CPSM Blog

Strategy and analysis : to insource or outsource?

This section is the second last section (whew!) of Exam 3 and extremely interesting and topical when you think of the current election season and employment problems in the US. How do you decide to outsource a product or service?  Should you outsource or insource?

The difficulty in these sections of Exam 3 is that more than one answer appears right. So please go by the answer that appears the best. Also do not assume that the question was framed yesterday and is considering all the political discussions around outsourcing (lose US jobs) or insourcing (gain US jobs).Also this section is about outsourcing and insourcing first from the organisation's viewpoint and then from a  global outsourcing (or offshoring)point of view. Naturally if you are say in the high cost East or West coast US and outsource work to relatively low cost states in the South or Mid-West US you probably do not lose too many jobs. But if you outsource globally, there is a problem of losing jobs unless you can speed up innovation while protecting intellectual property.This because innovation creates jobs.But without digressing too much from the core topic of the section...

Your role as a supply manager is to be able to weigh multiple issues (including the very real jobs problem, talk about taxation benefits of insourcing) and be able to carefully weigh all angles and take a considered point of view that is the better options of all. So here goes some key points of this section with the assumption that all the discussion is not about offshoring, but merely moving the task out of the organization:

1. What can you outsource? You can technically outsource some task that you can split. Let's say your organization does engineering drawings at a high cost location in North East US. You can get part of the drawings done from a lower cost location in the US where Engineers might have lower pay. You can think of the outsourced task as a "module" that is done outside the organization by a contractor's employees and brought back for integration. So you must have the right type of  engineers who are able to receive and integrate the work.
2.  Core Competence:  The other question is how close to the core competence of your organization is this task? As a  supply management leader you are expected to have clear thinking about how to manage outsourcing if it is close to your organisation's core competence  and then the supplier or other competitors pick up all your skills and secrets.The latter problem can be huge in offshoring or global outsourcing.
3. Types of Control: You need to figure out what types of control are needed. When the suppliers are well developed you can just work out supply level agreements (SLA)  in the contract. Where suppliers have to be developed you need to be able to hand-hold and bring suppliers and your internal users on the same page.

This topic is a vast topic on which you must have had some experience, do talk to colleagues and get a better sense of what steps organizations take in these matters. In the exam just stay within the boundaries of the case situation i.e. don't imagine or assume additional stuff that you know or have experienced and you should be fine.

Managing Strategic Change in Supply Management

As a Supply Management leader the content of this section asks you to look at managing strategic change in the supply management function. With 18 pages , 7 questions, bridge exam topic and a daunting title in the 2008 version of the CPSM Study guide (The title of this section in the 2008 study guide is " TASK 3-C-4 : Leverage spend through identification,prioritization,development and execution of strategies) you need to look for the unifying theme across this section and break it down to some key concepts.

The section is all about trying to change how your supply management department does things- and change is tough as any leader in any field will tell you. So where do you start?

• Opportunity Assessment : First figure out from past data how you might be able to make significant positive change without a whole lot of pressure on and of your stakeholders including buyers,suppliers,finance. If you keep in mind that what a supply management department buys is intended for eventual conversion and delivery to your organizations customer, you will start well. Let us say that that your user is manufacturing and they want raw material - try to see any inputs that quality control, your marketing has on the raw materials. Then working backwards reach out to suppliers and work through carefully managed changes. 
• The section also covers stakeholder management so that you are able to get buy in.
• As you try to execute change the section asks you to review Michael Porter's five forces model  and how it might impact what you are trying to change.
• On the prioritizing end of what to change the section covers some factors like savings for a particular commodity. Before deciding which savings challenges to attack you can make a 2X2 sourcing priority chart where savings potential is on one axis and ease of implementation is on another axis. Thus you need to look at your organization's capacity ( say too many paper based systems ) and organizational culture. For the latter, a great example is trying to implement a centralized purchasing system when everything is de-centralized. Better in such situations is to perhaps have an approved vendor list and rates at least for the top 20% items by volume and savings potential.
• The section ends with a discussion of constraints like exclusive contracts and agreements, lack of viable alternative suppliers etc. However, in the new year 2012, let us not think about constraints and instead think of opportunities of change for the better. For example, if you find problems in a long term contract can you ask the supplier to re-negotiate better terms perhaps for more volume?

A Very Happy and Prosperous New Year 2012 to all blog readers!