Driven by improvements in performance and cost
Gartner says that the most common outsourced SCP processes are inventory management, statistical forecasting and service parts planning. Companies moving to BPO in these practice areas are experiencing supply chain improvements in metrics such as inventory turnover and customer service.
Those companies also reduced planning spend. According to a survey by APQC, bottom performers planning costs four times more than top performers ($22.77 versus $4.84 per $1000 of revenue). Therefore Gartner suggests that moving a $1 billion annual revenue firm from a bottom to a top-performer represents a potential cost savings of up to $17.9 million.
In addition to improvements in performance and cost, Gartner cites other factors driving BPO:
Technology — With SCP becoming more technology-intensive, it’s hard for many user companies to keep up. By comparison, vendors have been investing in advanced technologies such as artificial intelligence (AI) and advanced analytics to enhance their offerings.
Talent — Especially with the advent of these new technologies, many companies struggle to find, hire and retain highly skilled individuals. But vendors have grown their staff with specialized knowledge workers and data scientists to support intensive data analytics, especially since they can scale these resources across multiple client engagements.
Process — Companies who want to move up to higher maturity levels can outsource the planning process while they build up competency internally. For instance, a business acquired through M&A may be less mature than the rest of the organization and so require time to develop that competency. An outsourcing vendor can be used at the entity to share best practices, recommend and implement new methodologies, and train resources.
Metrics – BPO vendors can also help firms utilize performance metrics and KPIs to help monitor performance and help to identify ways to improve it. For instance, less mature organizations may focus too much on forecast accuracy. But with the help of a BPO vendor they may be able to shift their focus to higher-level metrics such as on-time in-full (OTIF) or customer service levels.
For example ….
In a previous blogwe described a ToolsGroup customer who illustrated many of these drivers and decided to choose the BPO path. At this major consumer goods manufacturer, external market disruptions and internal changes (such as moving forecasting back and forth between Sales and Supply Chain) left them facing an array of demand planning process challenges. They lacked quantitative methods for forecasting, and the existing cumbersome tools were causing planners to spend way too much time on administrative work, pulling them away from providing real business value. The forecasting process had become very complex without adding value. Some additional challenges included:
- Mixed forecasting targets (such as constrained shipments versus unconstrained demand)
- The initial forecast was perceived as being driven top-down by the budget goals
- The current process needed more transparency, traceability and evaluation, such as identifying sources of forecast adjustments, forecast bias and forecast value add
The company needed to decide: would they rebuild their own demand planning and forecasting expertise, or outsource? They chose to outsource in order to rapidly deploy planning expertise and automate much of the administrative work. Within less than 12 months, the company saw rapid improvement. The solution was deployed in a shared platform through which sales staff collaborates with ToolsGroup demand planners. Most of their items are now more accurately planned using the statistical forecast vs manual overrides, taking a lot of work off of the salesforce.
The final forecast is still reviewed and approved by consensus among the executive team, but now sales’ focus can be strictly on the value-added part of the process. The system has about 70 users and covers nearly their entire product line, including custom products.
Gartner recommends that firms determine their most pressing need for moving planning from an in-house function to an outsourced function, such as technology constraints or process inefficiencies. Then engage with a vendor that can offer support to help improve areas where you are deficient.