Outsourcing Supply Chain Management – 8 Issues
Outsourcing is done for various reasons. The driver can be generating cost reductions and downsizing; this has been a traditional reason for outsourcing. But there are others, such as gaining capabilities that are not available internally, implementing lean programs, streamlining operations, strategically positioning the company, or improving or adding capabilities to gain competitive advantage. Regardless of the reason, outsourcing succeeds when it is well thought out and done properly.
Some key points to recognize for all parties involved in outsourcing are:
1. Know and Define Reason for Outsourcing.
This may seem obvious, but it can be tricky. What do you want to accomplish and why? What is it that you want to do better? What would it take to do it and do it well inside the company? Why is that option not viable?
For example, the reason may be to reduce freight costs. But freight cost can be a problem, with high rates or the carriers used or the methods selected. Or, freight can be a symptom of a problem from use of high cost shipping methods because of forecasting, inventory or supplier problems. In these situations, high freight cost is a derivative of another problem. If the real cause of freight is not identified, then the outsourcing will not be successful, or at least as successful as it could be because the reason for the outsourcing has not been properly identified.
Freight also has a service factor, whether it be moving inventory from suppliers, between company operations or to customers. That has to be understood in order to evaluate the freight cost problem and needs. What are you buying for transportation? What are you paying? Why are you dissatisfied? What do you require?
Similar comments can be made about outsourcing to manage inventory. The problem may seem to be too much inventory or out-of-stock situations. But the inventory problem could be the result of a larger problem as to sales forecasting reliability, supplier performance in delivering purchase orders timely and correctly. It could be a need for systems or systems integration to provide visibility of all inventories in the supply chain, whether at warehouses or purchase orders at suppliers or in-transit.
2. Evaluate Outsourcing Business Process versus Function.
Knowing what is being outsourced and why it is being outsourced then drives the type of logistics service providers to be considered. The reason for outsourcing may also direct whether you are looking to outsource a function or a process. Outsourcing management of inbound transportation takes a function and transfers it to an outside party. Outsourcing the management on the inbound supply chain, including supplier purchase orders, supplier performance and transportation takes a process and transfers it to an outside provider.
Outsourcing a function versus a process can change the type of service provider that should be evaluated. A 3PL is often used with functions, such as inbound transportation and related activities. Managing a function requires depth of skills sets from the service provider. A 4PL may be the better choice with managing a process, which requires breadth of logistics skill sets.
The point is that outsourcing to optimize a function, without fully understanding the process, problem and need, can suboptimize the supply chain effectiveness and costs. Outsourcing may fail, but not for the right reason. The need was not clearly understood; so the outsourcing solution was not properly identified. The functional issue overrode the process; so the proper logistics service provider was not identified and selected. Of the eight issues, this may be the key one, process versus function, because without this the outsourcing selection may be skewed, if not flawed.
Also determine if the outsourcing and the desired results require collaboration with any of the company trading partners. This is important to defining the needs, identifying partners and designing the needed program.
3. Recognize Seller and Buyer Roles.
Each party has a reason to be involved in the outsourcing action. And they bring different confidences and expectations into the effort. The company selling its outsource service wants the business for his reasons. He may want the volume to build his own leveraging position with the transport carriers or others he deals with. He may want the volume to increase the throughput and reduce costs at warehouses or other operations. The point is that the Seller may be focused on his needs and not focused on the Buyer’s needs. He may not listen to the potential buyer’s requirements and instead present his capabilities as a stand-alone instead of how it meets the Buyer’s requirements. Understanding and satisfying the Buyer’s unique and complete needs can become subordinate to “getting the business”. Also see if the Seller views you as a “client” or as a “customer”.
Outsource providers who see the potential buyer as a client will recognize the unique needs and develop, tailor and manage the relationship accordingly. Those providers who view a prospective buyer as a “customer” may not pay the attention to the business if and once they have gained it. A customer is one of many customers; he is not unique. Laying out a list of “customers” utilizing the service provider is not a critical as his demonstrating how that provider will manage the client’s needs, both today and as they may change. Such a provider is proactive, not reactive. Client management differentiates successful outsource service providers, for both gaining and retaining business.
Also, the company, more exactly, the persons, seeking to outsource can be very emotional; that should not be underestimated. And the effort can be in a more in a difficult situation. They may be under internal pressures that make them feel they are under attack. As a result, they may not be as open and receptive to the effort as they should be. They may close themselves off to what the company’s seeking the business are offering to do.
As a result, either or both parties may be talking “at” each other instead of “with” each other. The result of such communication can lead to bad decisions by either or by both parties.
4. Detail Your Operation.
Clearly specify in writing what is done, by whom, how it done, when and why. Highlight both the strengths and its weaknesses. Show and understand interfaces between departments and how duties and work is handed off between them. Understand “hidden”, peripheral and “assumed” work that is done and that is beyond the job descriptions and department purpose and responsibilities that outsiders may not know about. Define critical points in the function or process.
The function or process should be mapped. Supply chain management crosses organizational lines; mapping will delineate the cross-functional roles and interfaces. It will also show gaps or redundancies that may exist. These gaps or redundancies may highlight key areas for the 3PL or 4PL that are critical for success.
Detail the cost of the operation. What are the components, direct and indirect, such as labor, space, freight and other? Recognize any disconnect with some costs, such as transport costs and inventory, in the financial system. Freight is on the monthly profit and loss; inventory is a balance sheet item. Yet there is often a cause-effect, a connection, between them even if it is not readily reflected in the accounting system.
5. Set Metrics/Key Performance Indicators and Accountability.
The outsourcing is being done for a specific reason with anticipated results. Define those expectations clearly. The planned results should be tangible. The results should be measurable. “Reducing costs”, “improving supplier performance” or similar goals are vague and can lead to disputes during the contract on whether the outsourcing is successful.
The anticipated results should be clearly set early in discussions as part of the expectations. The Seller needs to know these to see the realities of accomplishing them, given the requirements and how and when it will be done.
Benchmark key costs and performance. The two are tied. Even if the purpose is a cost reduction or service improvement; benchmark both for the sake of the outsource arrangement and relationship. However do not develop measure for the sake of measures and do not develop too many measures. Focus on the key metrics and performance indicators that relate to outsourcing success.
With insights into the present operation and performance, then mutual agreement can be established on the results during an agreed time period. That clearly sets the framework and standard for evaluation of the outsourcer.
Does the program include incentives, for results beyond the baseline goals? Then drill down into the costs and results for an understanding of cause-effects. The mapping work will be of great aid for developing the changes needed for incentives results.
Accountability and responsibility should be understood too, from and for both parties. Supply chain management has multiple areas of responsibility and accountability; it is a complex, multifunction process that spans states and continents. It runs from suppliers right through to customers. The impact of each function on the total process cannot be overlooked nor assumed away. Key points of decision-making should be identified.
Problems will occur; successful, quick resolution involves knowing who is responsible. A single person should be deemed accountable for both parties.. The time to identify and define responsibilities and metrics is early in the process, before any contract is signed.
6. Be Aware of Risks.
Outsourcing is change management. It may very well be business process reengineering. There is no guarantee that the outsourcing will succeed. “The best-laid plans o’ mice an’ men gang aft a-gley, an’ lea’e us nought but grief an’ pain for promised joy. ”, quoting Robert Burns. Anticipate the various scenarios and the internal and external factors that can impact the program and results. There are planned benefits.
But, perhaps more importantly, there potential downsides from the outsourcing. Be aware of them. No rose-colored glasses are allowed during the outsource evaluation. Do a risk assessment. Identify real and perceived risks. Work to mitigate risks. There will likely be a contract; that is a commitment to the program. Consider contract length as an option in risk mitigation.
Think through the “what ifs.” What if goals are not attained? What if there are service problems that seriously impact the company as to customer deliveries or with purchase orders from suppliers? What if there are inventory difficulties, either stock outs or surges in levels? What if there are unanticipated, significant cost increases? What options will there be then?
With outsourcing, there is transference of company knowledge, practices and resources. If the outsourcing, for whatever reason, is not working, how do you fix it quickly and well? What if it cannot be remedied? Do you terminate the agreement and find another service provider? If so, how do you do it? How do you transfer from one provider to another? How do you regroup and bring the outsourced service back inside? Can you bring it back? There may be no calamities with the outsourcing. But recognize that there could be.
7. Plan the Change.
Outsourcing is not like turning on a light. All parties should plan the migration. Do not depend on the contract to make the outsourcing work. There are major tasks to plan and mundane ones that should be considered. Recognize the outsourcing means that people and departments in the company are giving up ownership of the function or process. Build teams among all affected parties and have the teams meet to detail what must be done. Develop the plan and time lines. Plan tests. Identify any opposition and how to overcome it. Build the relationship during the planning phase, before the change is made.
Understand any customization and reengineering that will be made and how it will be developed and implemented. Look at interfaces and handoffs of work or information between, within and among the company, the service provider and trading partners. Provide training. Make sure that people and systems are ready. Ignore no detail or task.
8. Manage the Outsource Operation.
Do not assume the contract will manage the logistics service provider and operation. Use the key performance indicators continuously. Meet regularly, especially during the implementation, to review progress, problems and successes. Test accountability. Assess the relationship.
CONCLUSION. Successful outsourcing takes effort. Distinguish theory from reality. Assess what must be done and who must do it. Define key metrics. Plan the transition. Manage the outsourcing.
First appeared at LTD Management.
LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.