Outsourced Manufacturing Within

The Current Global Marketplace

Mr. Anthony Della-Croce

VP Solutions Architecture
Core Services

1
Agenda

• The Current Shift To Global Manufacturing and

Distribution Operations
• ERP Application Requirements and Processes In
The Global Manufacturing and Distribution
Business Environment
• Benefits and Risks of Outsourced Manufacturing

2
The Industry Experts

Forrester Research
‌ High-tech firms continue to shed manufacturing plants but struggle to manage their
contract manufacturers. OEMs must treat these outsource relationships like a merger
and develop new virtual manufacturing skills.

Lean manufacturing and outsourcing

By Eric O. Olsen and Mark Zetter - Aug 09, 2006
‌ We have arrived at the nexus of two powerful trends in business process improvement and
product manufacturing operations management. 

‌ One, lean operations, offer streamlined flow of value to the customer with minimal inventory
and waste.  The other, outsourcing, offers dramatically lower cost of goods sold (COGs). 
Both can result in highly competitive pricing positions and healthy profit margins.  How do
executives remain true to the tenants of lean while stretching their company value stream
across the globe?  How do companies build close relationships with suppliers if each party
speaks, and acts, differently?  How does an organization make value 'flow' when its raw
materials, or products, might be arriving in batches the size of large, ocean-going ship
containers, or perhaps even the size of the container ship? 

3
The Industry Experts

Metric-Stream
‌ As companies shift manufacturing and assembly operations offshore to low cost
countries, a large number of deliveries to US based customers suddenly become
cross-border transactions. Sometimes shipments can take weeks to be delivered
to distribution sites within the United States, resulting in long supply chains. It is
very important for such companies to gain visibility into process capability and
quality issues within their outsourcer's manufacturing sites so that they can
prevent any unacceptable quality products from entering the inbound supply
chain. If these unacceptable quality products enter the supply chain, the
company has to wait to scrap a part of the shipment at the point of destination,
weeks after it was shipped from the outsourcer's manufacturing site. The
additional transportation and handling incurred due to poor quality products
being rejected at the point of destination, instead of the point of manufacture,
also leads to increased cost of inventory write-offs.

4
Overview Process - Drop Shipments

• Drop Shipment Characteristics

1. Entire Transaction Originates From Sales Order Line
2. Sales Order Line Is Linked To Requisition Which In Turn Is Linked
To Purchase Order Line- You Are Buying “Product” Not a “Process”
3. Sometimes Called “Back to Back” Orders
4. You Never Take Physical Possession Of Inventory But You Do Take
Financial Ownership of The Product
• No Manufacturing Work Order Is Generated
• MRP See Sales Order Demand Linked To Purchase Order
Supply, No Action Required

5
Overview Process - Outside Processing
Operations

• Outside Processing Characteristics:

1. Entire Process Is “Internal” To A Single Manufacturing Organization,
2. You Must Utilize Manufacturing Work Order or Repetitive Production
Schedule
1. You Are Buying “Process” Not a “Product”
3. The Work Order Generates a “Purchase Requisition” For “Outside
Processing Item Code” Automatically:
4. Common Misconception Is That You Are “Buying End Assembly”
5. Generated Purchase Requisition Is Converted To Purchase Order
By”
6. Purchase Order Receipt Is “To Outside Process Operation” On Work
Order

6
Overview Process - Outside Processing
Operations

Outside Processing Characteristics:

1. Common Misconception Is That You Are “Buying End Assembly”

You Are Buying The “Process”
2. Generated Purchase Requisition Is Converted To Purchase Order
1. Manually Converted or
2. Blanket Purchase Order Release - Can Be Automatic If Sourcing Rules Are
Available
3. Purchase Order Receipt Is “To Outside Process Operation” On Work
Order

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Complete Outsourced Manufacturing
Operations

Outsourced Manufacturing Definition:

– Your Organizations Controls the Creation and Release of Work Orders to
“Sub-Contracted” Manufacturing Vendor.
– Each “Sub-Contracted” Manufacturing Vendor Preferably Should Have
Their Own “Inventory Organization” Assigned to Them For
• Security/Address Definitions/Work Order Creation etc.
– Your Issue of The Released Work Order Creates a Purchase Requisition
Linked To That Work Order.
• Convert this Requisition to Purchase Order and Receive to the Work Order
– “Sub-Contracted” Manufacturing Vendor Ideally Logs Into Your System
• Receiving Raw Material Component Inventory As Necessary
• Controls Moves/Completion Of Work Order
• Work Order Completion Should be Updating Your Inventory Value
• Ships Directly To Your End Customer, This Is Not “Drop Shipment” Since “Sub-
Contracted” Manufacturing Vendor Is Shipping From Your Inventory

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Complete Outsourced Manufacturing Operations
Ship Directly To Customer “Demand Place & Planning
Directly on “Sub-Contractor”

GL
Purchasing
OM
1)
O rig
in al S
ale
s Or
de
rD
em
a nd
Internal Inventory “Sub-Contracted”
Organization Manufacturing Vendor

Your Owned/Managed Warehouse Item Flagged As “Make At “Sub-Contracted”

Manufacturing Vendor

Forecast MDS MPS MRP

9
Complete Outsourced Manufacturing Operations Ship
Directly To Customer “Demand Place & Planning
Directly on “Sub-Contractor”

1)
O
OM Ord rigina
e r D l Sa Purchasing
em le
and s

Internal Inventory “Sub-Contracted”

Manufacturing Vendor
Organization

i ni es
ed
r F at
sh
Fo Cre
Your Owned/Managed

er P
od Ord MR
Warehouse and You/Sub-Contractor
Go ork S or Purchase Requisitions
W MP
Control Planning At Sub-Contractor Org. s For Raw Materials
2)

Forecast MDS MPS MRP

10
Complete Outsourced Manufacturing Operations
Ship Directly To Customer “Demand Place & Planning Directly
on “Sub-Contractor”

OM 1)
O
De rigin Purchasing
ma
nd al Sa
le sO
rde
r

Internal Inventory “Sub-Contracted”

Manufacturing Vendor
Organization

sh s
ed
r F ate
3) Work Order Release

Fo re
ini
Creates Purchase

er RP C
Your Owned/Managed Warehouse and Requisition/Purchase Order

Go rk O or M
You/Sub-Contractor Control Planning At For Outside Process
od rd
Sub-Contractor Org.
Wo MPS

s Work Order Completed & Outside

2)

Process PO Received Triggers

Inventory Updates

Forecast MDS MPS MRP

11
Complete Outsourced Manufacturing Operations
Ship Directly To Customer ”Demand Place and Planning Directly

on “Sub-Contractor”
4)
Ori
g
Dir inal S
ect
ly T ales O Purchasing
OM oC r
ust der S
om h
er ipped

Internal Inventory “Sub-Contracted”

Manufacturing Vendor
Organization

3) Work Order Release

Creates Purchase
Your Owned/Managed Requisition/Purchase Order
Warehouse For Outside Process

Work Order Completed 4A) Print Pick/Pack/Ship Documents

& Outside Process PO
Received Triggers Inventory Updates
At “Sub-Contracted” Manufacturing Vendor
4B) Vendor Notifies You Of Shipment
4C) You Do “Logical” Shipment of Sales Order
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Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning Internal
Supply Chain

1)
Order O
GL Purchasing
rig

Mgmt
ina
Sa l
les
Or
de
Der
ma
nd

Internal Inventory 2) MRP Generates Internal Requisition

“Sub-Contracted”
Manufacturing Vendor
Organization And Internal Sales Order

Your Owned/Managed Warehouse Item Flagged As “Make At “Sub-Contracted” Manufacturing

Vendor But Buy Item In Internal Inventory Organization

Forecast MDS MPS MRP

13
Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning Internal Supply
Chain

GL
1)
De Or
m igin
OM an a
d l Sa Purchasing
les
Or
de
r

Internal Inventory 2) MRP Generates Internal Requisition

“Sub-Contracted”
Manufacturing Vendor
Organization And Internal Sales Order

s o ds
e ate Go
Cr sh
R P Fini
o r M F or
r
M PS rde
O
3) ork
W 4) Purchase
Requisitions For Raw
Forecast MDS MPS MRP Materials
14
Complete Outsourced Manufacturing Operations
Ship To Your Organization Demand/Planning Internal
Supply Chain

GL
OM 1) der
Or
Or D Purchasing
ig em
in
al and
Sa
les

Internal Inventory 2) MRP Generates Internal Requisition

“Sub-Contracted”
Manufacturing Vendor
Organization And Internal Sales Order

5) Work Order Completed At “Sub-Contracted” Manufacturing Vendor

6) “Sub-Contracted” Manufacturing Vendor Ships Item Back To Internal Organization Via
Internal Sales Order
7) After Receipt Against Internal Purchase Order, Update Inventory
8) Ship To End Customer From “Internal Inventory Organization

15
Review Of Outsourced Manufacturing
Benefits and Issues
Drop Shipments Benefits
• Don’t incur financial obligation
of inventory until customer
order received and processed.
• Don’t have the cost or overhead
of delivering finish product to
customers.
• Don’t maintain warehouse or
inventory carrying cost.
• Don’t control production or
design of the product
Drop Shipment Issues
• Cannot control acquisition cost
of product,
• subject to vendor price
• cannot control delivery or
promise dates
• Vendor could sell direct
• Financial liability for purchase
even if customer cancels order
• No control over product quality
but sale still impacts your
reputation with marketplace
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Review Of Outsourced Manufacturing
Benefits and Issues
Outside Processing Benefits
• No financial obligation of Assets
to perform special processing.
• Don’t have setup or overhead
costs associated with
completing specialized
processing.
• Don’t maintain inventory
required to perform specialized
processes.
• You still control production
process of your finish good
while holding the vendor
responsible for only this unique
process.
Outside Processing Issues
• Don’t control the direct quality
of the outside process
• Don’t easily control delivery,
promise dates to your customer
• Competitors can utilize your
outside processor
• Financial liability for purchase
even if customer cancels order
• No control over product quality
but sale still impacts your
reputation with marketplace
17
Review Of Outsourced Manufacturing
Benefits and Issues
Outsourced Manufacturing Benefits
• No financial obligation of Assets
perform special processing.
• Don’t have the setup or overhead
costs associated with completing
specialized processing
• Don’t maintain inventory required to
perform specialized processes.
• Control production process remotely
for your finish good while holding the
vendor responsible for executing shop
floor transactions.
• Don’t incur costs and overhead of the
shipment process.
• You can quickly change product lines
based on market conditions by utilizing
several “sub-contractors’
Outsourced Manufacturing Issues
• cannot control the direct quality of the
outside process
• cannot easily control delivery, promise
dates to your customer
• competitors can utilize your outside
processor
• financial liability for purchase even if
customer cancels order
• no control over product quality but
sale still impacts your reputation with
marketplace
• Engineering design and maintenance
must be controlled across
organizational boundaries
• You must establish a safe/secure ERP
environment that can be flexible and
easily adapted to multiple sub-
contractors
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