From Contract manufacturing through to 3PL through to Front end customer support operations through to Business Process Outsourcing to now euphemistically called Managed Services. It has been roughly a 25+ years journey of maturity in the Business of Outsourcing ‘non-core’ activities. Beginning with America’s largest corporations. Many once core functions became increasingly non-core over the years. Be it source to pay, order to cash or plan to inventory and other processes in accounting, finance and people management. Consequently the business of outsourcing grew exponentially. Many have new Avatars now. As business models matured with adoption of technology over the years, so did the people (on both sides of the world) and so did the suppliers. E.g. Purchasing was once a strategic function. Firms would never want competition to know at what price they procured their wares and from who. But then everyone knows now! Of course they have NDAs to respect and that they do. (A bad analogy though – 25 years ago people maintained confidential resumes but now they boast just about everything they did and did not on LinkedIn, proudly boasting their five star employers and ‘league’ of connections. So something changed fundamentally. Globally. I believe for good. I like the idea of transparency)
Then there was ‘specialization’ in BPOs. Some offered more serious ‘value’ than others. The value word always existed in pitch decks. To begin with such a value proposition was often enabled by sub-optimally implemented systems of record and planning. Leaving room for additional employment generation. Apparently that did add to the productivity of some of the largest corporations in Americas and helped save billions of dollars over the years. So all good as long the clients are happy. Though many have mixed views. The BPOs too now find it insulting if you call any of their employee a ‘BPO guy’. They are adding more value now. Not just saving costs through low cost of labour. They prefer to be called Consultants. Just like any other management consultant from a Bain or a McKinsey who do something similar for 40x the rewards. They are the ‘millennial’ with more immersed training in Business and Technology. More specialized and more suitably trained and certified on latest tools to visualize the possibilities better. Unlike the ‘oldie’ Managers who have outlived their utility value! So their (only) job is to groom the millennial and let them come up with great ideas to reduce costs, improve productivity, increase visibility (of whatever) and in general help people connect to processes. Help use technology in a manner not done before. So they deserve the applause notwithstanding their wage to value ratio. (But quite often they end up becoming footnotes in toxic corporations and hence high attrition too, but that is beside the point)
That was context.
But I am keen to know how are these Managed Services contracts in supply chain management functions structured between say a Deloitte and a large American corporation with multinational operations. A corporation headed by a ‘Global’ Supply Chain Director who has just begun to comprehend the scale of operations in US market. With added burden of having to oversee business in subsidiary firms in Asia and Europe who have their own way of doing things! This Director is is also expected to implement America’s best practices in the rest of world too. Some of them Joint Venture firms who look up to the leadership in US. But everyone learns from experience and that is absolutely fine. (Beside the point that the increasing centralization of power in Multinational firms is an interesting development of the recent past. Even for making a minor change in the system to address some local need, you need approvals from New York and Frankfurt). But I believe that is big plus for the Managed Services business. You only need to talk to the ‘headquarters’ with no more than couple of decision makers who need to be convinced! Then you walk out with a Global transformation mandate that pays bills for next 5 to 10 years)
Since I do not really know the details of large scale managed service engagements in Supply Chain space, I thought it is perhaps a nice idea to put this in perspective. E.g. I do not know how to baseline the status quo to measure and claim improvements in X, Y, Z metrics. I do not know what metrics make sense for sake of mutual agreement. What homework the firms need to do before engaging with a Managed Services provider? What Metrics to agree on and how to rationalize the baseline in a growing company. A Business that is growing by products, markets, customers, plants and countries. Since I understand planning a tad better than execution, I will emphasize the former.
THE HOMEWORK
Like with everything else in life it is important to understand your current health well before you go out shopping for something you really didn’t want. Here are some questions and exercises you need to attempt before you even entertain a salesman from Managed Services provider. Something I would have asked myself as a Supply Chain Director of a mid size firm!
What is my internal Assessment of the gaps in Functional and Business knowledge?
Not a step by step Lego style ‘process’ knowledge but hypothesis. Not t-codes and document flow. But the science behind. The utility value you derive per unit of time invested.
Do you THINK that your customer service levels are not up to the mark? Why do you think so?
Do you think your planners and inventory controllers are not doing a good job at maintaining a healthy inventory ratio? As good as nearest competition?
Do you think you are actually losing sales (or have very high returns from market) because of bad demand planning (or planners)? Or just because your marketing friends complain often of shortages of petty products you are better off not making and selling?
Do you think your shelf availability is bad despite high fill rates?
Do you think you are paying more freight, storage and handling costs per unit shipped than the competition?
Are your marketing and sales folks calling the production schedulers to dictate production priorities on a daily basis?
Then first test these hypotheses. Your unverified thoughts and conjectures. You may not be doing all that bad.
Engage ONE expert, preferably a millennial from your firm to conduct such a study. Have an assigned mentor to regulate time and costs lest this becomes a PhD work. Document the findings.
What is the scope of work of your existing support company? Are they Living it?
Pull out those contracts. Read what they promised to deliver.
Are your supply Chain planning systems optimal in terms of basic day to day solution operations?
How much of this is manual? Do the users get notified of issues and exceptions instantly?
Is your existing IT support guiding you beyond resetting your passwords and authorizations and letting you know of failed jobs and occasionally blaming you for blowing up something? While they take a break!
Did you explore the possibilities of automating some routine non-value adding tasks so that your planners focus only on data, process and outcomes?
How well trained are your Employees? Are they utilized well?
People, incl. some who have spent a few years in the org wouldn’t have asked basic questions re why are they doing seemingly simple things in the most arduous manner possible. That too on a 10 million dollar software. Like shuffling through 10 screens when it can be done on one. Or working through some complicated illogical reports programs that were developed 10 years ago in a different context. It may be an ego issue or may be the original implementers simply left the solution that way. That does not mean it cannot be made more efficient. Ask your support company for help because you are already perhaps paying them for such work but never used them for the purposes! May be by now your in-house L1 IT folks have also figured out how to make it work for you. But your CIO perhaps thinks they are second rung experts who don’t know SAP and hence useless! So they are demotivated and quiet. Cheer them up. Involve the local IT and supply chain leadership into this. The last thing anyone should do on earth is donkey work when paid systems are available to do it at a 10th of cost and time. Use the saved time to make picnic. That is more useful to the economy than shuffling screens. YOUR employees time is more precious than that of your support company.
Are you getting the information you want in the form and medium you want?
For some information is about unintelligible lists and reports that anyone can draw out with little training. For some it is analytics and metrics incl. SCOR metrics. E.g. Likely delays in fulfilment and Cost of Forecast error. If you are using some type of data warehouse and a front end tool incl. Excel, you have much needed infra already in place. At least to get the basic information on time. You can also get those in your inbox with petty effort by IT support. PS: Recently when considering some development of a standalone supply chain metrics ‘dashboard’, I realized SAP was kind enough to publish the data sources and the relationships to compute over 300 odd SCOR Metrics. Just about everything. With some effort your data warehouse support can develop some key metrics for your consumption right in your planning systems. Without having to buy an expensive Analytics software right away. Much of that is nothing more than descriptive stats anyway.
What are your current operational metrics for measuring the quality of Demand, Distribution and Production Plans?
Forecast Error – So many ways to compute and report, present and claim
Plan Vs Actual?
Extraordinary delays?
Extraordinary Exceptions?
Capacity overloads?
Out of stock instances?
If you are already using a planning system like SAP APO or Oracle APS, many of these metrics can be reported via planning views or through some ad-hoc queries. Again check with IT support re how they can help here. If you do not measure or report any of these metrics sincerely, there is much work to do!
What are you current metrics for measuring the performance of your demand planners, Supply Chain Director and Production Managers?
Forecast Value Add?
Cost of Forecast Error (ref e.g. Peter M Catt)?
Expected Lost Sales? (some calculus needed here)
Expected Out of Stock?
Expected Availability?
Service Level Achievement?
Schedule Adherence?
Cost over-runs?
Inventory ratio?
Return on Assets (Gartner loves it)
Top 10 performance- Demand – Supply – Fulfilment?
Unless your people are measured along agreed metrics, howsoever rudimentary, it is unlikely that you can measure that of your managed service partners. Job and role descriptions are important, notwithstanding the administrative titles. So are the metrics
Did you figure out why does your goods stay so long in Quality Inspection state after production?
A possible reason for long lead times and lost sales. Stuff not available just when it is needed the most.
When was the last time you reviewed you safety stocks in the system?
Tens of ways in which you can plan for your safety stocks. All with assumptions that may have outlived. An kind of ‘modifier’ esp. Unwanted buffers contribute to bottlenecks and also cause lost sales esp. If you shared resources are overloaded. Then there is of course the risk of over planning more often than not.
When was the last time you reviewed your lead times in the system?
Planning world and execution world have completely different levels of ‘optimism’ and facts at work here. Meanwhile you added (or removed) a few more additional sources of supply that perhaps led to lowering of the production and procurement lead times but you are still working with 5 year old lead times. Yes certainly adds unwanted inventories in a highly non-linear fashion.
When was the last time you reviewed your production and procurement lot sizes?
Are the lot size merely a justification for sake of capacity utilization? May be ok for sake of capital investments for in-house production but why for procurement or subcontracting? Did you sign up agreements for sake of Lot size discounts? Perhaps not worth it. A 10% discount does not explain writing off 1% obsolete inventory.
When was the last time you reviewed your production planning procedures?
What are your reordering methods? How are they distinct by products and plants? Did you explore another reordering method to spread out the inventory investments?
What creative projects did you undertake in the past to bring in some predictability and visibility of demand downstream? Supply upstream?
Anything creative or fact driven. Predictability is the antidote to variability. Tens of ways exist to accomplish the same. Incl. Creative contractors with your customers and suppliers. For that matter even a 2% improvement in forecast accuracy can bring down inventories by the order of 20%.
Are your Installed Capacities Underutilized? Frequently? Half the year?
Talk to firms who are in need of capacity. Incl. Your direct competition. It is always good to know something about their business too. At some point in time I was supervising the subcontracting operations of 3 major competitors utilizing out factories spare capacities. Then they wanted additional services of shipping their products too in return for beer kind! NO amount of effort in Inventory Optimization can explain the losses from capacity under utilization.
Is your Business anyway constrained by Supply of Raw/input Materials ?
There is abundance but not of everything. Cows only produce so much milk. Only so much coffee is likely to be available this year from Ghana and Ethiopia. It takes a full 8 months of lead time to make a particular API for one of your formulations. Your customers want a lot more. How do you fulfil such demand?
ASSESSING YOUR MANAGED SERVICES COMPANY
Now that you have figured out what’s wrong, you can better moderate the scope of managed services. Without they talking in a patronizing tone, promising to solve all your ‘Problems’. Many of them fictititious. Should not really bother you. But here are some hard questions you need to ask. All the while keeping in mind that your are paying for
a) A value add service and not a software systems expertise
b) Learning from your Managed Service Provider and not teaching them.
d) Performance Improvement and not Full Time Employee Costs.
e) Business knowledge and not functional know how
f) Domain expertise and not just generic set of skills.
Do you have experience in offering Managed Services to multiple firms incl. our direct competition?
Without any prior experience working with similar firms, it would be hard to trust the value and insights (not IP and data) your partner can possibly bring to the table. Not entirely mandatory always but this is certainly an important qualifier. e.g. The proposed team comprises of former employees and contractors of PG, Uniliever, J&J, CP can collectively bring a lot more value if you are say a GSK
Do you hire millennial and pay them well. Above average wages?
You are paying for talent. You are paying for skills YOU want. Something you do not have at the moment. You do not want them to leave midway once you have established some trust with them (unless they join you full time but that would be violation of contract)
Can you share a couple of case studies on how you realized savings in Inventory investments through inventory optimization? What software applications incl. those of your customer’s did you use to achieve the same?
This is going beyond capabilities of your software! IO is such an abused term that some software companies made a ‘module’ out of it when it is really about doing 101 things of which setting inventory related control parameters is just one. Your partners must share their prior experience here.
Did your engagement with your clients result in any major change initiatives in solution re-design or review of existing supply chain contracts with Customers and Suppliers?
This is a concrete outcome of the learnings. If this becomes a part of the daily solution, you have achieved something.
If you are specializing in Physical Logistics Optimization, how do you think you are better than our existing 3PL companies like DHL or FedEx? What Additional value addition will your involvement bring in? Qualitatively. Quantitatively
A vague question but good to hear what they say. May be something about their capabilities in building a ‘Control Tower’ that shows just about everything you need to know about your supply chain right now. Since the scope can always be challenged, it is the thought leadership that counts. May be your partner is capable of developing a unique control tower for you overtime, once they have understood the business better.
Other than the fine tuning the standard models, what expertise do you bring to the table in the area of forecasting demand? Particularly in the Industry we operate in.
Automobiles and Smartphones do not even lend themselves to time series forecasting. There must be different kind of models incl. causal and parametric models that rely on external information incl. those of competition market share. What expertise does your managed services provider has in this area.
What do you think should be the inventory turnover of our firm if you were to manage our planning services operations of our expanding (or contracting) business?
You can refer reports by Gartner for some of these statistics. For some reassurance. McDonalds does 175. General Motors perhaps does 2 or 3 at max. There is only so much improvement you can do. Do not be fooled with big promises. PS: The best case scenario I could achieve with all possible interventions was an improvement of Aggregate inventory ratio from 2.75 to 3.05 over 2 years. Not great but a lot when we are talking 3 billion dollars in inventories end to end.
Do you have benchmarking data on best case Inventory investments for the kind of service levels we want to achieve?
Here comes the useful repository that your managed services may have from experience working with other firms. Incl. those of their employees who have worked in other firms. This is about occupational integrity. If your doctor has sufficient case history files, it helps him make suitable assumptions about the treatment he needs to prescribe.
What advanced skills do your employees have in areas like Operations Research, Analytics, Data mining, Simulation and modeling? What kind of schools and prior firms do you hire your people from?
May be they can’t afford all MIT and IIT quants but some poets may have such skills earned from experience! Ask for resumes. Talk to them. A 30 minutes of discussion is enough to verify how well grounded he/she is. How much theory. How much practical.
What is your expertise in independent supply chain software evaluation?
The irony is most consultants, incl. some with 20+ years of experience do not even care to know what else exists out there. Other than SAP and Oracle. There are quite some unsung heroes out there and they are doing fine. Even Honeywell has a suite of Production Scheduling applications that have been doing fine for over 30+ years but in select industries. It is important that your managed services partner has some knowledge of other industry specific supply chain planning s/w that solves problems that cannot be solved with well known s/w. The heuristics and optimization methods needed for e.g. A furniture assembly company or a extremely perishable products maker do not exist in say SAP APO or Oracle APS.
What expertise do you have in Implementation of Demand Shaping and Sensing?
Your partners need to know something beyond the traditional tools and applications for planning. Because an independent expertise in this area may not be easy to find. If you are convinced about the need to implement the same e.g. Because you are in a really high turnover business like a QSR, you certainly derive some value from it.
What S&OP/MRP/IBP simulation tools do you use for planning?
This is some investment you need to expect from your managed services provider. Simulation would be the more frequently used activity to test and prove hypothesis and possibilities for reducing inventories for a given service level. If you using a tool like APO, this will be extremely hard to manage. It is just not meant for fast simulations by changing master data and customizing on the fly.
How can you help us achieve 100% visibility of physical state of our supply chain? trucks, inventories at various nodes, likely shortages, delays, obsolescne risk, inventory risk. And then let users work with bricks and rods of various colors.
That is a lot on the available real estate on ‘single screen’ that senior management wants everything to fit in but some inetesting developments are happening here. Your partner needs to exhibit some solution leadership in this space.
