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Finding the “Sweet Spot” in the Supply Chain

A critical process in creating a high performing supply chain is developing an in-depth understanding of your organization’s position relative to customers and suppliers in the supply chain. By employing supply chain mapping methodologies, a business can create a map of first-, second-, and third-tier customers and suppliers with associated information flows, cycle times, inventory positioning, demand requirements, and emerging technology road maps for new products.

Once you have defined your supply chain, the next step is to determine your organization’s internal competencies and those of other supply chain organizations in an effort to identify which organization is best positioned to perform a specific activity. This process is often referred to as the “insourcing/outsourcing process.” Insourcing/outsourcing decisions are among the most challenging faced in SCM. While, if your organization is on the “receiving end” of an outsourcing decision from a major customer that increases business it is viewed favorably. But, if you happened to be employed in the division of the customer organization that was just outsourced, you may not view the decision in the same manner. In either case, supply chain-wide insourcing/outsourcng analysis is a “must”, if supply chain member organizations wish to fully leverage the competencies of each organization to best meet the needs of the end customer. This discussion is often lost in debates over existing capabilities and future strategic advantages. Managers often fail to recognize the distinction between a “capability” and a “competence.” The insourcing/outsourcing decision is a search for your organization’s “sweet spot” in the supply chain, that spot where the organizations can make the greatest contribution to overall supply chain success as well as its own.

Where is the “sweet spot”? It depends on a range of factors and must be determined by the organization, through a systematic assessment process. Furthermore, the “sweet spot” can change depending on the position of the organization changes relative to that of other supply chain member organizations in terms of costs, technology, productive capacities and other factors. The most common criteria include the best potential financial return, growth, and identification of customer requirements vis-à-vis alignment with current technology development initiatives within the company.

Unfortunately, insourcing/outsourcing decisions are often made based on financial return alone, without regard to the strategic importance or the organization’s areas of core competence. Supply chain managers must take a comprehensive and long-term perspective when faced with insourcing/outsourcing decisions. The dangers of outsourcing before fully evaluating the human resource requirements and skill sets required for supporting the relationships can be dangerous.

To make an effective insourcing/outsourcing decision, companies should have a basic understanding of the performance metrics for key alliance partner management based on technology, potential for growth, and profitability. This means that the performance of key suppliers in terms of quality, delivery lead time, on-time delivery, and technology should be described in financial terms that directly relate to bottom-line impact. It also means that key players should be aligned with an organization’s internal strategies in order to exploit their expertise and knowledge in creating value. Finally, collaborative sharing of forecasting and demand information can help plan long-term capacity planning, inventory planning, and human resource requirements. In some cases, this may involve making some tough decisions, especially with respect to how one defines the core competencies that have been in place in the company for some period of time. By better understanding financial realities of supply chains, and getting serious about how your company discover the financial “sweet spot” within their supply chain, the path will become clear regarding how to best produce the highest returns given existing intellectual and physical assets.