How to run a virtual manufacturing network
Many consumer goods companies chose to outsource their manufacturing to third-party manufacturers (3PMs) to reduce their costs. If any part of your production line, from the conceptual design to the finished product, can be completed faster or at a lower cost somewhere else, it is always best to outsource. This can help to reduce or eliminate assets and increase cash flow for your business. You don't need to invest heavily in developing your own internal infrastructure. You can tap into the manufacturing know-how available from the leaders in the industry. Your resources can be redirected to your core operations around your brand.
In another blog (Please refer to this blog), we discussed how to run a virtual supply chain from a distribution perspective. With this blog, we will focus on the production perspective. Companies can outsource their production either fully (referred to as full package sourcing) or partially (referred to as sub-contracting). In a full package sourcing scenario, the supplier is responsible for purchasing the raw material, utilizing machinery and people to produce the product. The company will purchase the finished good from the supplier. This simple procure-to-pay scenario can be easily modeled in business applications. In some cases, material liability which was covered in another blog (Please refer to this blog) becomes an issue.
Sub-contracting is a more complex scenario. Companies own either all or a portion of the raw material. They ask a third-party manufacturer (3PM) to make the product. They pay for the production services, not for the end product. The raw material which is owned by the company must be transferred to the 3PM location. It will be then consumed by a production order to make the product. In this case, the product is owned by the company, not the 3PM which is solely providing machinery and labor to produce the product. The company will purchase the production services from the 3PM - which is tightly coupled to the production order. This is much harder to model in business applications as a service procure-to-pay cycle is linked to a make-to-order cycle. This sub-contracting model can get even harder if you have a string of operations that are sub-contracted to different 3PMs. For instance, imagine a denim jeans company that purchases the fabric and then uses different 3PMs to wash, cut, sew and finish the product. Multiple production orders with multiple purchase orders must be executed to monitor this virtual supply chain across multiple trading partners.
Implementing a production process across multiple 3PMs is much tougher than deploying an in-house production process. In a sub-contracting scenario, you don't own or control manufacturing resources. You are at the mercy of your 3PMs to report material consumption, work in process status, production scrap, finished goods build up. You may find most 3PMs are not technologically sophisticated able to provide you the data you need to track this virtual supply chain. It is common to see companies deploying several internal resources to gather and consolidate production data throughout their 3PM network. The true answer may be a cloud-based business application platform in which the production can be monitored in a secure way across multiple 3PMs.
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My name is Cem and this has been another gem.
