traditionally, an independent distributor has been a resource OEMs turn to during difficult times; for example, when products are in short supply or when there is a need to reduce surplus inventory. Working without contractual ties to parts manufacturers, independent distributors have historically been able to locate difficult-to-find items, albeit at a premium price. Conversely, when OEMs have excess inventory, they often turn to an independent distributor to sell the assets.

Liquidation, however, is rarely profitable for the OEM. VAPS have skewed their business model to create a marketable asset out of the industry data that is used to locate sources for new parts and homes for excess inventory. Working from this model, the success of the VAPS organization hinges on providing strategic procurement, logistics, and inventory management intelligence to OEMs. In other words, a VAPS organization succeeds when it helps OEMs improve profit margins through better supply chain management.

Some VAPS provide both outsourcing and co-sourcing programs to OEMs. However, because the co-sourcing concept is built on the premise that an OEM's existing relationships have value, companies that develop co-sourcing relationships with a VAPS organization can get the best of two worlds. They increase their market competitiveness while maintaining strategic relations that have been built throughout years and even decades. The ability to accomplish this without relinquishing control over the procurement and inventory management process makes the co-sourcing model even more appealing.

Choices for changing times

When one considers the impact of cost of goods on the profit-and-loss statements of an OEM manufacturer, it stands to reason that new methods of managing the supply chain are worthy of further investigation. Today's breed of VAPS provides a solid alternative for the OEM that sees the value of either replacing or supplementing its current procurement, logistics, and inventory management functions with an external procurement specialist. These options hold great promise for the ability of today's OEMs to prosper throughout future business cycles.

Joe Stafford is president and chief executive of IC Solutions Inc., a value-added procurement specialist in Irvine, Calif.

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