1. 1 Outsourced Manufacturing Within The Current Global Marketplace Mr. Anthony Della-Croce VP Solutions Architecture Core Services

2. 2 Agenda The Current Shift To Global Manufacturing and Distribution Operations ERP Application Requirements and Processes In The Global Manufacturing and Distribution Business Environment Benefits and Risks of Outsourced Manufacturing

3. 3 Forrester Research ‌High-tech firms continue to shed manufacturing plants but struggle to manage their contract manufacturers. OEMs must treat these outsource relationships like a merger and develop new virtual manufacturing skills. Lean manufacturing and outsourcing By Eric O. Olsen and Mark Zetter - Aug 09, 2006 ‌We have arrived at the nexus of two powerful trends in business process improvement and product manufacturing operations management. ‌One, lean operations, offer streamlined flow of value to the customer with minimal inventory and waste. The other, outsourcing, offers dramatically lower cost of goods sold (COGs). Both can result in highly competitive pricing positions and healthy profit margins. How do executives remain true to the tenants of lean while stretching their company value stream across the globe? How do companies build close relationships with suppliers if each party speaks, and acts, differently? How does an organization make value 'flow' when its raw materials, or products, might be arriving in batches the size of large, ocean-going ship containers, or perhaps even the size of the container ship? The Industry Experts

4. 4 Metric-Stream ‌As companies shift manufacturing and assembly operations offshore to low cost countries, a large number of deliveries to US based customers suddenly become cross-border transactions. Sometimes shipments can take weeks to be delivered to distribution sites within the United States, resulting in long supply chains. It is very important for such companies to gain visibility into process capability and quality issues within their outsourcer's manufacturing sites so that they can prevent any unacceptable quality products from entering the inbound supply chain. If these unacceptable quality products enter the supply chain, the company has to wait to scrap a part of the shipment at the point of destination, weeks after it was shipped from the outsourcer's manufacturing site. The additional transportation and handling incurred due to poor quality products being rejected at the point of destination, instead of the point of manufacture, also leads to increased cost of inventory write-offs.

5. 5 Overview Process - Drop Shipments Drop Shipment Characteristics 1.Entire Transaction Originates From Sales Order Line 2.Sales Order Line Is Linked To Requisition Which In Turn Is Linked To Purchase Order Line- You Are Buying “Product” Not a “Process” 3.Sometimes Called “Back to Back” Orders 4.You Never Take Physical Possession Of Inventory But You Do Take Financial Ownership of The Product No Manufacturing Work Order Is Generated MRP See Sales Order Demand Linked To Purchase Order Supply, No Action Required

6. 6 Overview Process - Outside Processing Operations Outside Processing Characteristics: 1.Entire Process Is “Internal” To A Single Manufacturing Organization, 2.You Must Utilize Manufacturing Work Order or Repetitive Production Schedule 1.You Are Buying “Process” Not a “Product” 3.The Work Order Generates a “Purchase Requisition” For “Outside Processing Item Code” Automatically: 4.Common Misconception Is That You Are “Buying End Assembly” 5.Generated Purchase Requisition Is Converted To Purchase Order By” 6.Purchase Order Receipt Is “To Outside Process Operation” On Work Order

7. 7 Overview Process - Outside Processing Operations Outside Processing Characteristics: 1.Common Misconception Is That You Are “Buying End Assembly” You Are Buying The “Process” 2.Generated Purchase Requisition Is Converted To Purchase Order 1.Manually Converted or 2.Blanket Purchase Order Release - Can Be Automatic If Sourcing Rules Are Available 3.Purchase Order Receipt Is “To Outside Process Operation” On Work Order

8. 8 Complete Outsourced Manufacturing Operations Outsourced Manufacturing Definition: –Your Organizations Controls the Creation and Release of Work Orders to “Sub-Contracted” Manufacturing Vendor. –Each “Sub-Contracted” Manufacturing Vendor Preferably Should Have Their Own “Inventory Organization” Assigned to Them For Security/Address Definitions/Work Order Creation etc. –Your Issue of The Released Work Order Creates a Purchase Requisition Linked To That Work Order. Convert this Requisition to Purchase Order and Receive to the Work Order –“Sub-Contracted” Manufacturing Vendor Ideally Logs Into Your System Receiving Raw Material Component Inventory As Necessary Controls Moves/Completion Of Work Order Work Order Completion Should be Updating Your Inventory Value Ships Directly To Your End Customer, This Is Not “Drop Shipment” Since “Sub- Contracted” Manufacturing Vendor Is Shipping From Your Inventory

9. 9 Complete Outsourced Manufacturing Operations Ship Directly To Customer “Demand Place & Planning Directly on “Sub-Contractor” OM Purchasing Internal Inventory Organization Your Owned/Managed Warehouse Item Flagged As “Make At “Sub-Contracted” Manufacturing Vendor “Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand Forecast MDS MPS MRP GL

10. 10 OM Purchasing Internal Inventory Organization Your Owned/Managed Warehouse and You/Sub-Contractor Control Planning At Sub-Contractor Org. “ Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand Forecast MDS MPS MRP 2) MPS or MRP Creates Work Order For Finished Goods Purchase Requisitions For Raw Materials Complete Outsourced Manufacturing Operations Ship Directly To Customer “Demand Place & Planning Directly on “Sub-Contractor”

11. 11 OM Purchasing Internal Inventory Organization “ Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand Forecast MDS MPS MRP 2) MPS or MRP Creates Work Order For Finished Goods 3) Work Order Release Creates Purchase Requisition/Purchase Order For Outside Process Work Order Completed & Outside Process PO Received Triggers Inventory Updates Your Owned/Managed Warehouse and You/Sub-Contractor Control Planning At Sub-Contractor Org. Complete Outsourced Manufacturing Operations Ship Directly To Customer “Demand Place & Planning Directly on “Sub-Contractor”

12. 12 OM Purchasing Internal Inventory Organization Your Owned/Managed Warehouse “ Sub-Contracted” Manufacturing Vendor 4)Original Sales Order Shipped Directly To Customer 3) Work Order Release Creates Purchase Requisition/Purchase Order For Outside Process Work Order Completed & Outside Process PO Received Triggers Inventory Updates 4A) Print Pick/Pack/Ship Documents At “Sub-Contracted” Manufacturing Vendor 4B) Vendor Notifies You Of Shipment 4C) You Do “Logical” Shipment of Sales Order Complete Outsourced Manufacturing Operations Ship Directly To Customer ”Demand Place and Planning Directly on “Sub-Contractor”

13. 13 Complete Outsourced Manufacturing Operations Ship To Your Organization Demand/Planning Internal Supply Chain Order Mgmt Purchasing Internal Inventory Organization Your Owned/Managed Warehouse Item Flagged As “Make At “Sub-Contracted” Manufacturing Vendor But Buy Item In Internal Inventory Organization “ Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand Forecast MDS MPSMRP GL 2) MRP Generates Internal Requisition And Internal Sales Order

14. 14 OM Purchasing Internal Inventory Organization “ Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand Forecast MDS MPSMRP GL 2) MRP Generates Internal Requisition And Internal Sales Order 3) MPS or MRP Creates Work Order For Finish Goods 4) Purchase Requisitions For Raw Materials Complete Outsourced Manufacturing Operations Ship To Your Organization Demand/Planning Internal Supply Chain

15. 15 OM Purchasing Internal Inventory Organization “ Sub-Contracted” Manufacturing Vendor 1) Original Sales Order Demand GL 2) MRP Generates Internal Requisition And Internal Sales Order 5) Work Order Completed At “Sub-Contracted” Manufacturing Vendor 6) “Sub-Contracted” Manufacturing Vendor Ships Item Back To Internal Organization Via Internal Sales Order 7) After Receipt Against Internal Purchase Order, Update Inventory 8) Ship To End Customer From “Internal Inventory Organization Complete Outsourced Manufacturing Operations Ship To Your Organization Demand/Planning Internal Supply Chain

16. 16 Review Of Outsourced Manufacturing Benefits and Issues Drop Shipments Benefits Don’t incur financial obligation of inventory until customer order received and processed. Don’t have the cost or overhead of delivering finish product to customers. Don’t maintain warehouse or inventory carrying cost. Don’t control production or design of the product Drop Shipment Issues Cannot control acquisition cost of product, subject to vendor price cannot control delivery or promise dates Vendor could sell direct Financial liability for purchase even if customer cancels order No control over product quality but sale still impacts your reputation with marketplace

17. 17 Review Of Outsourced Manufacturing Benefits and Issues Outside Processing Benefits No financial obligation of Assets to perform special processing. Don’t have setup or overhead costs associated with completing specialized processing. Don’t maintain inventory required to perform specialized processes. You still control production process of your finish good while holding the vendor responsible for only this unique process. Outside Processing Issues Don’t control the direct quality of the outside process Don’t easily control delivery, promise dates to your customer Competitors can utilize your outside processor Financial liability for purchase even if customer cancels order No control over product quality but sale still impacts your reputation with marketplace

18. 18 Review Of Outsourced Manufacturing Benefits and Issues Outsourced Manufacturing Benefits No financial obligation of Assets perform special processing. Don’t have the setup or overhead costs associated with completing specialized processing Don’t maintain inventory required to perform specialized processes. Control production process remotely for your finish good while holding the vendor responsible for executing shop floor transactions. Don’t incur costs and overhead of the shipment process. You can quickly change product lines based on market conditions by utilizing several “sub-contractors’ Outsourced Manufacturing Issues cannot control the direct quality of the outside process cannot easily control delivery, promise dates to your customer competitors can utilize your outside processor financial liability for purchase even if customer cancels order no control over product quality but sale still impacts your reputation with marketplace Engineering design and maintenance must be controlled across organizational boundaries You must establish a safe/secure ERP environment that can be flexible and easily adapted to multiple sub- contractors