Supply Chain Leader - Issue 5

The Case for Knowledge Process Outsourcing
by Anand Iyer

Many supply chain organizations are turning to outsourcing various capabilities— from information technology outsourcing (ITO) to business process outsourcing (BPO) to knowledge process outsourcing (KPO)—requiring multi-location teams to work together effectively.

Managing complex supply chain operations and applications requires an increasingly broad collection of sophisticated skills. Sustaining a team that possesses this skill set, while controlling costs, is one of the main challenges facing businesses today. Because it takes a large, skilled staff to support supply chain management applications, enterprise and legacy systems, and the human processes with which they intersect, personnel costs can easily be at odds with tight budgets. Complex workflows and data integration consume management attention, undermining the focus on continuous improvement and exception management. Because staff is tied up in basic operational tasks, innovative projects with a real business return on investment wait in the queue. Likewise, the complexity involved in the delivery of future requirements demands deep solution expertise, often lacking in existing support teams.

In addition, companies are challenged by increasingly frequent changes in business requirements as they respond to market dynamics. For instance, new technology in automotive, telecommunications and consumer electronics has opened up new markets to semiconductor manufacturers. Each market has its own business requirements with which these manufacturers have to stay current. A contract with an automaker to provide a component for a number of years can go unchanged. But a component for a cell phone must be custom made for a particular model, and will be in production only as long as the phone is produced. In the latter case, the shorter product life cycle for the custom component requires effective order and inventory management to maximize profit. In a quickly changing scenario, businesses often rely on ad hoc spreadsheets that cannot handle either the volume or the complexity required for data analysis and decision making.

These market challenges can all be met through outsourcing with service providers to help fill the resource gaps. Many supply chain organizations are turning to outsourcing various capabilities—from information technology outsourcing (ITO) to business process outsourcing (BPO) to knowledge process outsourcing (KPO)—requiring multi-location teams to work together effectively. Advancements in technology and international telecommunications, as well as a mindset shift brought about by the forces of globalization, have made it easier for multilocation teams to accommodate each other and work productively. The availability of outsourced teams, onshore and offshore, comprised of specialists who can run day-today supply chain functions, and experts who possess the depth of knowledge required to offer business and strategic guidance, has begun to help shift the goals of supply chain service providers. As they endeavor to satisfy their customers, they are delivering outcomes, not just software products.

Whether it's demand management, inventory optimization, channel management, forecast optimization or point-of-sale-based replenishment, leading-edge supply chain service providers offer such capabilities as services which can be rapidly assembled and reassembled to meet the demands of today's market. This eliminates a rigid set of roles, fixed assets and processes that can be ineffectual, costly and slow. Additionally, by assembling multi-location teams, these leaders are able to work with their customers on an operational level rather than on a project-by-project schedule. And these teams become part of the customers’ supply chain organizations, dedicated for the long haul. As a result, expenses are reduced, learning curves are shortened and effectiveness is increased.

Building a team like this is similar to a semiconductor manufacturer outsourcing a component to a specific manufacturer who becomes integrated into the production of the final product. Let’s look at how a hypothetical semiconductor company’s responses to changes in the market helped develop today’s KPO scenario. ABC Semiconductor had manufacturing sites spread across five continents. Because of a siloed approach, oftentimes the different business units within ABC were talking to the same customers. Each business unit had its own relationship with one of ABC’s manufacturing sites, creating massive duplications and inefficiencies  

As they try to satisfy their customers, supply chain service providers are delivering outcomes, not just software products.

To simplify business processes and focus business units on growing revenue, ABC was reorganized to make business units focus on sales, marketing and design. Manufacturing became a shared asset that was its own cost center focused on increasing efficiencies and getting the best return on capital investments. It didn’t make sense to purchase manufacturing equipment that wasn’t going to be in production often enough to justify its cost. As a result, ABC made the innovative (at the time) move of using a mixed strategy of internal and external manufacturing sites. In the quest to find cost-effective ways of doing things, it determined that in some cases it was smarter to use subcontractor resources, and in others it was best to keep production internal.

When the dot-com slump arrived, ABC’s CEO wanted to see more cost-reduction measures. He put increasing pressure on upper management to reduce expenses in staff and support functions. At this time, advancements in global communication technologies supported the move by the CIO to develop an ITO strategy that moved routine application maintenance and specification-based programming jobs to low-cost countries. Soon ITO became a routine, ordinary part of the work landscape. Still, the pressure remained to further reduce expenses while maintaining service-level agreements with customers.

In the meantime, the industry worked its way out of the dot-com slump, and the company crafted a more nuanced strategy to develop the business, leveraging BPO and KPO. The changes included carefully matching supply chain policy, business-support policies and customer segmentation with the different lines of business. A onesize- fits-all supply chain strategy for diverse markets was no longer effective. It was apparent that to accomplish company goals while keeping costs low, the traditional lines between IT and business needed to be blurred in some areas, notably in the supply chain operations space. Supply chain business expertise expanded to include supply chain management applications.

In addition, the years of working globally with teams in different geographies had provided fresh data and insights into the structure of work; which tasks could be outsourced and which needed to be done in-house. In the final analysis, ABC met its market challenges by embracing innovation and allowing itself to build the team it needed from both inside and outside of its walls.

BPO performs essential tasks

Companies like ABC learned to solve resource problems by going off site when justified. The early days of outsourcing were focused on information technology capabilities, but it soon became obvious that companies needed the human resources to perform essential tasks beyond data warehousing and analysis.While BPO paved the way for KPO, the two must be viewed as providing quite different capabilities to a company.

As indicated on this list, BPO focuses on scripted tasks within business processes that can be learned quickly—in a few weeks or months—by offshore workers. Typically, an entire business process is given to a BPO vendor. In some cases, the hiring company transfers some staff to the BPO vendor as well.

KPO provides in-depth industry knowledge

KPO moves one step above BPO in the pecking order by adding domain expertise and an in-depth understanding of a specific industry. KPO workers have specialized proficiency in their field, which often requires several years of experience, a high level of intellectual skill and an advanced degree. Their work requires a fair degree of judgment, subjective analysis and interpretation. In general, KPO workers provide business-sector expertise—rather than pure process or technology expertise—that directly affects efficiency, effectiveness and business outcomes.

When looking for a KPO partner, companies should look beyond the best price point available to the most critical competencies and knowledge available across all locations globally. Imperative to any KPO approach is that the provider offers secure hosting and working environments, ensuring that all sensitive data and intellectual property are secure and protected. All members of a KPO team also need to have deep operational experience within a specific industry area, so they can set up solutions that give customers the greatest knowledge available in a given vertical. Companies that do not have the resources to add staff, or the knowledge in place to solve complex supply chain problems, can meet their needs and excel in their business using a mixture of ITO, BPO and KPO. In most cases, because these outsourced resources focus only on one customer’s supply chain interests, cycle times are low and operations stay in a continuous innovation mode. This enables companies to focus on updating and implementing new processes on a regular basis so they can hold a competitive advantage in the marketplace.

i2 Solutions - Operation Services