Category Archives: Outsourcing

Wrong on So Many Levels

Editor’s Note: Today’s guest post is from Dick Locke. Dick, who has delivered seminars to over 100 companies across the globe, is a seasoned expert on International Sourcing and Procurement who wrote the book. (Check out his archived posts.)

The fire that killed 112 Bangladeshi garment workers has brought out some appalling purchasing practices that seem rampant in the garment industry. And this is the second such fire in three months. The previous fire killed more than 300 people in Pakistan.
The New York Times has had several articles on the issue. Here are some quotes. This picture is wrong on so many levels.

From one article:

“… mounds of flammable yarn and fabric were illegally stored on the ground floor near electrical generators. Had the fabric been stored in an enclosed, fireproof room, as required by law, the fire could have been contained and the workers could have escaped.”

“After the fire, Walmart, Sears and other retailers made the same startling admission: They say they did not know that Tazreen Fashions was making their clothing.”

“Much of the factory’s business came through opaque networks of subcontracts with suppliers or local buying houses.”

“The factory’s owner, Delowar Hossain, said his managers arranged work through local middlemen. ‘We don’t know the buyers’, Mr. Hossain said in an interview. ‘The local man is important. The buyer – I don’t care’.”

“The Bangladeshi government has started inspecting the country’s 4,500 garment factories; it has already found fire code violations in almost a third of the hundreds it has examined.”

From another article:

“Sridevi Kalavakolanu, a Walmart director of ethical sourcing, along with an official from another major apparel retailer, noted that the proposed improvements in electrical and fire safety would involve as many as 4,500 factories and would be ‘in most cases’ a ‘very extensive and costly modification’.

‘It is not financially feasible for the brands to make such investments’, the minutes said”.

Folks, this is so basic. You need to know your suppliers personally, wherever in the world they may be. You also need to know where your products are being built. It’s time to bring garment purchasing into the modern world. If you can’t afford to have your own people in the suppliers’ country, you can’t afford to buy there.

Thanks, Dick. (Global Supply Training)

Hiperos – It’s So Hip To Be Square with 3rd Party Management! Part II

Hiperos provides a SaaS platform that allows an organization to manage the entire 3rd party lifecycle, which consists of registration, data collection, segmentation, control automation, assessment, management, and collaborative issue resolution.

Hiperos includes your standard SIM (Supplier Information Management) functionality that allows for supplier self-service registration and profile maintenance and data integration from third party sources. On top of that it implements a user-configurable rules-based workflow that allows third-parties to be segmented into different buckets that represent the different programs that they need to be subjected too – be it FCPA, REACH, WEE, HIPPA, or some other type of compliance or monitoring program. Each bucket has its associated monitoring rules that notify the third party when more information is needed and that automatically alerts the user when a violation is detected or when information is not provided by the third party in a timely fashion. Assessments are automatically run every time new data becomes available and can be run by a user at any time. The fact that all relevant third party information is available at all times allows users to pro-actively manage third parties, and associated risks, and then either work with third parties to mitigate risks, if the potential infraction can be corrected, or cut them loose if the risk of association is too great (because they showed up on a denied party list or use child labour in their supply chain).

The application, which loads the default user-defined dashboard, allows a user to manage third parties, engagements, relationships, products, and programs and to define programs, vendor communities, reports, and analytics.

The dashboard is multi-tabbed and allows a user to define relevant views on each of the application areas defined above, as well as a default dashboard that allows the user to see the information most relevant to him or her. At the top of the dashboard is a link to current action items that allows a user to quickly see what needs to be done in third party management, engagements, programs, etc. The dashboards can be configured using hundreds of pre-defined (reporting) widgets or the user can define their own widgets by defining appropriate reports in the reporting module. And the user can bring in real-time news and data feeds from sites of interest.

The application can track any compliance, performance, sustainability, or risk data elements of interest and, like any good SIM platform, is preconfigured to track hundreds of relevant data items, depending upon the programs you define as relevant for a given compliance, performance, or risk program (which minimizes the amount of configuration required to track custom fields). And not only is all relevant data available from any view that is program or user defined, but it’s all interlinked so a user can click on a third party included in a program, see the relevant report(s), and then dive into the third party data management screen to examine the raw data elements, and then run a report on just a data subset.

Program definition is flexible and allows for any type of compliance, risk, sustainability, or performance program you can think of. In addition, the fact that Hiperos also supports contract meta-data and third-party data feeds allows financial impact reports to be generated. That way, a user always knows what the impact of a third-party falling out of compliance is to the organization. Knowing that a tier-one supplier might be buying from a tier-two supplier that might be using child labour is one thing, but knowing that the organization is spending 20 Million across 5 categories on that tier-one supplier is something else. In the first case, the supplier is put on the “investigate” list and someone gets around to it when they get around to it. In the second case, the user knows that it is a high priority and an investigation has to be started immediately as the public backlash will be extremely damaging to the organization if it gets out that 20 Million is being spent on products and/or services that were partially produced by child labour.

Hiperos has also included extensive color-coded geo-mapping capabilities so that you can quickly see, for any program, where the highest risk areas are globally and dive in. While Hiperos is not the first company to do this, they have latched on to the fact that the visual representation of risk or non-compliance by region allows one to quickly see what regions have to be monitored. This allows resources to be properly applied, especially since proper monitoring will typically require subscriptions to appropriate data feeds for those regions.

The Market Intelligence capabilites are quite extensive too, and they have pre-configured watch-lists, diversity monitoring, parent-subsidiary monitoring, subcontractor monitoring, REACH/WEE monitoring, and dozens of other feeds of interest which can be enabled as required by the client.

And the analytics piece supports the full suite of slice-and-dice capabilities found in most sourcing products today, so that you can dive into the data and find out which suppliers, categories, or programs represent the highest risk to your organization.

There’s quite a bit of data, and the application can be quite busy at times, but Hiperos has one thing right, where compliance is concerned, it’s Hip to be Square.

Robotistan, I Think Not!

In a recent post over on Horses for Sources, Jim Slaby gives us Greetings from Robotistan, outsourcing’s cheapest new destination, and tells us that software robots are going to replace outsourced labour.

According to Jim, you will soon be able to have your own business process analysts create software robots to do the work instead of outsourced labour because you can get the robots up and running in five months and they will do the work for less than half the cost of Indian FTEs.

His rationale, the existence of a UK startup by the name of Blue Prism that makes a software development toolkit and methodology that lets non-engineers quickly create software robots to automate rules-driven business processes.

Pretty flimsy. For starters, here are the caveats that he finds:

01. The process must be repetitive back-office and not require human judgement or much exception handling.
Which probably limits it to data entry, account review, and creation of initial online access credentials.

02. IT buy in is required.
For starters, the software requires a virtual machine cluster. And the maintenance of such adds to what is probably already an excessive workload.

0.3 There is a learning curve.
It typically takes two to four months to master the tools to model, automate, test, and optimize the robots, according to Jim.

And this is just the beginning. Yes, a large wireless carrier and a major BPO services provider may have found some limited success, but you can’t overlook the facts that:

04. When you scale up, any unhandled exception has the potential to effectively crash the system.
Let’s say you created a robot for account review, a prime example for the technology as indicated by Jim, and you define an exception as any new account under a year that is overdue more than 10 days. Let’s say you are a wireless carrier, which typically has relatively high customer turnover thanks to the fact mobile numbers are portable, and you run the robot on a small test set of 1,000 records and only come up with 10 exceptions. You think it’s great and set it loose on the system with millions of subscribers, but fail to realize your sample set was abnormal and the exception rate is actually 5% and not 1% (and that you failed to insure the less than one year test was properly coded) and all of a sudden you get a queue with 100,000 exceptions that need to be manually processed. Chances are the robot will crash when the manual reviewer tries to load the entire queue!

05. BPM software is currently the be-all, end-all of bloat-ware, especially when you’re trying to create an “AI” application.
As a result, the amount of memory, processing power, and storage required to automate even simple queues is exponentially more than what would be required by an application set up to support a human. And while processing power and storage is still doubling on a regular basis, Moore’s Law is coming to an end as we are close to hitting the point where quantum uncertainty will prevent us from shrinking chips any further. This means that, as you try to build more sophisticated robots, the number of machines you require will double, quadruple, octuple, etc. until the cost to run the hardware will exceed what you could pay a human to do the same task in an emerging market (because machines require energy and energy costs and they are going nowhere but up). And, unlike the machine, the human won’t have to push every tenth transaction to the queue for someone else to process as she’ll know how to deal with the majority of transactions by the virtue of her intelligence, dedication, and desire to keep her job and have a better life.

Software is going to continue to get more powerful, and it is going to continue to automate more data processing, and continue to minimize the amount of data that requires human review, but human review is still going to be required and we’re not going to replace humans in any process that matters any time soon. We might reduce the number of humans we need, but we won’t eliminate the need for them or replace them with robots just yet.

And anyone that disagrees with me can bit my gloomy fleshy ass. 😉

How advanced are your Shared Services?

Especially if you’re not a global 3000 working with a BoB (Best of Breed) Shared Services Advisory firm?

A recent article over on the Shared Services Link describes “Six Trends that define the Shared Services age today”. In particular, it notes that:

  • Shared Services Continue to Move Up the Value Chain
    The argument is that much of the finance function has been outsourced, the dynamic of staff in an SSO is changing (as teams no longer crunch and enter data) but instead judge and advise, and the model works.
  • Business services rather than finance services
    The argument is that we’ve moved on to business functions like HR, IT, and Procurement and this provides the organization with greater value.
  • Outsources gain share, but slowly
    Since 2007, there have been 850 major finance multi-process outsourcing deals.
  • Shared services find better ways to work in a multi-ERP environment
    They have adopted middleware technology to integrate the systems.
  • Data is evolving into insight
    Now that we’ve moved beyond process consolidation and off-shoring, we can focus on BI (Business Intelligence).
  • A new breed of being — the global process owner
    We have created end-to-end process guardians who oversee the global implementation of a process.

And while I believe this is true for the 850 multi-nationals that entered into big shared-services deals with “tier 1” shared service providers, for mid-size companies just jumping on the bandwagon, are they as lucky? Yes, the technology and processes will be there in the providers, but in order to take advantage of it, it often requires considerable restructuring and change management on the part of the company. Sometimes so much so that the leading organizations, uninterested in what will be a losing engagement during the learning curve, may inadvertently scare these organizations away to “tier 2” providers that mainly focus on process standardization and data consolidation and haven’t advanced to the third wave of BI and expert consulting. So if you’re not in the big leagues, have you yet to catch sight of the third wave?

Should Manufacturing Jobs Be ‘Re-Shored’ to the U.S.?

Yes. No. Maybe.

A recent article over on the Knowledge @ Wharton site that questions if manufacturing jobs should be ‘re-shored’ to the U.S. points out that the Boston Consulting Group forecasts that 2 Million to 3 Million manufacturing jobs will come back to the U.S. because of the fundamental shift in economics between China and the United States. While the projected shift will increase U.S. economic growth by about $100 Billion, let’s not get too excited. First of all, this is less than 1% of current GDP. Secondly, if the right jobs aren’t brought back for the right reasons, they’ll just shift again next decade.

Before we dive into this discussion, let’s summarize some key statistics from the article. Namely:

  • it is projected that the wage differential will drop from the 22X it was in 2000 to 4X in 2015, not adjusted for productivity
  • many global manufacturers have begun to move their outsourcing to even lower cost countries such as Vietnam, Indonesia, and Cambodia
  • outsourcing costs include higher transportation/logistics costs, extra inventory costs, and quality control costs
  • improved lean manufacturing processes can often cut production-times per unit considerably, up to 65% in one instance at GE
  • more than 60% of the cost of manufactured goods can be attributed to goods and services that the average firm buys from its suppliers

When you consider these points, it becomes clear that:

  • if the primary reason for outsourcing to China was labour savings, this is no longer a good reason; in some districts, the wage savings are less than 40%!
  • the wage game requires a constant move, often into unknown, or dangerous territory (as Africa will be next)
  • there are ‘hidden’ costs as transportation costs are rising, inventory carry costs can explode if demand patterns shift, and quality control costs are exponentially higher as the only sure way to ensure quality is to get feet on the ground … regularly
  • innovation and creativity can slash the relative cost of manufacturing at home if productivity is doubled (or tripled)
  • the production costs will probably be less than the procurement costs for the raw materials, components, and services — which means cost reduction is more reliant on Procurement efficiencies and successes than manufacturing, as it should be

This means that:

  • you should never outsource on a wage analysis alone, but it doesn’t necessarily mean you should pull back to the U.S. — sometimes near-sourcing, to Mexico for instance, is the right solution
  • you shouldn’t play the wage game unless you are planning two moves ahead
  • bulky items, items that can experience unpredictable demand spikes, and items that require a lot of quality control are typically not good options for outsourcing
  • you should never underestimate the potential of talent — and what can be accomplished with the right incentive
  • decisions should be made from a true TCO perspective, not just a manufacturing perspective

And when you start looking at the overall picture, the overall product lifecycle, and the strengths and weaknesses of outsourced manufacturing partners, you’ll realize that some manufacturing, even with the disappearing wage differential, should be left in China; some should be brought back home yesterday; and some should be near-sourced. For example, you can’t build a FoxConn in the U.S. China is dominant in many areas of electronic manufacturing now and will stay that way — and considering the density of phones, tablets, and laptops, it makes sense to produce them in China. On the other hand, major appliances and automobiles should be produced at home, where efficiencies in production and greatly reduced transportation costs more than make up for the labour differential. And major appliance and automotive sub-assemblies should probably be produced in Mexico, where they have idle factories, and from where shipping costs are relatively minimal.