The Challenges of Moving Upstream

Spend Matters welcomes a guest post from Tony Fross, of LogicSource.

We see several industries where clients are migrating up the value chain to focus on branding, product development, and marketing, where in the past they had done their own manufacturing and sourced secondary goods. Now they are focused on the highest value activities, but it's hard to manage the value chain that actually produces their products.

This sort of movement was particularly noticeable in the 90’s in the apparel industry. Designers lived onshore in the garment district and merchandisers initially sourced their core materials overseas. Gradually, manufacturing moved offshore as well. Calvin Klein insiders related the stories of how vertical manufacturing took them close to bankruptcy in the early 90’s. They shifted to a licensing approach, but maintained tight brand control through their in-house agency CRK. Licensees could produce merchandise, but the brand remained with the originator. The genius of this approach, of course, is that CRK produced racy and controversial advertising for clothes in muted tones with classical lines. You could feel transgressive for wearing the underwear sported by Marky Mark above the madding crowds of Times Square, but the garments themselves were far from controversial.

Other industries have followed suit, (e.g., pharmaceuticals, consumer electronics, and cosmetics, to name just a few), exiting the high CAPEX requirements of their traditionally vertically integrated manufacturing and commercialization models in favor of the higher margins (and commensurately higher stock prices) won by a company focused on the three pillars of intellectual property: new product development, branding, and marketing.

For the professionals working in global sourcing, this new world creates new and interesting challenges. Using turnkey manufacturers means managing externalized functions that used to be wholly owned. Managing the value chain well means managing a lot of directed buying. For instance, negotiating primary packaging pricing with a supplier a turnkey manufacturer will use to ultimately deliver a finished good.

This environment quickly becomes extremely complex. And managing metrics like purchase price variance (PPV) is challenging when, as is often the case, you lack the needed visibility. You may have your external manufacturers receiving demand directly from your manufacturing resource planning (MRP) system, but you cannot see the order flow from those turnkey shops to the goods suppliers you’ve negotiated rate cards and minimum order quantities (MOQs) with.

The net result is that if your demand information comes in bursts to your manufacturers, you’re going to have a lot of missed opportunities to meet your MOQs. And your marketers and product managers are going to be confused (at best) and peeved (at worst) about their ability to meet their projected cost of goods (COGs) targets when the PPV variance is high and the standard costs are not what you had hoped.

The solutions for the challenges of moving upstream are further complicated by the costs of deep systems integrations with shifting players in an enterprise’s particular value chain. For affordable solutions, explore emerging software-as-a-service (SaaS) solutions providers that may be able to provide platforms that allow you to plug-and-play all of your stakeholders at a cost you can afford. It’s early days and tricky work. But to achieve the transparency required to manage the distributed enterprise, it’s going to be essential.

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