Outsourced Manufacturing Within The Current Global Marketplace

1
Outsourced Manufacturing Within The Current
Global Marketplace
Mr. Anthony Della-Croce VP Solutions
Architecture Core Services
2
Agenda

• The Current Shift To Global Manufacturing and
  Distribution Operations
• ERP Application Requirements and Processes In The
  Global Manufacturing and Distribution Business
  Environment
• Benefits and Risks of Outsourced Manufacturing

3
The Industry Experts

• Forrester Research
• High-tech firms continue to shed manufacturing
  plants but struggle to manage their contract
  manufacturers. OEMs must treat these outsource
  relationships like a merger and develop new
  virtual manufacturing skills.
• Lean manufacturing and outsourcing
• By Eric O. Olsen and Mark Zetter - Aug 09, 2006
• We have arrived at the nexus of two powerful
  trends in business process improvement and
  product manufacturing operations management. 
• One, lean operations, offer streamlined flow of
  value to the customer with minimal inventory and
  waste.  The other, outsourcing, offers
  dramatically lower cost of goods sold (COGs). 
  Both can result in highly competitive pricing
  positions and healthy profit margins.  How do
  executives remain true to the tenants of lean
  while stretching their company value stream
  across the globe?  How do companies build close
  relationships with suppliers if each party
  speaks, and acts, differently?  How does an
  organization make value 'flow' when its raw
  materials, or products, might be arriving in
  batches the size of large, ocean-going ship
  containers, or perhaps even the size of the
  container ship? 

4
The Industry Experts

• Metric-Stream
• As companies shift manufacturing and assembly
  operations offshore to low cost countries, a
  large number of deliveries to US based customers
  suddenly become cross-border transactions.
  Sometimes shipments can take weeks to be
  delivered to distribution sites within the United
  States, resulting in long supply chains. It is
  very important for such companies to gain
  visibility into process capability and quality
  issues within their outsourcer's manufacturing
  sites so that they can prevent any unacceptable
  quality products from entering the inbound supply
  chain. If these unacceptable quality products
  enter the supply chain, the company has to wait
  to scrap a part of the shipment at the point of
  destination, weeks after it was shipped from the
  outsourcer's manufacturing site. The additional
  transportation and handling incurred due to poor
  quality products being rejected at the point of
  destination, instead of the point of manufacture,
  also leads to increased cost of inventory
  write-offs.

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Overview Process - Drop Shipments

• Drop Shipment Characteristics
• Entire Transaction Originates From Sales Order
  Line
• Sales Order Line Is Linked To Requisition Which
  In Turn Is Linked To Purchase Order Line- You Are
  Buying Product Not a Process
• Sometimes Called Back to Back Orders
• You Never Take Physical Possession Of Inventory
  But You Do Take Financial Ownership of The
  Product
• No Manufacturing Work Order Is Generated
• MRP See Sales Order Demand Linked To Purchase
  Order Supply, No Action Required

6
Overview Process - Outside Processing Operations

• Outside Processing Characteristics
• Entire Process Is Internal To A Single
  Manufacturing Organization,
• You Must Utilize Manufacturing Work Order or
  Repetitive Production Schedule
• You Are Buying Process Not a Product
• The Work Order Generates a Purchase Requisition
  For Outside Processing Item Code Automatically
• Common Misconception Is That You Are Buying End
  Assembly
• Generated Purchase Requisition Is Converted To
  Purchase Order By
• Purchase Order Receipt Is To Outside Process
  Operation On Work Order

7
Overview Process - Outside Processing Operations

• Outside Processing Characteristics
• Common Misconception Is That You Are Buying End
  Assembly You Are Buying The Process
• Generated Purchase Requisition Is Converted To
  Purchase Order
• Manually Converted or
• Blanket Purchase Order Release - Can Be Automatic
  If Sourcing Rules Are Available
• Purchase Order Receipt Is To Outside Process
  Operation On Work Order

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Complete Outsourced Manufacturing Operations

• Outsourced Manufacturing Definition
• Your Organizations Controls the Creation and
  Release of Work Orders to Sub-Contracted
  Manufacturing Vendor.
• Each Sub-Contracted Manufacturing Vendor
  Preferably Should Have Their Own Inventory
  Organization Assigned to Them For
• Security/Address Definitions/Work Order Creation
  etc.
• Your Issue of The Released Work Order Creates a
  Purchase Requisition Linked To That Work Order.
• Convert this Requisition to Purchase Order and
  Receive to the Work Order
• Sub-Contracted Manufacturing Vendor Ideally
  Logs Into Your System
• Receiving Raw Material Component Inventory As
  Necessary
• Controls Moves/Completion Of Work Order
• Work Order Completion Should be Updating Your
  Inventory Value
• Ships Directly To Your End Customer, This Is Not
  Drop Shipment Since Sub-Contracted
  Manufacturing Vendor Is Shipping From Your
  Inventory

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Complete Outsourced Manufacturing Operations
Ship Directly To Customer Demand Place
PlanningDirectly on Sub-Contractor
GL
Purchasing
OM
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
Your Owned/Managed Warehouse Item Flagged As
Make At Sub-Contracted Manufacturing Vendor
MRP
Forecast
MDS
MPS
10
Complete Outsourced Manufacturing Operations Ship
Directly To Customer Demand Place Planning
Directly on Sub-Contractor
OM
Purchasing
1) Original Sales Order Demand
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
2) MPS or MRP Creates Work Order For Finished
Goods
Your Owned/Managed Warehouse and
You/Sub-Contractor Control Planning At
Sub-Contractor Org.
Purchase Requisitions For Raw Materials
Forecast
MDS
MPS
MRP
11
Complete Outsourced Manufacturing Operations
Ship Directly To Customer Demand Place
Planning Directly on Sub-Contractor
OM
Purchasing
1) Original Sales Order Demand
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
3) Work Order Release Creates Purchase
Requisition/Purchase Order For Outside Process
2) MPS or MRP Creates Work Order For Finished
Goods
Your Owned/Managed Warehouse and
You/Sub-Contractor Control Planning At
Sub-Contractor Org.
Work Order Completed Outside Process PO
Received Triggers Inventory Updates
Forecast
MDS
MPS
MRP
12
Complete Outsourced Manufacturing Operations
Ship Directly To Customer Demand Place and
Planning Directly on Sub-Contractor
Purchasing
OM

1. Original Sales Order Shipped Directly To Customer

Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
3) Work Order Release Creates Purchase
Requisition/Purchase Order For Outside Process
Your Owned/Managed Warehouse
4A) Print Pick/Pack/Ship Documents At
Sub-Contracted Manufacturing Vendor 4B) Vendor
Notifies You Of Shipment 4C) You Do Logical
Shipment of Sales Order
Work Order Completed Outside Process PO
Received Triggers Inventory Updates
13
Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning
Internal Supply Chain
Order Mgmt
Purchasing
GL
1) Original Sales Order Demand
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
2) MRP Generates Internal Requisition And
Internal Sales Order
Your Owned/Managed Warehouse Item Flagged As
Make At Sub-Contracted Manufacturing Vendor
But Buy Item In Internal Inventory Organization
Forecast
MDS
MPS
MRP
14
Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning
Internal Supply Chain
GL
OM
Purchasing
1) Original Sales Order Demand
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
2) MRP Generates Internal Requisition And
Internal Sales Order
3) MPS or MRP Creates Work Order For Finish Goods
4) Purchase Requisitions For Raw Materials
Forecast
MDS
MPS
MRP
15
Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning
Internal Supply Chain
GL
OM
Purchasing
1) Original Sales Order Demand
Internal Inventory Organization
Sub-Contracted Manufacturing Vendor
2) MRP Generates Internal Requisition And
Internal Sales Order
5) Work Order Completed At Sub-Contracted
Manufacturing Vendor 6) Sub-Contracted
Manufacturing Vendor Ships Item Back To Internal
Organization Via Internal Sales Order 7) After
Receipt Against Internal Purchase Order, Update
Inventory 8) Ship To End Customer From Internal
Inventory Organization
16
Review Of Outsourced Manufacturing Benefits and
Issues

• Drop Shipments Benefits
• Dont incur financial obligation of inventory
  until customer order received and processed.
• Dont have the cost or overhead of delivering
  finish product to customers.
• Dont maintain warehouse or inventory carrying
  cost.
• Dont control production or design of the product

• Drop Shipment Issues
• Cannot control acquisition cost of product,
• subject to vendor price
• cannot control delivery or promise dates
• Vendor could sell direct
• Financial liability for purchase even if customer
  cancels order
• No control over product quality but sale still
  impacts your reputation with marketplace

17
Review Of Outsourced Manufacturing Benefits and
Issues

• Outside Processing Benefits
• No financial obligation of Assets to perform
  special processing.
• Dont have setup or overhead costs associated
  with completing specialized processing.
• Dont maintain inventory required to perform
  specialized processes.
• You still control production process of your
  finish good while holding the vendor responsible
  for only this unique process.

• Outside Processing Issues
• Dont control the direct quality of the outside
  process
• Dont easily control delivery, promise dates to
  your customer
• Competitors can utilize your outside processor
• Financial liability for purchase even if customer
  cancels order
• No control over product quality but sale still
  impacts your reputation with marketplace

18
Review Of Outsourced Manufacturing Benefits and
Issues

• Outsourced Manufacturing Benefits
• No financial obligation of Assets perform special
  processing.
• Dont have the setup or overhead costs associated
  with completing specialized processing
• Dont maintain inventory required to perform
  specialized processes.
• Control production process remotely for your
  finish good while holding the vendor responsible
  for executing shop floor transactions.
• Dont incur costs and overhead of the shipment
  process.
• You can quickly change product lines based on
  market conditions by utilizing several
  sub-contractors

• Outsourced Manufacturing Issues
• cannot control the direct quality of the outside
  process
• cannot easily control delivery, promise dates to
  your customer
• competitors can utilize your outside processor
• financial liability for purchase even if customer
  cancels order
• no control over product quality but sale still
  impacts your reputation with marketplace
• Engineering design and maintenance must be
  controlled across organizational boundaries
• You must establish a safe/secure ERP environment
  that can be flexible and easily adapted to
  multiple sub-contractors