"We can compete and create great American jobs. But not without offshoring." That's according to the CEO of the holding company for Paper Converting Machine Co., which manufacturers packaging materials. ⁱ

His comment sounds counterintuitive. Outsourcing makes headlines as much for its threat to jobs as its role in cost efficiency, as new manufacturing centers emerge in Eastern Europe , parts of Asia and elsewhere.

The CEO's remark reflects a transition in current thinking about outsourcing. PCMC, set back by the U.S. economic recession in 2001 and customer pressure to cut machinery prices, was acquired by holding company Barry-Wehmiller Cos. The holding company plans to shift some design work to India so its engineers can collaborate around the clock with U.S. staff. What's different is that this strategy is intended not only to reduce costs and improve competitive response, but also to preserve local U.S. operations.

Fundamentals for Success

Perhaps the drama around outsourcing will give way to a more enlightened approach. After all, manufacturers have been dealing with outsourcing as long as there has been a supply chain.

QAD customers with successful outsourcing strategies share several things in common. These include manufacturing-related issues, such as:

• Profit margins: Ever-present pressure on manufacturers to reduce prices also squeezes profit margins. So manufacturers identify components of their products that are commodity items and therefore candidates for another supplier to produce more cost-effectively. That cost advantage may come from a local abundance of raw materials or lower labor costs.
  
  
• Product mix: Where production of a component is not aligned with a manufacturer's strengths, volume is too low or systems aren't designed for optimal production of that item, manufacturers find it makes sense to outsource to a company better suited to the work.
  
  
• Resource allocation: Other projects or products may have greater sales or volume requirements. Capacity constraints may require manufacturers to focus allocation of personnel, resources and facilities on their highest priorities, and outsource production of other items.

As these challenges have grown more complex, manufacturers' response-and their tools and techniques-have grown more sophisticated. Here are some considerations that we find our customers factor into their outsourced operations.

Learning from Others' Lessons
IT support outsourcing seems to be grabbing the lion's share of headlines and will continue to do so: According to AMR Research, $100 billion in outsourcing contracts are due to expire in the next two years (and EDS and IBM hold $50 billion of those deals). As these outsourcing customers revisit their contracts, AMR predicts we can expect a shakeup-and points to a trend in best-of-breed, rather than monolithic, outsourcing. ⁱⁱ

Don't overlook the opportunity to take advantage of IT outsourcing. There are plenty of success stories making news. According to BusinessWeek , Penske Truck Leasing has outsourced its back-office functions and logistical services to Genpact. If a Penske truck is missing a necessary permit, the driver calls Genpact staff that happens to be based in India. They get the required paperwork and then notify the appropriate authority-in minutes instead of hours. ⁱⁱⁱ

If the analysts' predictions are right, keep watching IT headlines, too-there may be lessons that are applicable to your IT and your manufacturing operations.

Accounting for the Challenges
Outsourcing looks so easy on paper: Map out workflow, redesign it-or its processes-for optimal performance, unveil new systems and processes and watch that they operate smoothly.

In reality, outsourcing–and choosing the right vendor–requires expertise. Processes become entrenched over time and outsourcing demands more than handing a vendor the keys to an empty office. The painful aspects of IT outsourcing emerge from minor details and assumptions, as in the case of at least one QAD customer who found its IT outsourcing vendor's staff didn't have the expertise promised.

Nor is outsourcing production simply a question of deciding that tomorrow, a supplier will provide the component your firm manufactured. Product design, shop floor configuration and workforce training are affected. And whether it's IT or manufacturing systems, you have to manage your outsourcing provider and the connections between its systems and your own–whether your plants are in the United States and your vendor is in India , or your factories are in Spain and Portugal and your suppliers are in Poland and Romania .

Is your supplier equipped to be easy to work with? Are there constraints that offset outsourcing's advantages? In IT, there are trade-offs between a vendor that speaks your language, has systems in place and is located in a major metropolis, and a vendor with lower labor costs but a rudimentary infrastructure. For manufacturing, there are trade-offs between a supplier with overseas production that's dependent on shipping, and a supplier based in a business park where physical transport is minimized.

Training the Invisible Team
The challenges of managing distributed operations are familiar. Outsourcing places additional burdens on staff to guide widely dispersed teams. Professor Mohanbir Sawhney of Northwestern University 's Kellogg School of Management summed up the difficulty: "How do you manage employees you can't even see?" ^iv

In this column, we've talked about manufacturers' training issues, starting with a consistent, company-wide baseline of knowledge. How well do your managers supervise teams with whom they may meet only sporadically, at best?

Our customers are taking advantage of the fact that QAD eLearning is designed precisely to address the distributed nature of their teams . QAD eLearning online learning resources give business and production staff access to training wherever they are, when it's convenient. From the QAD Knowledgebase repository to comprehensive product documentation, and from pre-recorded and custom-recorded training presentations to live and interactive Webcasts, QAD eLearning options accommodate a dispersed workforce and equip its members for teamwork that circles the globe.

In addition, QAD eLearning tools verify that a distributed team has the skills that it needs to work smart. Grade books and exams help monitor individuals' training progress, certify completion of coursework and mastery of concepts and skills, and even create a foundation for incentive programs that encourage employees to keep their knowledge up to date. Training records also help document skill acquisition required for regulatory compliance.

Walking in Suppliers' Shoes
Outsourcing multiplies manufacturers' legal and business requirements as materials and goods traverse borders. Your company faces regulation of imports. But consider that those same goods–and your suppliers–are subject to export rules as well. For example, each nation in Europe has local tax and border-crossing requirements, import and export fees, freight logistics and legal constraints further complicated by apportionment of taxes and fees based on a product's composition and the origin of its contents.

In the interest of a productive and expeditious supply chain, our customers find it pays to put themselves in their supplier's shoes and consider these additional hurdles.

Seeking Return on Relationship
Here's where ERP and supply chain management technology come in. QAD Lean Manufacturing and QAD Supply Visualization (SV) tools enhance the infrastructure for an effective outsourcing strategy that takes the form of an efficient, responsive, demand-driven supply chain.

These products give manufacturers the means to signal demand–whether by electronic kanban representation, EDI, even fax or email–and give suppliers secure access to inventory status round-the-clock. Suppliers can see what replenishment signals have been sent and respond according to agreement, eliminating a host of related, typically manual steps to confirm order status and expedite shipment. When inventory updates are visible to suppliers, they can use this data to manage their production that's dependent on their own outsourcing contracts. If there's agreement on a blanket order, a vendor might even send an advance ship notice back to a customer along with ship or projected delivery dates.

We've talked about the advantages of more efficient supply chain communications–and the freedom that automation gives manufacturers to direct people and resources to other priorities like new product development. But there's another advantage that comes from QAD Lean Manufacturing and QAD SV, something that our team calls return on relationship (ROR).

The popular solution to shrinking profit margins is to trim labor costs. But another way to staunch dwindling profits is to reinforce customer relationships. Through automation and communication that's nearly real-time, manufacturers and their suppliers can improve their collective response to demand and in turn, improve end-customer satisfaction and loyalty–relationship-building benefits. QAD Lean Manufacturing and QAD SV help strengthen those ties.

Industry developments suggest that services-based business is the wave of the future: Take IBM, which sold off its PC manufacturing business last year and has even more closely staked its future to its IT outsourcing services business. Or GE, which reported sales of product services totaling $25.8 billion in 2004–and whose foray into the airline industry has grown from engine manufacture to a division with more than $29 billion in loans and leases, ^v strengthening relationships with customers beyond core manufacturing.

As the success of service-based business depends heavily on customer relationships, ROR may become a better measure than ROI to gauge successful outsourcing–and the key to your ROR is right in your QAD technology suite.

ⁱ Pete Engardio, "The Future of Outsourcing," BusinessWeek ( January 30, 2006 ).
ⁱⁱ Lance Travis, "Outsourcing 2006: At the Tipping Point," AMR Research ( January 30, 2006 ).
ⁱⁱⁱ Engardio, op. cit.
^iv Ibid.
^v Diane Brady, "Why GE Is Keeping Loser Airlines Aloft," BusinessWeek ( February 7, 2005 ).