The role of IT in Manufacturing Outsourcing

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A couple weeks ago a question was raised about what the implications were for IT when a company was transforming from a manufacturer to a brand owner. This is actually a very interesting question and I will try to share with you my response at the time.

It goes without saying that a manufacturer has control over at least a portion of the manufacturing process of its products. Having a brand often means it includes the final assembly (word to be taken here in the widest sense of the term). Customer demand is consolidated within the company and the demand supply matching involves operations that are within the control of the company. Strategic buffer stocks can be established to shield the company from potential supplier shortages or other issues, and as such the S&OP process can happen within the full control of the company.  The ultimate example of this was Henry Ford's Rouge plant where ore, coal, rubber and timber entered, while the Ford T rolled of the line. And as the well known quote says, "You can have it in any color as long as it is black".

By outsourcing manufacturing, and I should probably say final manufacturing, this control is fundamentally broken. The brand owner transforms himself from a manufacturer to an "orchestrator", in the sense that it is now his responsibility to organize what happens in other companies. This has as effect two things:

• First, he does no longer have all information in its own hands, and depends on others to provide that information


• Second, he cannot take decisions directly as he needs to coordinate with outsourcers and suppliers

Maintaining an efficient Supply/Demand matching in such environment puts a burden on IT. Indeed, a very close collaboration is required with the outsourcer to ensure production capacity, inventory, availability of appropriate skills etc. are known and can be taken into account when decisions need to be made. Unfortunately, in many situations, the relationship between the supplier and the customer are rather tense resulting from thorough purchasing negotiations. With the low prices agreed upon, the outsourcer is looking for smooth and continuous operations, not for disruptions. On the other hand, the brand owner needs those to ensure demand is met.

It is critical for a successful manufacturing outsourcing that a trustworthy relationship is established between the partners and that information flows easily between them. This is possible if the relationship is seen as a "win-win" one by both parties. Where this is the responsibility of the Supply Chain or Manufacturing team, the IT department needs to be available to integrate the information coming from the outsourcer within its own system to provide management the data for the S&OP process.

Such approach requires a fundamental change in the way the company sees its suppliers and approaches collaboration. In a following post we will review how the integration can take place and what needs to be done to achieve success.

Obviously, sharing production data is not the only area to look into when outsourcing manufacturing, and we will look at other aspects in future posts also.