We're living it right now: foreclosures, shriveled savings accounts, small businesses hanging on by a thread, if even surviving at all. The collapse of the financial markets negatively affected not only the executives and investors of the largest banks, but reached its ugly tentacles to every last one of us.

In the same way that the interconnectedness of the financial world magnified the risk of a handful of companies' mistakes, so does our globally connected, multi-enterprise supply chain environment amplify the risk for every company involved in outsourced manufacturing.

What's Changed?

The world financial crisis has exacerbated the pressures on companies who already had their hands full with the complexities of changing from an in-house manufacturing model to outsourced manufacturing. Since this new model favors longer, multi-national supply chains and ties up more inventory in finished goods, companies seeking the planned benefits of outsourcing have become even more vulnerable to today's tight credit constraints and cost uncertainties created by volatile energy markets.

Traditionally, in-house manufacturers have used the supply chain primarily to secure raw materials or components for production. They could manage risk by walking down the hall or simply calling the responsible department to directly force reporting parties to take action. But now, as more companies rely on a web of partners and contract manufacturers (CMs) dispersed around the globe, they have less control over the supply chain community. This indirect management of partners makes for very complex challenges and supply chain owners -- along with every interconnected partner and customer -- are faced with more risk, more often.

Outsourcing manufacturing has been pursued to reduce costs and provide more flexibility, but it also puts more critical "brand values" -- such as quality, compliance, time-to-delivery -- at arm's length, introducing more risk into the equation than ever before. Add to that the overarching question of CM financial viability (100,000 manufacturers went belly up in China alone in 2008!) and risk is even higher.

The table below gives a snapshot of the increased risk as companies have evolved to this new model:

Risk	In-house Manufacturing	Outsourced Manufacturing
Quality	Companies have direct control over pre-, in- and post-production quality measurement.	Contract-driven standards and testing make quality control reporting-based. Brand owners must trust suppliers -- and their suppliers -- and rely on accuracy and validity of third-party measurement and reporting. Like it or not, the pressure of this economic climate is likely to tempt CMs and their suppliers to cut corners, so quality and compliance are at even higher risk.
Demand Responsiveness	While capacity and access to materials / components is ultimately limiting, companies can change manufacturing priorities (e.g. reprioritize SKUs) with direct edict.	While similarly constrained by materials / components, brand owner power is only as strong as its supplier relationships and contracts. Competition for suppliers' capacity from other companies' brands introduces further risk. Consideration of the opposite -- cancelling orders -- puts stress on partnerships as finger-pointing for "who owns the excess inventory" can bankrupt participants. There's simply no more room to tighten the screws on suppliers. If they are able to survive, relationships are likely harmed, which constrains capabilities to the rebound at the economic upturn.
Cost	Despite fluctuations in commodity and energy prices, companies maintain direct control of many costs (e.g. manufacturing efficiency, asset utilization, labor.)	Brand owners face similar risk on commodity and energy prices, but risk is further complicated due to indirect control over all factors of Cost of Goods Sold (COGS.) Global sourcing locations -- e.g. the once golden China with rising costs -- are less predictable, putting the brand owner in a more vulnerable position.

Shifting to a Community Mindset

Brand owning companies that rely on outsourced manufacturing require new risk management practices to ensure the same quality, reliability, and responsiveness as if they handled the manufacturing in-house.

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