WHITE PAPER

Supply Chain Operations

Outsourcing:
A Strategic Approach to Creating Significant Economic Value
 Supply Chain Operations Outsourcing

Table of Contents

I. Introduction...................................................................................... 1
II. Demand Management....................................................................... 2
III. Value of Outsourced Demand Management........................................ 2
Value of Demand Management........................................................... 3
Outsourcing Value Above & Beyond..................................................... 4
IV. Why Now?...................................................................................... 4
V. Determining Your Readiness for Outsourcing Demand Management....... 7
Readiness Dictated by Supply Chain Structure...................................... 7
Readiness Dictated by Technology Landscape....................................... 7
Readiness Dictated by Organizational Structure.................................... 8
VI. Enabling Technology........................................................................ 8
VII. How to Start the Journey............................................................... 10
VIII. Summary.................................................................................... 10
IX. About HAVI Global Solutions........................................................... 11
X. About SAS..................................................................................... 11

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 Supply Chain Operations Outsourcing

Content for this paper was provided by SAS, the leader in business analytics
software and services, and HAVI Global Solutions, a supply chain services
provider with more than 30 years’ experience in optimizing the performance
of customers’ supply chains. The two companies have partnered together in
a new approach to delivering supply chain value: a managed service solution
that provides advanced supply chain planning capabilities in an outsourced
environment.

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I. Introduction

Countless articles, analyst reports and perspective pieces have been written on the
merits and the pitfalls associated with business process outsourcing (BPO). BPO is
widely accepted as a cost reduction vehicle that involves contracting the operations
and responsibilities of a specific business function to a third-party service provider.

The predominant supply chain outsourcing today revolves around “peripheral”

supply chain functions and processes. Peripheral supply chain processes are
essentially commodity functions in that:

• There are many established providers that offer the services.

• The services tend to be uniform in quality and hard to differentiate.

• The benefit revolves primarily around cost reduction.

In the supply chain arena, BPO has traditionally focused and thrived in the
warehousing and logistics functions. Many companies today tap into expertise
of third-party logistics providers to execute the transportation, physical handling
and storage of products as they flow from the point of creation to the point of
consumption. In many industries, the manufacturing process itself is commonly
executed by outside partner companies.

Based on SAS’ and HAVI Global Solutions’ expertise in supply chain management
technologies and experience in providing managed services, we believe that the
next generation of BPO will focus on outsourcing “central” supply chain processes
as a strategic approach to create significant economic value. By central supply
chain processes, we mean the demand management functions (supply chain
planning and execution) that help determine customer demand, which in turn
drives the supply chain. These capabilities are considered central because they
can differentiate a company strategically. If you perform these functions better than
your competitor, you can create a dominant advantage. Consequently, outsourcing
these capabilities also carries the biggest risk perception.

In evaluating the possibilities associated with outsourcing central supply chain

functions, companies often ask themselves, “Is the work too strategically
important to outsource?” We suggest that for many organizations whose core
competencies do not include demand management functions, the work is too
strategically important not to outsource. In this paper we address:

• Value of outsourced demand management.

• Why now is an optimal time to outsource.

• Readiness of an organization.

• Enabling technology.

• How to start the journey.

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II. Demand Management

In our definition, demand management consists of seven processes that define how
a company understands true customer demand and executes the supply chain to
fulfill the demand. Each process represents a capability that is critical in creating a
true demand-driven supply chain. These processes are also an integral part of a
sales and operations planning process (S&OP).

Figure 1. Demand management processes.

Executing a demand-driven supply chain has been widely accepted as a top priority
for supply chain executives across nearly every industry. In a recent AMR survey of 100
supply chain executives about the gaps between perceived performance and business
importance of key supply chain functions, demand planning was described as the
function having the largest gap. This suggests that demand planning is the supply
chain process area with the biggest improvement opportunity for many companies.

However, while many companies recognize the value associated with a demand-driven
supply chain, their challenge lies in making it happen. Outsourcing specific demand
management functions is a highly viable means for moving closer to this vision.

III. Value of Outsourced Demand Management

Demand management continues to be a top management priority that drives

a significant portion of COGS (cost of goods sold) spend across the extended
supply chain. Suboptimal demand management drives those costs higher; it can
significantly handicap a company’s inventory and working capital position. But savvy
outsourcing can reverse that scenario. Outsourcing specific demand management
functions to a service provider with core competency in demand management – and
commitment to industry best practices – can lead to a significant increase in overall
business performance and accuracy. Many of these benefits will stem from a better
understanding of the demand stream.

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VALUE OF DEMAND MANAGEMENT

Impact Area Benefit Process Enabler

Asset Utilization Improved working • Lower inventory-carrying costs via better forecasting
capital utilization accuracy.
Revenue Growth Increased product • Maintain or increase service levels while better
availability matching inventory plans to demand.
Improved promotions • More effectively anticipate and manage the strains
management that promotional activity puts on the supply chain.

• Improve product allocation.

Operating Margin Reduction in freight • Reduce spending on expedited freight and
and logistics unscheduled deliveries by better positioning inventory.

• Reduce spending on reverse logistics.

Reduction in • Reduce stranded inventory.
obsolescence
• Reduce out-of-code product.

• Actively manage run-out ranges for limited-time

offerings.
Reduction in order • Reduce quantity and date changes at the retail and
changes distributor level.

• Translates into fewer line schedule changes at

supplier.

In fact, outsourcing specific demand management functions can provide value

above and beyond increased business performance. The benefits of outsourcing
often significantly outweigh the results that companies can achieve by performing
these functions themselves. And, of course, freeing your organization from the
tactical execution of supply chain operations allows employees to focus on the big
picture of steering the business and making smarter decisions.

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Outsourcing Value Above & Beyond

Outsourcing Benefits Value an Outsourced Environment

Quicker Time to Benefit
Capital Spending Avoidance
• Creation of a capability can be realized quicker
by leveraging a service provider that has the
process and supporting technical experience.
• Clients avoid a significant up-front expenditure
by leveraging a service provider’s tools,
processes and infrastructure.

• Clients can also save costs associated with

maintaining legacy systems, or avoid costs
associated with nonperforming package
software investments.
Continuous Improvement • Service providers focused on the demand
management discipline embrace industry best
practices and foster client-specific innovation
and differentiation.

• Service-level agreements and incentives are

Reduced Cost to Capability
Better Process Integration
Frees up Internal Resources
often tied to demonstration of continuous
improvement.
• For developing a complex supply chain
capability, outsourcing can provide a lower
total cost of ownership than in-house
development.
• The right service provider can play a role as a
supply chain integrator – facilitating, or adding
discipline to, S&OP or other existing processes.
• Outsourcing frees up internal resources and
improves productivity.

• Allows resources to focus less on operational

execution, and more on operational
management and other value-adding activities.

Combined, the above and beyond value and the increase in business performance
afforded by outsourcing provide competitive advantage. In this model, we are
not talking about realizing the same value with a different executor; we mean that
companies can reap significant incremental value as a result of the outsourced
relationship.

IV. WHY NOW?

In determining the appropriateness of various strategic directions for your supply chain,
one of the challenges will be articulating why you believe that the timing is right. Relative
to supply chain operational outsourcing in the last two to three years, advances in process
management and technology have pushed the risk/reward pendulum to swing in favor of
reward. Furthermore, better understanding and management of key risks have come with
deeper experience in peripheral supply chain outsourcing.

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These collective experiences have allowed more companies to be both politically and
culturally accepting of outsourcing and managed-services approaches.

Simply put, the risks associated with supply chain operational outsourcing are now
manageable – as documented in the following table:

Former Risks/Concerns Mitigation Strategies/Reality

Relinquishing control to a service provider • Relinquish execution but not control of key decisions.

• Successful demand management outsourcing

Too much integration required
relationships are built by preserving client ownership
of the supply chain processes.
• Service providers can leverage existing supply chain
data marts or create cost-effective alternatives to
power the demand management solution.

• The technical integration between a service provider

Service providers don’t have the systems
required
Experienced outsourcers don’t exist
Unclear where to start
and a client can be as limited as publishing a demand
forecast.
• SAS® Business Analytics software, including
forecasting and data integration capabilities, is well-
suited to perform in a managed service environment.
• HAVI Global Solutions has 15 years’ experience as an
outsourced provider of demand management and has
supported some of the world’s biggest brands.
• Start small.

• Engage with a service provider to manage a category,

Our business is too complex
promotion or geography as a way of ensuring that
both companies develop a proper partnership.
• A successfully managed service relationship is
a marriage of industry best practices and client-
specific knowledge.

• Managed service providers focus on best practices

and technology advances to better address the
growing complexity associated with today’s current
economic challenges.

• Outsourced demand management relationships

sometimes result in a business simplification as a
result of business process evaluation.

• Complex business models are the most challenging

and stand to reap the greatest benefit from industry
best practices, demand management expertise, and
leading-edge enabling technologies.
Outsourcing means a reduction in work • Demand management outsourcing is more about
force creation of a supply chain capability than a reduction
in staff.

• A program is initiated only when it is proven that the

incremental benefits associated with the service provide
a return that is greater than the incremental costs.

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While the outsourcing risks have decreased, spiraling supply chain complexity is
increasing the risks of maintaining in-house operations. Over the past several years,
as companies have been forced to do more with less – yet meet the demands of
more complex customer segments and compete globally – they’ve begun to lag
technologically. They cannot adequately evolve systems and processes to manage
the growing intricacy of their supply chains. Many businesses today simply do not
have the resources to solve complex demand management issues.

Figure 2. Supply chain complexity.

What’s more, the right human resources are scarce. High demand for analytic and
quantitative skills makes it difficult to recruit and retain the type of people who can
hone demand management competency. Meanwhile, supply chain executives are
faced with continued pressure for new value-adding and cost-reducing vehicles.
Economic conditions are reinforcing the mandate for tighter, more efficient supply
chains.

These factors can severely hamper in-house efforts to keep pace with what’s current
and applicable for your supply chain operations, from both a process-advancement
and a technology perspective. Now more than ever, the time is right to explore supply
chain operational outsourcing.

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V. Determining Your Readiness For Outsourcing Demand

Management

Outsourcing components of your demand management processes can be an

innovative and strategic approach to maximizing supply chain value. However, it is
not for all companies.

The charts below identify criteria by which companies can begin assessing the
suitability of supply chain operational outsourcing as a means for achieving their
goals. If your company meets several of these criteria, it is likely a good candidate for
outsourced demand management.

Readiness Dictated by Supply Chain Structure

Criteria Traits of a Good Outsourcing Candidate

Demand Variability
Advanced Buy Requirements
Promotional Activity
Obsolescence Risk
• Significant demand variability brought on by seasonality,
consumer trends, economic conditions, etc.
• Procurement decisions that must be made months in
advance of product need or use.
• Significant promotional activity that relies on timely
supply chain operations.
• High risk associated with getting demand wrong.

• Short shelf life and/or product life cycle, etc..

SKU Stability • Significant introduction of new products.
Long Demand Planning Cycle Time • Long information latency (lead time).

• Business decisions based on out-of-date information.

Current Performance • Current demand management-related performance
does not satisfy business goals.

• Current demand management capabilities cannot

support advanced marketing events, such as limited
time offerings.

Readiness Dictated by Technology Landscape

Criteria Traits of a Good Outsourcing Candidate

Data Accessibility • Reasonable access to the best available demand stream
– POS, shipment history etc.
Data Integrity • Data accurately reflects customer purchase behavior.

• Reasonable data quality.

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Readiness Dictated by Technology Landscape

Criteria Traits of a Good Outsourcing Candidate

Process Discipline • Process-oriented company.

• Downstream processes in place to leverage demand

plans.
Management Support • Existence of a strong champion within the company
who can drive change.

• Ability to manage and partner.

Competitive Culture • Is willing to change, and eager to gain a competitive
advantage.
Resource-Constrained • Significant resource time spent on activities that don’t
add value.

• Lack of sufficient quantitative resources and skills.

• Employees’ technical skills not fully developed.

VI. Enabling Technology

Whatever your current criteria, the supply chain service managed by HAVI Global
Solutions and SAS ensures the best possible technological foundation for your
outsourced operations: the platform for SAS Business Analytics. Figure 3 represents the
SAS Business Analytics Framework that supports a supply chain management solution.

Figure 3. The SAS Business Analytics Framework.

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The SAS Business Analytics Framework encompasses the following components

to guarantee a comprehensive, flexible solution that accommodates – and helps
analysts anticipate – changing business needs:

• Data integration (ETL, data cleansing and enrichment). With these advanced
data management capabilities, the HAVI Global Solutions and SAS team can
integrate all of the components of your existing supply chain. We can combine
data from every source, such as transactional and operational systems, and
cleanse and standardize that data for accurate, comprehensive analysis.

• Analytics. Using predictive analytics such as sophisticated forecasting

and modeling techniques, the team will go beyond the basics of demand
management. It will be able to answer questions such as, “Why is X happening?”,
“What will happen next?”, “What is the best that can happen?”, and “How
can we make it a reality?” (Figure 4 shows the totality of strategic vision that
your company can achieve through an outsourced solution based on the SAS
Business Analytics Framework.)

Figure 4. The complete landscape of analytical insight delivered by the service managed
by HAVI Global Solutions and SAS.

• Reporting. Using state-of-the-art technology, the HAVI Global Solutions and SAS
team will provide timely static reports and interactive, Web-based reporting tools.
These tools will allow users to see current data at various levels of detail across
the product, time and geography dimensions. Information such as top-line sales,
sales rates and factors that could influence sales (e.g., weather) can be accessed
by users to evaluate cause-and-effect relationships.

The result: A solution that enables you to manage demand, cost-effectively source
material, plan products for production, optimize inventory, report key metrics and
support S&OP.

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VII. How to Start The Journey

As described in Section IV, one of the biggest challenges companies face in

assessing the value associated with supply chain operational outsourcing is
determining where to start the journey. Developing enhanced supply chain
capabilities via operational outsourcing is a strategic decision, and provision of these
services is relatively new. Your company needs to understand how the process will
work and where the incremental value exists.

A focused opportunity assessment is a cost- and time-effective way of determining

a fit for your company in outsourcing demand management functions. HAVI Global
Solutions and SAS have developed a nonintrusive assessment approach, which
includes a combination of on-site interviews, process assessments and data
analysis. The initiative culminates with a half-day on-site presentation of findings and
recommendations. Experienced industry domain and technology professionals work
with leaders in your organization to help determine:

– How well your company’s planning processes are structured to execute a

demand-driven supply chain.

– The specific benefits your company would gain by refining its approach to
demand management.

– How your company’s processes and approach compare to relevant benchmarks.

– Where the specific opportunities to drive additional value are and how much value
a change could create.

– The impact to your company’s data management.

– Your organizational, technological and business process readiness.

– A road map to realize operational excellence and competitive advantage through

supply chain operational outsourcing.

VIII. Summary

The next generation of BPO is focused on outsourcing central supply chain

processes as a strategic approach to creating significant economic value. The risks
are manageable – and done properly, outsourcing sets your organization free from
tactical execution and provides competitive advantage.

In fact, if your company does not have core competency in demand-driven supply
chain management, the stakes are too high not to outsource. Economic conditions
are reinforcing the mandate for tighter, more efficient supply chains. Yet so many
factors (many of which are hard to identify, much less control) drive increasing supply
chain complexity.

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Service options managed by HAVI Global Solutions and SAS provide the analytical
software and expertise that are necessary to uncover those factors, accurately
forecast demand, and apply the resulting insights to streamline the supply chain and
improve profitability. Their managed service possesses the required blend of business
processes, best practices, technology and skilled resources to properly synchronize
an organization’s disparate supply chain components.

Now is the time to explore your outsourcing options. The potential to improve
business performance and accuracy – and achieve significant incremental value –
has never been better.

IX. About HAVI Global Solutions

Operational outsourcing has proven effective for some of the world’s largest supply
chains. HAVI Global Solutions has been a provider of demand management as a
managed service for 15 years and has developed expertise with granular forecasting
on a massive scale to support supply chain planning and execution. A few key
statistics are listed in the table below.

Element Solution Scale

Active Forecasting Models 3.9 Million
Daily Forecasts Created 1.9 Billion
Frequency of Updates Daily
# of Unique Promotions Managed Thousands / year.

X. About SAS

SAS is the leader in business analytics software and services, and the largest
independent vendor in the business intelligence market. Through innovative solutions
delivered within an integrated framework, SAS helps customers at more than 45,000
sites improve performance and deliver value by making better decisions faster. Since
1976 SAS has been giving customers around the world THE POWER TO KNOW®.

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