Guess what, outsourcing production to contract manufacturers causes more problems than it solves.

Vendors today are unable to effectively adjust the supply of products from contract manufacturers to dramatic changes in demand, management consultancy Booz Allen claims.

The result is "product shortfalls in times of high demand and more recently, bloated inventories as demand tapered off".

It gets worse: "The effects of significant revenue shortfalls have been compounded as high-tech companies such as Cisco were locked into commitments to buy large quantities of new products from their suppliers".

Booz Allen notes a basic conflict of interests between vendors such as Compaq and Cisco and contract manufacturers. The vendors want flexibility, while the manufacturers are looking for predictability. Operating on cut-throat margins, the contract manufacturers require certainty in their production schedules.

Like good management consultants, Booz Allen says there's nothing wrong with outsourcing production in theory - it's the practice that falls down. We guess that it can - at great expense - tell companies how to improve their outsourcing models.

A cheaper summary is contained in Booz Allen's article on supply chain problems, to be published in the August issue of its quarterly magazine strategy+business.

Entitled: "Why Cisco Fell: Outsourcing and Its Perils," the article covers the outsourcing pains experienced by Cisco, Sony, Palm, Compaq, Apple, and Philips. ®