KUHN CAPITAL Monday, March 19, 2018
Dispatches from the front

Manufacturing Information II

Last month’s Dispatch argued that the BPO trends sweeping American service industries (like the outsourcing of HR and customer service departments by insurance carriers), will next increasingly penetrate American manufacturing industries.

While domestic manufacturers actually pioneered a form of outsourcing – that of certain manufactured components -- BPO is different: it’s the outsourcing of entire internal departments. In one extreme case, we know of a distribution company that has outsourced all its functions to third parties, reserving only the employment of key executives to pursue the company’s “core”, in this case defined as the acquisition of other distribution companies in an industry roll-up.

So How can manufacturers ride this looming wave of change, rather than be engulfed by it?

Niche In
First, determine if you are sufficiently protected from the price wars that BPO-equipped competitors bring to the market. Every manufacturer with information processing costs is vulnerable except those who are strongly niched. Examples of niched companies are those who own valuable proprietary intellectual property, who specialize in just-in-time delivery, who operate in a specialty industry that’s too small to attract global competition, or who are in a business that requires local “feet on the ground.” Snap-on Tools has many feet on the ground: they own a fleet of trucks that tote tools around to local machine shops and manufacturers, a service impossible to offer from a distance. Find ways to burrow deeper into niches.

Clients: A Contact Sport
Examine ways by which you can make your client contact more intimate. Strong knowledge of the client’s needs is a powerful antidote against distant competition. In addition to the obvious benefits of close-contact marketing and sales functions (think golf course outings), such intimacy can generate opportunities to better match your products to client needs.

Be Clear on Core
The word “core” refers to a set of business processes that you have determined represent a unique competitive strength, and that generate above-market margins. Core activities leverage your team’s skills and industry expertise and, by exclusion, they define those non-core activities that you should consider outsourcing.

Of help in determining core is a benchmarking exercise that compares your products and processes against each other and against external competition. That is, you list on a spreadsheet your products by column and the value-add processes by which you create and support those products by row. The data you consider is both financial (sales volume, rate of growth, cost of goods, operating margin, etc.) and operational (market share, client quality, synergy with other processes and product lines, etc.). The point of all this is to emerge with an understanding of which products and processes are key to the company’s future and which are not. Whatever’s not should be considered as a candidate for termination or outsourcing. Obviously, you want to rationalize your business to concentrate on profitable growth.

Into Outsourcing
Investigate outsourcing alternatives for those processes that don’t provide compelling arguments for continued internal operation, that aren’t core. A recent survey by the Outsourcing Institute showed that 55% of its respondents quoted the goal of improving focus, the leading rationale for outsourcing. Following in close second place at 54% was cost reduction, the third was to “free resources for use elsewhere”, while the fourth reason, interestingly, was to gain access to “world-class capabilities”.

But availing yourself of BPO services is no easy panacea: it takes work. Another survey focusing on the causes of BPO project failure found the following reasons:

1) Poor key executive commitment, or a failure to internally recruit the best and brightest to the cause;
2) Poor internal communications plan: Failure to create incentives for the cooperation of current employees in the BPO transition process;
3) Rushing through the BPO RFP definition and vendor selection;
4) A blindness to the BPO supplier’s cultural differences;
5) Underestimating the cost of tech/skill transfer to the BPO partner;
6) Lack of a formal BPO partner governance procedure.

Ryan Kuhn

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