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Q&A with Oracle's John Bermudez: Guard Against Hidden Outsourcing Costs
Staying strong in tough economic times requires a careful balance of cost savings and risks, says John Bermudez, Oracle's senior director of SCM product strategy.
Q: How is the current economic environment impacting supply chains?
A: As the cost of capital goes up, so too does the cost of inventory, which means companies need to manage inventory more precisely than ever. And part of that is taking a more judicious look at supply chains.
Q: What should companies look at specifically?
A: Companies are realizing that sending contracts offshore can bring about big labor savings, but it may not be as profitable as they originally thought. They're saying "We're just not seeing the savings in our bottom line, and on top of that we're increasing our risk."
Q: What are the main risks?
A: Lead times. Unless you want to fly products all the way from Asia, you need to build in a minimum of 14 to 16 weeks for getting products through the ports, across the ocean, and onto trucks for deliveries in North America. That doesn't include manufacturing time. And while that inventory is on a ship, it's yours. Nobody likes to carry excess inventory, but at least if it's in a warehouse, you have a chance to sell it. Sitting on a ship in the middle of the Pacific Ocean, it's useless.
Q: What's the best way to balance labor costs and risk?
A: You have to become better at forecasting. Something like Oracle's Demantra Demand Management tool can feed accurate forecasts into a strategic network optimization tool, such as Oracle Strategic Network Optimization. Together they can help companies analyze the trade-offs a little bit more scientifically than what’s been done in the past. Then you can look at the trade-offs between having suppliers that are offshore and offer lower-cost manufacturing versus slightly higher-cost manufacturers in locations where there’s less lead time.
Q: Can you give an example of how this capability is being used today?
A: We have a customer in Montreal that makes knit golf shirts and won an enormous contract with a large U.S. discount chain because of their near shoring strategy.
They use Oracle Strategic Network Optimization for tactical planning by looking every week at their orders and factory capacity at their Central American facilities. They decide on the best sourcing strategy for that week, including whether or not to use supply sources from Asia that they contract with.
Q: By leveraging the supply chain more efficiently, can they also improve sales and the bottom line?
A: Absolutely, and this is especially in apparel, which has some of the most challenging supply chain problems. Clothing manufacturers typically toss a mix of items into a big box–so many XLs, so many smalls, so many blues, so many reds. Some of them sell, some of them don't. Instead, the Montreal manufacturer can say, "You don't have to store a lot of inventory because we can replenish inventory very quickly to reflect what is and isn't selling right now."
Q: So along with reducing risks for manufacturers, this strategy reduces risks for their customers as well.
A: Absolutely, and that's one of the latest trends in supply chains: using knowledge you gain from the supply chain starting right at the point of consumption of the product.
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