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The SCM Ecosystem - the Service Providers (Part 1 of 3)

Outsourcing of production and logistics has become a firmly established model for growth and cost competitiveness in the global markets of today. Can outsourcing of SCM processes be far behind?

Supply Chain Management is often seen as a core function within organizations and seldom do supply chain executives feel that these could or should be outsourced. However the slow morphing of most manufacturing companies to becoming design and marketing organizations with the actual production being taken over by contract manufacturers in low cost countries contradicts this view. Outsourcing of production and logistics has become a firmly established model for growth and cost competitiveness in the global markets of today. Can outsourcing of SCM processes be far behind?

The BPO industry has achieved considerable maturity in delivering transactional processes in Finance and Accounting, Customer Service, Travel and Expense etc. This learning curve has helped the industry to scale up and perfect its delivery models. The next wave of services will be in delivering value added services where knowledge/skill and improved business outcome is the promise rather than the earlier focus on labour arbitrage.  SCM and Analytics will play an important role in the future of the BPO industry and its sustainability over the long run. To understand the scope and potential of SCM BPO we will need to first understand (1) the service providers in this space, (2) the processes that clients are looking at being delivered from a shared service center and finally (3) the operating strategy for successful SCM operations.

(1) The Service Providers:


Contract manufacturers:
Most manufacturing companies today retain R&D, design, local assembly and marketing while production is outsourced to contract manufacturers. These manufacturers in low cost locations like China utilize the same levers of BPO such as labour arbitrage and economies of scale to deliver cost benefits to the client. Contract manufacturers may operate under a license or under full control of the outsourcing organization with pre-agreed rates and margins for services delivered. Celestica and Flextronics would be good examples of successful CMs for the electronics industry

Logistics Service Providers:
Movement of goods, information and cash is provided by LSPs which would include management of warehouses, freight and payment channels. The physical movement of materials is accomplished with an asset heavy structure by 3PLs like UPS or DHL. Another alternative could be LSPs which simply manage processes which do not require physical movement of goods such as customs clearances and freight forwarding (some examples being C.H Robinson and Ceva). A 4PL on the other hand will be able to manage a set of 3PLs using a asset light model by providing services such as selection, evaluation and management of 3PLs, freight auditing and billing, route optimization, vendor negotiations etc. It is in this space that some LSPs have begun to offer traditional BPO services and offer stiff competition to BPO vendors. However the BPO component of services offered by LSPs is typically small and focused on a narrow set of processes such as logistics helpdesk and freight billing

Independent Software Vendors:
Supply Chain application and ERP modules provided by ISVs are an important component of the logistics value chain. Besides standard packages in SCM and CRM from majors market players like SAP and Oracle, niche offerings are available from IT vendors like JDA, Manhattan Associates, Netstock etc. These ISVs also provide cloud based services or SaaS (Software as a Service) in a multi-tenant model to reduce the capex for their clients and to make their services more affordable. These managed services on the cloud are in close competition to BPO vendors. However these managed services are typically restricted to the software associated with the ISV and rarely does it encompass service delivered on a competing platform or a technology agnostic service 

BPO Vendors:
SCM BPO has now moved beyond the F&A domain (S2P and OtC) and currently offers a series of services that encompass technology, consulting and deep domain knowledge. These services typically seek to optimize the supply chain and less on labour arbitrage. These may range from optimizing processes such as S&OP or demand forecasting to services which are currently not available with the client such as SCM Analytics. However it is clear that BPO vendors will need to span the SCM ecosystem and integrate with all SC partners to deliver an optimized supply chain. Hence an aggregator model with strategic alliances to cover contract manufacturers, LSPs and ISVs is imperative - this will be key in positioning SCM BPO as a key differentiator and provider of end-to-end supply chain services

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