Value Proposition - Outsourced Manufacturing

Internet Supply Chains pick up where single company systems break down:

Business processes are undergoing dramatic change - rapidly moving away from traditional manufacturing to a value network model. Value networks have come to the forefront as companies have focused on their core compentencies, partnering for everything else.

Let's look first at the structure of a traditional manufacturing environment:

The OEM sits in the central role in this traditional business model. The OEM holds the direct customer relationship, handles final manufacturing and assembly, orders materials from suppliers and directs 3rd party logistics carriers.

When the OEM performs all these roles, the demand information flow (depicted in red) and the fulfillment material flow (depicted in blue) are essentially mirror images of each other. The OEM is central to both demand and fulfillment, and the OEM's information systems contain all the necessary information about both.

In this traditional manufacturing business model, Internet Supply Chains such as Logistical's Supply Chain Action Network™ (SCAN) can still be a highly effective tool for managing the supply chain. The event-driven, real-time character of SCAN™ can drive inventory levels down and fulfillment rates up. Although inefficient and costly, it is possible to manage this environment using single company systems connected to each other by EDI, fax and phone.

But faced with increasingly complex challenges, businesses are rapidly moving toward a highly specialized 'value network' model. In this new model, companies focus resources on their strategic assets, and outsource everything else. The OEM's strategic asset is their hold on the customer relationship, and as a result OEM's more and more come to specialize in marketing and product development.

Behind the scenes of the 'value network', OEM's are moving toward outsourcing the increasingly complex manufacturing process to contract manufacturers. And once manufacturing is outsourced, it is a rational extension for the OEM to have the contract manufacturer drop ship directly to the customer. The contract manufacturer comes to assume the central role in the the fulfillment process formerly held by the OEM.

The diagram that follows illustrates how the material fulfillment flow now bypasses the OEM. Companies with advanced value network models, such as Cisco, often never touch their customer's product. For the OEM, this model can provide highly returns on assets - achieving at the far extreme an 'assetless' business process.

But the customer is doing business with the OEM, and holds the OEM up to ever higher standards for fulfillment and service. The OEM must be able to rapidly move demand information to the fulfillment side of the value network, which is now outside the four walls of the enterprise. And the OEM must be able to reach into multiple layers of their value network (contract manufacturer, suppliers, 3rd party carriers) to provide customers with accurate commitments and order visibility across the whole process.

The following diagram illustrates how demand information flows in an outsourced manufacturing model. Compare this to the material flow diagram. Unlike traditional manufacturing models, there is a wide disparity between the two. The OEM can no longer make commitments in response to customer demand based solely on information stored within their own systems.

The OEM must be able to answer specific information queries from their customers:
... Do you have the inventory available to immediately fill my requirement?
... If not, can you fulfill my order for 'x' quantity to arrive on 'y' date?
... Show me the current status of my order, including the stage of manufacturing and/or the shipping status

And even more difficult multi-party problems may exist. For example, the OEM may be responsible for payment of the 3rd party carriers that the contract manufacturer uses to drop-ship directly to the OEM's customer.

Essentially, the OEM's systems must be able to provide complete demand and tracking integration across several tiers of their value network in order to provide excellent, seamless customer service. No pre-Internet, single company system can address the structural requirements of outsourced manufacturing for true, multi-enterprise collaboration.

Internet supply chains, also known as collaborative or supply chain networks, have emerged as the only viable solution.

The Supply Chain Action Network™ provides the collaborative framework that solves all these multi-party, value network issues. SCAN™ even directly supports the materials flow and payment reconciliation for drop-shipment scenarios.