Outsourcing: Supply-Chain Stretch

June 11, 2006
Manufacturers meet growing value-chain challenges with a little help from vendor partners.

Opportunity and challenge. Both are by-products of globalization for many U.S. manufacturers. New markets open both for finished goods and for the sourcing of raw materials and components -- but the supply chain stretches. Consequently, supplier lead times lengthen; the demand for their products remains now, now, now; and cross-border and international regulations add yet another level of complexity.

On a domestic scale, customers' demands for product on a just-in-time basis continue to challenge suppliers, while manufacturers remain in pursuit of ways to reduce the amount of inventory they carry.

To meet these challenges and opportunities, U.S. manufacturers look increasingly to their value-chain partners for assistance, both by outsourcing logistics efforts to third-party providers and by partnering more closely with their valued suppliers.

StorageTek de Puerto Rico, a company of Santa Clara, Calif.-based Sun Microsystems Inc. and a 2005 IW Best Plants winner, for example, holds approximately 70% of its inventory in its Supplier Logistics Center (SLC), a warehouse or inventory hub operated by a third-party provider and located less than one mile from StorageTek's manufacturing facility in Ponce. That third-party provider handles transactions related to incoming inventory from StorageTek suppliers and delivers inventory to StorageTek in response to pull signals from the manufacturing floor.

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The SLC, which began operations late in 2002, is one component of StorageTek's comprehensive lean supply-chain effort driven by pull signals, explains Osvaldo Cruz, materials group manager for the Puerto Rico operations. Among its benefits, he notes, are a reduction in the number of warehouses StorageTek operates, reduced inventories as a result of the lean supply model, and more open space in the factory for additional production. The inventory in the SLC is owned by the supplier until StorageTek pulls it into production.

Additionally, StorageTek employs a third-party financing strategy for inventory received from a Far East supplier. The program temporarily transfers ownership of the inventory from the supplier to the third-party provider until StorageTek pulls it into production, allowing the supplier to get paid more quickly, yet relieving the manufacturer from the costs of carrying inventory. (A more detailed description of the trade payables program is available at http://www.industryweek.com/ReadArticle.aspx?ArticleID=11070.)

3PL Use Widespread

The use of third-party logistics providers is ubiquitous in manufacturing, with all signs pointing to a desire by users for even greater service offerings. The 2005 IndustryWeek Value-Chain Survey, for example, showed that more than half of respondents outsourced -- in whole or in part -- their inbound and/or outbound transportation, as well as customs and export-related functions. More than four in 10 manufacturers who participated in that same study, conducted with research partner IBM Business Consulting Services, also said they outsourced warehousing and distribution functions.

Add to that the results of a separate study, the 2005 Third-Party Logistics (3PL) Study, which showed that approximately 80% of North American survey participants employed third-party logistics providers. Manufacturers represented 70% of the North American respondents to that study, a 10th annual effort by Georgia Institute of Technology, with contributions from consulting firm Capgemini, global logistics provider DHL and technology provider SAP.

"Increased global sourcing is a major force in the use of 3PLs as formerly domestic companies start to learn about the complexities and capacity constraints and regulations involved in international commerce," comments Cap-gemini's Peter D. Moore, vice president, logistics and fulfillment/RFID. "As the need for visibility to inventory is extended beyond the enterprise and over long distances, many companies are seeking partners to help them."

Indeed, John Kivinen, director of supply-chain design, UPS Supply Chain Solutions Consulting Services, says global sourcing has meant increased business, such as "more shipments moving longer distances. This provides an increase in transport volume. But more than that, it increases opportunities to provide end-to-end global solutions that help to minimize the cost and risk that global sourcing creates."

And users want more services. According to the 2005 3PL study, "Although many 3PL providers satisfy user requirements around basic services, such as transportation or warehousing, users continue to identify ongoing development of capabilities as a key issue. The stated need for advanced supply-chain services and for organizations that can serve as 'integrators' has validated a 'strategic service' model in meeting -- and servicing -- the needs of 3PL users."

Results from the IndustryWeek Value-Chain Survey suggest that manufacturers might be well-advised to consider outsourcing their logistics functions. Indeed, survey respondents overwhelmingly reported that their outsourcing of transportation functions was effective in helping achieve business objectives. Nearly 93% identified it as effective, with fully 51% calling it "extremely effective." Similarly, nearly 88% of survey respondents who outsource their warehousing and distribution centers said such outsourcing was effective, with nearly 55% reporting that it was "extremely effective."

Partnering For Improvement

Is it outsourcing or is it partnering? At 2005 IW Best Plants winner Thomas & Betts Corp., Athens, Tenn., Operations, about 70% of raw material components is supplier-managed. It's a partnership between the manufacturing plant and the supplier, says plant manager Herb Bradshaw.

"Our suppliers are now able to monitor current on-hand quantities in our plant and plan their daily deliveries in 24-hour windows. We also maintain projected future demand by component part number based on a 13-week historical usage. This demand can be modified to accommodate any type of special sales scenarios," he explains.

Bradshaw says a once primarily manual system has evolved into primarily electronic inventory and materials management process. Five daily supplier-managed-inventory reports help suppliers plan and deliver stocks daily.

The plant manager said some job elements of internal material management employees have diminished or been consolidated as the supplier-managed inventory program has grown. However, "even though our suppliers are doing an excellent job, we still have responsibility to manage our end of the business," he says. In fact, the plant's materials and production departments were merged to create value-stream supervisors within the facility. Those supervisors still have full responsibility for planning, scheduling and supervising a complete product family. "The fact that our suppliers have become integral to our success through their shared responsibility and inventory management is a key element."

Multiple benefits have accrued as a result of the supplier-managed inventory program. Bradshaw says raw and component inventories have been reduced by nearly 70%; inventory accuracy is very high; stock outages have been minimized or eliminated; and the need for an annual physical inventory has been eliminated, saving about $35,000 each year.

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