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Manufacturers: Is It Time to Rethink Your Sourcing Strategy?

by David Lewis

In the wavering global economy, Top 5many manufacturing companies are finding that they need to revisit their sourcing strategy to widen their once-myopic focus on cost and look at how IT can enable growth and business transformation. ISG is working with a variety of manufacturing companies to re-assess their sourcing strategies. Consider these Top 5 ways to rethink yours.

1. Enable growth by redirecting funds. Many companies are shifting their spend from running the business to changing the business. It is not unusual to see manufacturers flip their build-to-run ratio from a 35 percent-to-65 percent ratio to a 65 percent-to-35 percent ratio. During a recession, many manufacturing companies delay investment in IT and then need to fund transformational programs to enable growth. Reduction in the cost of running the business lets funding flow to everything from streamlining the supply chain and expanding into emerging markets to using social media to improve the customer experience.

2. Create a clear integration strategy for multi-sourcing. While manufacturers might have once sought a single service provider to manage its infrastructure or application environments, many are now evaluating a multi-sourcing delivery model to seek best-of-breed providers for select functions. This approach can lead to reduced cost and increased capability, but it demands a clear service integration strategy to prevent creating disparate processes across service providers. Without it, companies risk increased cost and degraded service delivery.

3. Strike the right balance in the sourced-to-retained mix. One large manufacturing company has announced it intends to shift its outsourced-to-retained services mix from a 90-to-10 mix to a 10-to-90 mix. While we don’t expect a mass move toward insourcing, many companies are working to retain the right skills in today’s sourcing environment, including architecture, business requirements management and governance stewardship. Many are also retaining service integration functions to handle the growth in multi-sourcing.

4. Shift to managed services. Though manufacturing is a leading industry in outsourcing, 65 percent of the contracts we review use a staff augmentation delivery model. Many companies are considering a shift to managed services with defined requirements, built-in variability, defined service levels and fixed unit rate pricing with committed productivity improvements. Moving to managed services is almost always accompanied by a consolidation initiative to reduce the number of service providers. Smart companies are paying close attention to the subsequent cultural change from managing staff to managing outcomes and quality.

5. Make cloud computing part of the solution. Though it may be a buzz word in every sourcing discussion, the cloud is also becoming an important component in broader sourcing strategies for manufacturers. While the prevailing view is that cloud computing isn’t for large, complex manufacturing companies or defense contractors faced with regulatory restrictions, the reality is that many companies are already integrating cloud solutions from private and hybrid clouds to software-as-a-service solutions with Workday, NetSuite, SFDC and others.

Sourcing in manufacturing is no longer one-size-fits-all, and creating a sourcing strategy should not be a one-time event. ISG experts can help your organization understand if now is the time to rethink yours. Contact David Lewis to discuss further.

About the author

Mr. Lewis is a Director in the ISG Manufacturing Industry Vertical organization. Mr. Lewis’ primary responsibilities include: client relationship management, business development, oversight of strategic sourcing engagements and service provider relationships. He has spent 29 years in Information Technology and his credentials include experience in outsourcing account management and service delivery management, as well as experience in working with clients in defining outsourcing strategies, performing operational and financial assessments, leading large-scale Information Technology and Business Process engagements, and managing transitions. He has been involved in outsourcing transaction and transitions as well as account operations both as a customer and as service provider. In addition, he has expertise in relationship management, governance models and performance management.