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The benefits of disaggregating:
Combining commodity purchases with "insourcing" for efficient supply
Stephen Pacitti
In today's global economy, how companies manage change will often determine their success or failure. In my experience, I've realized a company can proactively manage production to minimize waste, and by doing so, actually make a profit. Yes, with global competition, margins are that tight! This approach is also very applicable to the sourcing of services. I first became interested in the idea after reading The world is flat—A brief history of the twenty-first century, by Thomas L. Friedman. The bottom line is the advancement of communications technology has provided supply chain practitioners with increased choices of vendors.
But even more importantly, as the global economy develops, it's easier than ever to break the work up—or make it "disaggregated, delivered, distributed, produced, and put back together again."
The significance of this opportunity is that part of a process or product can be outsourced. That new reality means options have multiplied for supply chain personnel.
Better inventory control
Let's look at some concrete examples. When you call an IT help line for your home PC, you may well be speaking to someone in India. The PC company has separated this aspect of their product and outsourced it to a less costly supplier.
Closer to home, I'm currently buying packaging supplied by North American producers. The packaging is both simple (i.e. a commodity buy) and complex. The simple part of the packaging is the formation of the core product, which involves energy and labour. The complex part is managing the graphics from design to pre-press.
If my supplier disaggregates this task, they could potentially source plain white packaging from overseas and produce the graphics themselves. For a labour-intensive commodity item such as packaging, the strategy of splitting up the work can reduce the total cost in the supply chain.
Taking this example one step further, our company could potentially "in-source" the graphics decoration and reduce inventory levels and lead time. So the supplier would provide a commodity package, while the graphics are applied in house.
The old model required accurate forecasting, and usually involved long lead times and relatively high levels of inventory. But with our example, there are immediate inventory benefits.
Rather than hold SKU-specific packaging inventory, our company can hold generic packaging that becomes SKU-specific much closer to the date it’s used in production.
The benefits include reduced scrap cost, since we would apply graphics only to the packaging we actually require at that time. We would also experience reduced lead time, as the company would be better able to react to unexpected changes in demand ebbs and flows.
As powerful as these opportunities are, the key—as in most projects—is successful implementation. The packaging supplier will be a key partner in technology transfer and must have a progressive viewpoint.
"Insourcing" requires new skills sets and you might also have to develop new core competencies. The capital cost of equipment will require financial analysis. A credible time frame over which to justify this change requires consensus approval. These are all great opportunities for the supply chain professional to guide the "team" through.
Global supply increases choice and there are many variations of how and what to source. Many are looking at the Indo-Asian economies for new sources of supply.
Many buyers are sourcing finished consumer goods from these economies, but there are also real opportunities to source separate segments of the value chain. It will take all of our skills to make this happen successfully.
Stephen Pacitti (C.P.P.), is a buyer with Taro Pharmaceuticals Inc. in Brampton, Ont. He is also on the organizing committee for the Purchasing Management Association of Canada's 2007 annual conference.
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