The Cloud Computing Advantage for Companies that Outsource Manufacturing

April 20, 2009
Cloud computing is well-suited to support the multi-company business processes inherent in any supply chain, beginning with business applications 'as a service,' followed by other cloud aspects such as development platforms and ongoing integration on an o

At a time when trade is shrinking faster than production, and U.S. industrial output has dropped 11% in the past year, manufacturers and their trading partners are anxiously seeking all available avenues to cut costs and improve efficiency. While addressing the business problem is foremost, rather than the delivery method, two areas -- Cloud Computing and its subset, software-as-a-service (SaaS) -- can improve business performance by rapidly transforming the supply chain for solid business value. "The Cloud" is serious business: $16.2 billion was spent worldwide on cloud computing in 2008, according to IDC.

The advantages of total cost of ownership (TCO), scalability, and the pay-as-you-go cost structure of SaaS have driven its adoption in both manufacturing companies and those that outsource manufacturing to manage their supply and demand chains.

"Annalee saves around 900 man-hours of labor a year," reports Dave Pelletier, CEO of Meredith, N.H.-based Annalee Dolls, Inc., user of SaaS-based RedTail EDI management. "More importantly, the SaaS option allows us to ensure we meet the requirements of our very large customers without the charge-backs incurred by errors and non-compliance."

As companies evaluate whether to go with SaaS solutions as part of a move towards overall cloud computing, they're considering further benefits: increased visibility, agility and better collaboration.

Visibility & Agility Across the Supply/Demand Chain

Major financial value and business agility derives from visibility -- visibility into every segment of the supply and demand chaini.

SaaS solutions provide the hardware and software infrastructure, easy upgrades, remote, scalable storage, "Support-as-a-Service" and low, predictable costs through subscriptions. With the addition of cloud computing, the supply chain further benefits from the glue that holds the parts together.

"The first wave of supply chain automation focused on modeling complex processes within the four walls of the enterprise," says Tim Minahan, chief marketing officer for Ariba, a Sunnyvale, Calif.-based SaaS procurement company. "The next wave will focus on enabling simplified business processes with embedded intelligence across an extended network of trading partners. SaaS was the enabling delivery model for this inter-enterprise collaboration. Yet, the cloud is the next wave, providing a combination of processes, software and intelligence all delivered as an accessible, web-based service -- or a mash-up." Ariba saw a 73% jump in its subscription revenue, from $18.8 million in the third quarter of 2007 to $32.6 million in the same period in 2008.

OK International, a worldwide manufacturer of tools for the electronics assembly, uses Ultriva, a SaaS-based Kanban solution to provide an automated closed loop cycle of consumption and replenishment that integrates with their ERP system. Vice President of Operations Ken Demirjian sees value in the full transparency between the supplier and OK International. "SaaS moves Kanban outside the four walls," Demirjian reports. "Good vendors want their customers to have good fill rates. We get a sale, the supplier gets a reorder, the whole chain is linked and creates value for the end customer."

With SaaS supply chain management (SCM) solutions, manufacturers have the ability to easily add new partners, better monitor product quality, and benefit from the agility to respond to change quickly.

This agility is essential, especially with today's increasing risk of supplier failure. Ernst & Young LLP reports that 67% of companies would be adversely affected if even one of their top three suppliers failed. And fail they do: 100,000 plants in China were shuttered in 2008.

The Supply Chain as Collaborative Community

With an increased reliance on outsourced manufacturing, the need for collaboration has escalated.

"Inbound and outbound inventory management requires the ability to monitor inventory throughout the supply chain, allocate inventory in-transit to improve fill-rates and speed distribution, and integrate outbound fulfillment activities and information across multiple channels to enhance customer service," says Sean Rollings, vice president of marketing at Amitive, Inc., a San Mateo, Calif. provider of on-demand community supply chain management solutions for brand owners who outsource manufacturing. "Software as a service and integration as a service support these collaborative logistics processes for all aspects of materials and parts movement, and communications to customers. This 'SCM in the Cloud' collaboration and communication reduces risk and increases market competitiveness."

Cloud computing is well-suited to support the multi-company business processes inherent in any supply chain, beginning with business applications "as a service," followed by other cloud aspects such as development platforms and ongoing integration on an outsourced subscription basis. IDC predicts that cloud computing will be part of an expanding portfolio of options for the CIO, with the biggest growth in collaborative applications, growing 46.3% over the next three years, compared to 25.4% in use today.

"A supply chain is really a network of interdependent trading partners who are geographically dispersed. Each trading partner has many upstream and downstream trading partners with whom they need to coordinate plans, schedules, deliveries, etc.," says Mike Frichol, long-time ERP and SCM veteran and founder of Pragmatic Papers. "Cloud computing provides a geographically dispersed network approach that is much better aligned to serve all these trading partners trying to communicate with each other through different systems. Supply chains are networks. Cloud computing comprises networks for delivering business applications anywhere, anytime -- that should significantly improve supply chain capabilities, communication and coordination."

"A major shift has occurred as more companies rely on a community of partners worldwide to carry out outsourced manufacturing services," continues Amitive's Rollings. "The Internet-based capabilities of new technologies and processes, combined with the enabling Cloud environment, are the catalysts for explosive change in supply chain management. And it is this trigger that will deliver on the promises of a new collaborative, community supply chain management model."

Dr. Katherine Jones is the principal consultant at Independent Consulting Services which is a business and marketing strategy consulting firm.

Interested in information related to this topic? Subscribe to our Information Technology eNewsletter.

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!