Outsourcing and SCMluxe (Part 3 of 3)

Some of the business models used for offshoring/outsourcing business services as Shared Service Centers (SSCs) are as below:

Sl No	Model	Characteristic	Pros	Cons
1	Captive SSC	Owned by company but process consolidated in single location	Better Control and ownership	Not cost effective
2	Outsourced SSC	SSC operated and owned by third party vendor of services	Best practices, economies of scale, cost effective, ability to focus on core competancies	No ownership, initial employee dissatisfaction
3	Distributed	Business services delivered from distributed locations	Local requirements completely addressed	Lack of economies of scale and cost effectiveness
4	Nearshore	SSC operated in a location close to centers of delivery	Local requirements partly met. Some cost advantages	Not as cost effective as offshore delivery
5	Offshore	SSC operated from distant low cost country (Eg: India, Phillipenes etc)	Cost effective, economies of scale	Local requirements and cultural issues not met

Note that typically even for a single process the model can be a combination of the above. For example in vendor management process, the identification of the vendor can be done onsite and in a distributed fashion without any consolidation but the transactional activity of performance evaluation can be done from a shared service center (SSC). Even here the evaluation done based on data obtained from the IT (or ERP) systems like % rejections, % on time deliveries etc can be done from an offshore location while the actual audit at the vendor's premises will need to be done locally and onsite.

Some of the business processes in SCMluxe and recommendations for the shared service model is as below:

Sl No	Business Process	Business Model	Location
1	Supply Chain Planning	Captive - SSC	Onsite
2	Demand Forecasting	Captive - SSC and Distributed	Nearshore
3	Direct Procurement	Captive - SSC	Onsite
4	Indirect Procurement	Outsource - SCC	Offshore
5	Vendor Management	Captive - SSC	Onsite/ Nearshore
6	Inventory Management	Outsource - SSC	Nearshore/ Offshore
7	Fulfillment	Captive - SSC and Distributed	Nearshore/ Offshore
8	Order Management	Distributed	Onsite
9	Logistics	Captive - SSC and Distributed	Onsite and Nearshore
10	Returns Management	Captive - SSC and Distributed	Onsite and Nearshore
11	Master Data Management	Outsource - SSC	Offshore
12	Supply Chain Analytics	Outsource - SSC	Offshore
13	Customer Relationship Management	Captive SSC and Distributed	Onsite

Again it is to be noted that for each sub process a different model maybe used. However only broad indications are provided here based on the risk and opportunity each process provides in outsourcing or offshoing in SCMluxe

Outsourcing and SCMLuxe (Part 2 of 3)

Outsourcing business processes like Finance and Accounting, HR administration or Customer Service Call Center processes are done for several reasons:

1.   Lower costs from moving operations to lower cost locations (like India, Philippines etc)

2.   Economies of scale from consolidating these transactional processes in a single location

3.   Ability to build centers of excellence wherein best of breed solution and best practices can be deployed

4.   Convert capital expenditure involved in processing these transactional tasks into variable expenses by outsourcing to a vendor who can then bill based on volume of transactions handled. Thus enabling the move from a capex to an opex model for business processes

5.   Managing volume fluctuations for these processes and the inability of a company to provide resources during peak periods while maintaining them during periods of low volumes. For eg: a retail company may require only 100 people to process customer orders in low season but during the Christmas holiday season would require 500 people to perform the same tasks. How does it staff these peaks, what do the staffs do during the rest of the year. How does one manage attrition and employee development in such a situation? Outsourcing to a specialist provider of these services is one answers

6.  Advantages of 24/7 hour operations by utilizing time zone differences across the globe

Traditionally companies have tended to offshore transactional low

end work like bookkeeping and call center operations. Companies are moving towards offshoring processes requiring higher skills like supply chain operations (order management, fulfillment or inventory management and indirect procurement).

Let us look at what factors need to be considered while considering offshoring SCMluxe processes:

1.   Brand capital: Any processes which directly impact the brand should not be offshored for whatever reason since the heart of a luxury product is its brand value. Design and marketing  communications are examples of processes which need to be kept in-house

2.   Customer Facing processes: Processes which need direct interaction with the customer, either in person or over phone. Customer service for instance always need to be local and personalized and not delivered remotely from a low cost country (LCC)

3.   High cost administrative tasks: Luxury companies typically have offices in high cost locations. Though retailing requires such locations, the administrative tasks such as finance and accounting, HR administration, Travel and Expenses administration need not be performed from these high cost locations

4.   Disbursed administrative processes: Activities that are performed from disbursed locations such as warehouse mgmt, inventory and merchandising planning, logistics administration,  might benefit from consolidation of processes in a single location

5.   High Volume processes: Certain processes which have high volume benefit from consolidation and driving benefits from discounting. Processes such as indirect procurement and Travel and Expenses accounting, hospitality mgmt will benefit from consolidating volumes and obtaining discounts

In the next post we will discuss specific SCMluxe processes which will  lend themselves to outsourcing and the models we can use for these processes

Outsourcing and SCMLuxe – Part 1 of 3

Outsourcing consists of two separate and discrete areas in any industry/operations:

1.       Outsourcing of operations of the firm – such as production/logistics etc

2.       Outsourcing of business operations of the firm – such as Finance and Accounting, HR Administration and Purchase (mainly indirect procurement)

Let’s look at each area separately since they are very distinct and need to be analysed independently.

Outsourcing operations:

Here the options considered are outsourcing operations like production, logistics or even the distribution of goods and services. Two of the models of outsourcing operations are:

China's increasing share of global procurment....

1. Outsourcing production to low cost locations: China is now the back office for most manufacturing companies due to low labour costs and economies of scale possible in the country. Some of the dangers of outsourcing operations is dealt in the posts  location and country of origin for SCMluxe and Make Strategy for SCMluxe. One must remember not to dismiss LCC production totally since it does bring the product closer to the customer and helps reduce lead times and possibly the quality of the product – something that might not be important for products like jewelry and perfumes but certainly of importance in a product like premium yogurt or bread. For instance a leading provider of organic luxury bread produces its dough in its country of origin in France but ships it over to its major market in China where its licensees/customer’s bake it in specialized ovens provided by the company. If not for this case of postponement strategy being put in place (see post on mass customization for postponement definition at Postponement strategy), this particular perishable product, bread, would never have been able to be sold in distant markets like China

...and one of the reasons why

2. Licensing or subcontracting parts of production or distribution: Licensing is the most widely used tools for faster growth in most industries and especially in the luxury goods sector. It frees up capital and growth can be achieved with very little investment. But it also leads to dilution of the brand equity if not managed well and problems of maintaining the relationship with the licensee (see posts “counterfeits” and “types of licensing and subcontracting”). Managing both the contract and the licensing agreements becomes of particular interest in SCMluxe.

In the next post we will see the outsourcing to LCC countries of business processes

Using counterfeits to refine Distribution Strategies

Counterfeits and fakes are the bane of the luxury goods industry. However in this post lets look at how its existence (or lack of it) can influence the distribution strategy:

• Counterfeits flooding market



 Bags on sale - time to set up a proper shop?



This typically indicates a deep desire and "want" for the product in the market. Besides taking manufacturers and purveyors of fake goods to court, communication of the genuine goods, drumming up public support against counterfeiting, we would need to relook at distribution and the availability of the brand in local markets.  For instance counterfeits could indicate that the distribution is too restricted and unavailable (or too tedious to purchase) for genuine buyers. Introduction of more retail points and Internet sales in case the market does not have infrastructure to support too many retail outlets would be good options.

• Absence of Counterfeits in the market

In markets where IP and trade mark protection is lax, the complete absence of fakes/counterfeits reveals a more fundamental problem - a lack of demand or desire for the luxury product. This could be due to the unsuitability of the product to local culture/needs or lack of awareness of the product. For the latter, a good communications and marketing investment would be needed. However the distribution will need to be controlled and muted, perhaps targeting only a small percentage of high income globe trotters in the market or tourists/foreigners. Fewer retail outlets located in five star hotels catering to visitors might be an option

• Good quality counterfeits in the market

The presence of near identical counterfeits of good quality and which is difficult to distinguish between the original may require further investigation. Licensing brands or sub-contractors in local markets might be deviating from contractual terms and allowing products to flow into the grey market. Distribution is such markets should normally be kept inhouse and subcontracting avoided, else a cast in stone contract drawn out with regular audits conducted in the market

Emerging markets and the lack of high streets

With growth in luxury markets moving to emerging economies, a common problem experienced by luxury retailers is that high streets are mostly not up to the mark or in some markets like India are completely absent. Location of a store is of prime importance in the success of luxury goods and an unsuitable one can be suicidal especially if consumers in these countries who are quite well travelled can afford to pick up their luxury fixes in a much more appealing environment in the traditional high streets of Europe or USA.

The options so far for most purveyors of luxury in these markets were limited stores in five star hotels. This is not only a very expensive option but restricts the target customer to visitors and foreigners which defeats the very purpose of having a local presence for local customers. With these economies growing, some more options are coming up – mainly high end malls and gentrified streets where a group of high end stores huddle up and create an oasis of luxury. Costs of the options indicate why the move to a gentrified street might make sense:

Location	Approximate costs in Mumbai, India	Cost per month for 3000sq.ft store (280 sq.meters)
Five Star Luxury Hotel	Rs.1000 per sq.ft  per month (Euro 15 or USD 22)	Rs.3mn (Euro 45000, USD 66000)
High End Mall	Rs. 400 per sq.ft per month (Euro 6 or USD 9)	Rs.1.2mn (Euro 18000, USD 27000)
Gentrified Street	Rs.200 per sq.ft per month (Euro 3 or USD 4.50)	Rs.600k (Euro 9000, USD 13500)

 The changing market dynamics have contributed to luxury retailers creating and moving into high streets in these markets:



·    The rise of the well travelled domestic consumer – purchasers of these products are not   only foreigners but mainly local High Networth Individuals

·    The high cost of rentals in luxury hotels and limited visibility

·    The growth of high end malls with the right ambiance and exclusivity in these markets

·    The possibility of huddling together in cheaper “gentrified” streets and creating a high street

Hermes, Mumbai - India

Cheaper rents also mean substantial investments can be made on the store and in developing the shopping street or estate in cooperation with local city authorities (mainly in design and maintenance sponsorships). Hermes always the leader of the pack in innovating the retail end of its supply chain has already moved out of its luxury hotel location in Mumbai and set up space on Ballard Estate – a gentrified street with other high end local boutiques. Will the others be following suit?

 

Hermes Dry Fruit Stores - also Mumbai - India



Much will depend on the ability of these pioneers to create a high end piece of real estate providing the same level of desirability and convenience to local consumers as their regular haunts abroad - and at the same time protecting the brand and its image!

Supply factors and its influence on Demand-Supply Strategy in SCMluxe

Managing supply and meeting (or not meeting) demand assumes a different dimension in SCMluxe.  For instance for most mass produced goods, the only aim would be to increase supply, meet increased demand and maintain margins. However for luxury goods, not meeting demand might simply be a brand strategy – maintaining exclusiveness and desirability (besides artificially keeping prices high). Thus the supply strategy should dovetail into the overall plan for the luxury product.  Let us look at some factors that influence supply and how they need to be incorporated into the overall demand-supply plan

Supply Factors	Demand-Supply Planning
Supply limited by natural circumstances – Eg: Non availability of raw materials or rarity of occurrence: gems, platinum, ermine, art	Adjust Price to level demand to supply (Volumes)
Supply controlled by innovation – Eg: patents for features in products, non-reproducible features	Protect innovation by copyrights/patents. Plan demand-price-supply based on timeline of innovation protection available (patent period etc)
Supply restricted by production – Eg: bespoke suits, monogrammed silverware, custom built cars	Plan supply based on production capacity. And on need to retain brand exclusivity if required
Supply based on exclusivity – Eg: Private clubs, limited edition merchandise	Plan supply around brand positioning around level of exclusivity desired

Interesting we see almost all products having several supply factors influence them in varying degrees – say innovative products where supply can be increased to meet increased demand as required, but its brand positioning might stress on exclusivity which will need supply to be restricted.  The Vertu phone limited by the availability of its gold casing as well as its copyrighted name or “Art” limited both by natural circumstances and restricted production. A mix and match planning methodology would work but a common rule of thumb would be to simply follow the brand positioning strategy – after all brand management as everyone knows is the be all and end all of the luxury goods industry

Technology as a myth creater

While discussing the more mundane aspects of ERP and SCM technology solutions for SCMluxe in the previous post Selecting Technology for SCMluxe an interesting point by Kapferer and Bastien in their seminal book “Luxury Strategy” caught my eye. They argue that the function of technology in the luxury industry (with specific reference to the luxury auto sector) are two fold:

·         As a base to justify the “quality” of the product especially in auto and electronics products which rely heavily on the technological superiority of its products. This is especially true for non traditional products where artisanship and old world hand finished values are not enough to sell the product

·         As a strong component in creating a myth or aura around the product. The mythic ability to perform tasks (which may have no practical use in most cases) which seem super human are mostly aided by technology. The ability of a Rolls Royce to drive for 100km even with flat tyres (why would one want to do that?) or the fact that a coin balanced on its hood will stay balanced even while driving is an outcome of the superior technology used. This creates legends and myths that helps build a luxury brand and makes it exclusive.



James Bond's mythic Aston Martin



On a lighter note, an easy way to comprehend the mythic qualities of technology is the Aston Martin driven by James Bond – it even has the ability to turn invisible (with the help of mirrored bodywork!) and fire torpedoes at oncoming spies in tanks or plebian BMWs!!!