13 October 2006 | Geraint John
Chief procurement officers need to understand the differences between contract manufacturing and other types of supplier relationship if they are to lead this growing area of outsourcing.
Brian Slobodow, CPO of Johnson & Johnson Consumer Products (J&J), told a US conference of purchasing executives in Scottsdale, Arizona, that there were some "unique characteristics" of what he called "contract operations" - outsourced manufacturing and packaging.
And he urged procurement leaders to "get in the game" or risk these critical supplier relationships being managed by other functions such as finance or manufacturing.
Not only would contract operations (CO) increase in usage over the next few years, he predicted, but the experience of managing this type of relationship expanded a CPO's skill set.
"CO will stretch today's CPO to be a broader leader," he said. "It certainly stretched me."
Slobodow said COs differed from other kinds of strategic sourcing in several ways. Chief among these was that products were typically shipped straight from a contract manufacturer or packager to your customers.
"The stakes are higher. You need a team who appreciates that, it's very sensitive," he argued.
A second factor was that, with the exception of the electronics industry where there were a small number of major players, the supply market for contract operations tended to be very fragmented. J&J, which makes products from shampoo to contact lenses, had to deal with a lot of small and medium-sized firms with only a local rather than a global presence, he said.
As well as a good legal agreement, success factors included two-way performance metrics, regular senior-level joint management reviews, the use of only appropriate tools and processes, and what he called "externship", where your company's employees work side by side with those of your partner to ensure you don't lose vital knowledge as a result of outsourcing.
Slobodow added that those responsible for managing these supplier relationships needed to be highly skilled and that finding and developing the right people was a major challenge.
"You need to be more creative in SRM [supplier relationship management] with COs," he said.
Procurement professionals also needed to realise that lower costs were not the only, and often not the most important, reason to outsource, he said. J&J had derived significant benefits in quality, innovation and material usage.
Despite all the theory about focusing on core competencies and outsourcing the rest, in practice this type of make-buy decision stirred strong emotions, Slobodow noted.
"The reality is that these discussions get ugly. There's a lot of routine arm wrestling."
Hurdles that needed to be overcome typically took two forms: financial, with people claiming that they could do it cheaper in-house because fixed costs were already taken care of, even if longer term it was less efficient; and those related to risk, such as concerns about loss of control, divulging intellectual property and a failure to comply with regulatory requirements and good corporate practice.
Some of these were genuine arguments to weigh up when considering whether to outsource, and J&J still made "a significant proportion" of its own products. But many were "a bit of a crutch" and masked internal power battles, he suggested.