Supply Chain Management & Ethical Outsourcing

JWI 550 Operations Management week9 summary, 3/10/13

I enjoyed another fantastic week of learning in this class. I particularly value the ethical concerns that need to be taken into account. I understand Nike's stumble could have been avoided if they used Jack Welch's approach to outsourcing - which is to not view outsourcing as just a cost reduction play but as an opportunity to grow the intellect of the firm. It is clear to me that by respecting, valuing and tapping the intelligence of the team members of the outsource provider and driving end-to-end development of supply chain, higher and sustainable performance of supply chains can be achieved.

JWI 550 Operations Management Week9 Summary

A. Supply Chain Management principles (Heizer & Render, 2011)
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I. Competition is no longer between companies; it is between supply chains.

1. Supply chain management is of strategic importance
It is the management of activities related procurement of materials and services, transforming them into intermediate goods and final products, and delivering them through a distribution system.

2. Objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer.

3. Ethics within the supply chain critical for Sustainability (Institute for supply management has principles and standards for ethical conduct)

4. Supply chain economics
Make or Buy Decision : produce a component or service in house or buy it from an outside source
Outsourcing - transferring a firm's activities to external suppliers

5. 6 Supply chain strategies
Negoatiate with many suppliers and play one supplier against another
Develop long-term partnering relationships with a few suppliers
Vertical integration
Joint ventures
Develop Keiretsu networks (suppliers who become part of the company coalition)
On Demand virtual firm (develop a network of companies; rely on variety of supplier relationships to provide services on demand)

6. Manage the supply chain
Success requires mutual agreement on goals, mutual trust, compatible organizational cultures.
Complicaitons in developing integrated and efficient supply chains include: local optimization, incentives, large lots.
Bullwhip effect - fluctuation in orders or cancellations through the supply chain
Pull Data - accurate sales data that initiate transactions to pull product through the supply chain
Single state control of replenishment - fixing reponsibility for monitoring and managing inventory for the retailer
Vendor managed inventory
Collaborative planning, forecasting, replebishment (CPFR)
Blanket order
Postponement
Drop shipping - ship direct from suppler to customer
Passthru hub - ship from hubs
channel assembly - distribution channel to assemble product

7. save thru supply chain efficiency with e-procurement
phone, email, waste =>centralized online system

8. Supply chain operations are - Plan, Source, Make, Deliver, Return


B. Outsourcing as a supply chain strategy (Heixer & Render, 2011)
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1. Outsourcing - procure from external sources services and products that are normally part of an organization
Backsourcing - return of business activity to the original firm
Offshoring - move a business process to a foreign country but retain control of it
Nearshoring - choose an outsourcing provider in the home country or a nearby country

2. Outsorucing Strategy
core competencies: unique skills, talents, capabilities, specialized knowledge, proprietary technology/information, unique production methods
Identify non-core activities and outsource them

3. Theory of comparative advantage
countries benefit from specializing in products and services in which they have relative advantage
and importing goods where they have a relative disadvantage

4. Outsourcing Risks
Making decisions without sufficient understanding, analysis and planning leads to 50% failure rate
- erratic power grids
- difficult local government officials
- inexperienced managers
- unmotivated employees
- drop in quality
- poor customer service
- political backlash from outsourcing to foreign countries
- change management
- logistics issues (insurance, customs, timing)

5. Advantages of outsourcing
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Cost savings,
gaining outside experience,
improving operations and service,
focusing on core competencies,
gain outside technology,
image,
right-sizing the firm

6. Disadvantages of outsourcing
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Increase in transport costs
loss of control
create future competitors
negative impact on employees
degrade effects that show up in the longer term

7. Audits & Metrics to evaluate outsourcing performance
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Outsourcing agreements must specify results and outcomes
Evaluation process must monitor factors that ensure satisfactory and continuing performance eg. Quality, customer satisfaction, delivery, cost, improvement
Outsourced relationship needs to be based on continuing communication, understanding, trust, performance

8. Ethical issues in outsourcing
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Outsourcing is unethical when it:
- violates religious holidays
- moves pollution from one country to another
- stresses cheap labor that leads to employee abuse
- violates basic human rights
- is used primarily for short term  cost-reduction instead of building good long term partnerships
- results in loss of technology


C.Bullwhip effect in supply chains (Lee, Padmanabhan & Wang)
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Exaggerated order swings in supply chains result despit rational decision making by members in supply chain
Distorted information from one end of a supply chain to other end can lead to tremendous inefficiencies:
excessive inventory, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules.
Mitigation strategies: integrate new information systems, define org relationships, implement new measurement and incentive systems.
excessive inventory management

D. Aligning incentives in supply chains
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A supply chain stays tight only if every company on it has reasons to pull in the same direction.
To prevent misalignment:
- Conduct incentive audits when adopting new technologies or entering new markets
- Educate managers about supply chain partners and their constraints
- Get executives to examine case studies from other industries

E. Hitting the wall - Nike & International Labor practices
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To be ethical and fair, a firm must take into account Monetary and Non-monetary impact for employees at the outsourced location
Leadership in fairness can make perfect business sense - can avoid loss of revenues, damage to brand from activist-led changes forced on the firm


F. More notes on advantages, costs and risks of outsourcing
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There are several advantages, costs and risks of outsourcing (JWI 530, Welch, video, week9; Heizer & Render, 2009). One must take into account the many considerations from a 360 degree view and arrive at a balanced and well informed decision.

 Outsourcing should not be approached just as a cost reduction move but also as a way to increase the organization's intellect and gain new markets (Welch, video, WK9). Overestimating the true benefits and underestimating the hidden problems is a recipe for big trouble.

Advantages
(1) Gain new markets eg. IBM understood the outsourcing trend early on but saw it as an opportunity to gain new growth markets rather than just as a cost arbitrage scenario. IBM today employs more people from India than in any other country. By doing this IBM gained a strong presence in a growth market early on.
(2) Increase the organization's intellectual horse power - gain different perspectives from outside the firm and use them as a source of innovation for improving products, processes and services eg. IBM Microelectronics has a 24x7 data analysis team with half the team in the US and half in Bangalore, India. The pace of learning has doubled and faster yield ramps are being delivered.
(3) Lower cost eg. India based firms such as Infosys, TCS, WIPRO, Satyam Mahindra, promise to significantly lower the outsourced IT support cost for its worldwide clients and have been wildly successful with this business model.
(4) Improve operations and services eg. IBM Microelectronics partners with Global Foundries, an AMD spin-off, to outsource excess demand. IBM gains by getting increased capacity while Global Foundries gains by increased demand. It is a win-win situation.
(5) Focus on core competencies. By using the strengths of the outsourcing provider to the supply chain, a firm can free up its human, physical and financial resources to reallocate to its core competencies.
(6) Gain outside technology eg. IBM Services division helps businesses upgrade to state-of-art enterprise computing technology. Individual businesses cannot easily develop such capabilities on their own.
(7) Boost Brand Image. By associating with a credible firm, brand image of a firm can be enhanced.
(8) Right size the organization. Human Resource in bloated organizations that are not competitive can be trimmed to the right size by leveraging outsource options.

Costs
(1) Infrastructure may need to be built eg Power outages common in India and power generators are needed for smooth operations; IT infrastructure may need to be added to manage information flow
(2) Potentially increased transportation costs if the firm and the outsource provider are oceans and mountains apart
(3) Loss of control eg. Dell and HP which use the same contractor Quanta to produce their laptops may struggle for control over the supplier.
(4) Buffer stocks may be needed to to avoid disruptions in supply (JIT inventory may not work)

Risks
(1) Creates future competition eg. Intel outsourced chip production, a core competency, to AMD, which quickly capitalized on the opportunity to become a top competitor.
(2) Country's political stability of the system eg. China could make a move any day and so it is important to understand options
(3) Problems may develop over longer term though short term may look great like sunshine and peaches. CEOs with short term mind-set may have a bias that prevents them from seeing this fact eg. IT provider Satyam created bogus financial reports and firms that were close to Satyam did not want to see the truth that was in plain sight.
(4) Talent to enable supply chain to operate thousands of miles away
(5) Quality assurance becomes difficult with loss of control over parts of supply chain
(6) Training the team from a distance may not be easy or sustainable
(7) Loss of employee morale, productivity and loyalty eg. seeing a friend getting laid off can do permanent damage to employee trust
(8) Ethical violations eg. lower standards in environment, labor and human rights in foreign countries could do great damage to indigenous cultures and create a backlash. Foxconn, a Chinese firm which provides parts for Apple's products, drives its employees so hard that suicide rates are abnormally high.

Dr DP