Daily Archives: February 23, 2007

Charge into Contract Manufacturing!

A few months ago, Geraint John penned a great article over on Supply Management where he urged CPOs to take the lead in contract manufacturing and understand the differences between contract manufacturing and other types of supplier relationships.

According to the article, contract operations have unique characteristics and differ from other types of strategic sourcing in several ways. First of all, products are typically shipped straight from a contract manufacturer to your end customer. Secondly, the supply market for contract operations tends to be very fragmented and many of the firms are small or medium sized with only a local, rather than global, presence.

Success factors include a good legal agreement, performance metrics, regular senior-level joint management reviews, the use of only appropriate tools and processes, and “externship” where your company’s employees work side-by-side with those of your partner to ensure you don’t lose vital knowledge as a result of outsourcing.

Furthermore, these relationships, which often require creativity, need to be managed by highly skilled individuals, but finding and developing the right people can be a major challenge with the current talent crunch.

So what’s a CPO to do? Take Charge and lead the way – it’s the only way to guarantee success. But remember CapGemini and CFO Research Services’ nine best practices for successful outsourcing relationships (as summarized in the Outsourcing Journal).

  • Visit the supplier’s site.

    Consider visiting supplier’s customers to assess the supplier’s true capabilities.

  • Define and document all performance metrics; then capture and report them.

    Deciding what factors you’ll measure helps both you and your outsourcer understand what’s important in your relationship.

  • Capture and report qualitative reaction to supplier performance.

    Stay in touch with the users and make sure they are being satisfied.

  • Conduct formal audits of the supplier’s processes and performance.

    Remember that section 404 of the Sarbanes-Oxley Act requires companies to document the effectiveness of their internal controls. When they outsource, they must do this themselves or obtain a Statement on Standards No. 70 report.

  • Allow or encourage company managers to join the supplier’s team.

    The closer your personnel are to the supplier, the better their outsourcing experience.

  • Include incentives for excellent performance and impose penalties for poor performance.
    Suppliers given incentive to provide excellent service are more likely to provide it.
  • Be willing to revise performance objectives during the contract term.

    Companies willing to adapt to change are generally happier with their outsourced activities than those who lack such flexibility.

  • Consolidate work with a few strategic suppliers.

    It’s easier to manage a few relationships than many.

  • Use a formal governance process for outsourcing.

    It’s the only way to ensure all the pieces are being addressed.