Is Your Procurement Organization Ready for Outsourcing? by Rob Handfield

It is notable that the success of an outsourced project is not only dependent on technological capability, but is more dependent on the service organization to effectively communicate with its client and to stimulate open channels of communication – greater information will in every situation result in a higher likelihood of success – again, there is voluminous research conducted by our research and that of others that clearly indicates this relationship . In most cases, this task falls upon procurement. In many companies today, procurement is suddenly finding itself tasked with managing a highly complex relationship, without the required resources required to do so. Ineffective outsourcing management is further perpetuated by a high turnover, a new set of faces, and changes/shifts in the organizational chart----as people are re-assigned to new locations, downsized, or outsourced relationships are moved around based on supposed “cost savings initiatives” – the results are always likely to lead to significant market revenue losses due to delays, errors, and other problems arising from lack of communication, as shown in Figure 1.


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In order to effectively managing outsourcing – it is critical that customer requirements be clearly understood by the procurement organization. This means getting the right people on the team that can understand the end user requirements, and understand the global impact on the customer of the partnership with the outsource partner. Specific details on communication tasks, timelines, and ownership of these tasks is critical, requiring a solid set of project management skills. Finally, a solid set of legal and regulatory infrastructure capable of supporting a global asset transfer is important, as well as the logistical processes for packaging, importing-exporting, and moving and storing materials. This is particularly true when we look at the globalization of the supply base, as well as the relationships we establish with outsource partners. For example, in the pharmaceutical industry, Active Pharmaceutical Intermediates imports are increasing (about 80% today). Is there a process within your procurement organization to manage this? What are the implications for source quality? One FDA speaker indicated that 50% of FDA inspections of API manufacturers in China had found serious GMP deficiencies.

Traditional procurement-defined processes often are overwhelmed by these requirements; procurement managers have in the past been more comfortable with the sponsor-service provider relationship. The sponsor outlines the specs, the outsource provider follows the specs, and so on with the rules, etc. However, with outsourcing of non-traditional functions, sponsors must become more comfortable in letting the outsource partners do what they do best – and not assigning specific responsibilities in terms of actions, but establish end results through pre-defined metrics, and in some cases, letting them become the true driver of the project plan.

From an objective standpoint, it is my observation that there is no clear leader yet in effective outsourcing….as it is such a new concept, the winners will be those organizations that are quickest to learn and to implement the lessons of other industries in collaborating with customers and suppliers, and moving materials quickly through the supply chain, through integrated product and process development.

Sincerely,

Rob Handfield

Handfield and Nichols, Supply Chain Redesign, 2002

New Product Development: Supplier Integration Strategies for Success. R. Monczka, R. Handfield, D. Frayer, G. Ragatz, and T. Scannell, Milwaukee, WI: ASQ Press, January, 2000.

Developing a World Class Supply Base, Center for Advanced Purchasing Studies, Daniel Krause and Robert Handfield, Tempe, AZ:, National Association of Purchasing Management, 1999.