Trends, Triumphs and Traps in Supply Chain Outsourcing

If you want a job done well, then should you do it yourself… or through outsourcing? Outsourcing offers the chance to boost a company’s performance with greater efficiency and effectiveness than if it stuck to internal resources alone. The potential advantages are considerable – and magnified in the case of supply chains that are now the key sources of competitiveness for many enterprises.

However, as outsourcing has developed, so have misconceptions about what it is and how to use it. Good outsourcing, like good management delegation, is also often easier said than done. To get more out of it, organisations can start by better understanding where it is going, where the real advantages lie (not just a question of cost reduction), and pitfalls to be avoided.

Outsourcing from Tactical to Strategic

Tactics are for winning battles and strategies are for winning wars. The first outsourcing battles were often against costs and centred on physical, asset-based activities. In the same way that companies outsourced IT, customer phone support, telemarketing and payroll, they also found third party alternatives for portions of their supply chains: transport and manufacturing were key examples.

These tactical measures offered reductions in operating expenses, increases in productivity, or in some cases both at the same time. Then the situation changed. The supply chain developed into a major driver of profitability and sustainability for many companies. From being simply a tactical device, it turned into a fundamental and strategic business differentiator for winning the war (so to speak) against other enterprises. Just doing things better was no longer good enough. Companies had to find better supply chain things to do as well.

The Scope for Innovation in Supply Chain Outsourcing

By taking an end-to-end view of their supply chains, organisations understand and perform better. The same is true of outsourcing. By planning and executing outsourcing from a process standpoint instead of simply by separate activities, they can balance and optimise their supply chains overall to obtain the best trade-offs and results. Moreover, the outsourcing partner can contribute more ideas for innovation. Between them, 3PLs (third party logistics providers) and professional services organisations are expanding the range of outsourcing services and the ideas for innovation they offer to cover supply chain processes of:

Demand planning, forecast analytics and supply chain intelligence
Sourcing and procurement for smarter buying as well as discounts
Manufacturing, warehousing, spares handling
Fulfilment with order management, transport planning and management, customs handling
Customer service, warranty management and reverse logistics.

Client companies can then weave the combination of in-house and out-house services they want. For instance, IT vendor Hewlett-Packard interposes its own global procurement service to buy components from suppliers and re-sell them to subcontracting manufacturers. Pharmaceuticals company Pfizer gives its employees worldwide access to an internal tool for them to outsource non-strategic or non-core tasks to external providers.

A Change in Business Focus Too

At one time, outsourcing was synonymous with cost reduction. CEOs and finance directors rubbed their hands together at the thought of cutting expenses and moving CapEx to OpEx to consequently pimp up their company balance sheets. Cost reduction is always a goal worthy of consideration, thanks to larger scale cost efficiencies, lower employment costs and independent expertise in getting better prices. Yet net savings may be significantly less than imagined. There may be several reasons for this:

The expenses and length of time to select new suppliers and outsourcing partners
The time to hand over a work activity or process to an outsourcing partner
Severance costs for workers that cannot or will not be deployed elsewhere, once the activity on which they worked has been outsourced to an external supplier
Management costs due to extra effort required to address language or cultural differences
Freight costs, trade tariffs, lengthened shipping times and increased probabilities of damage in transit for products produced in remote countries

In addition, although often impossible to quantify, a client organisation may lose its knowhow in the supply chain process it outsources. This adds again to expenses if it decides later to move the process back in-house. Some of the costs above may be incurred at the beginning of the outsourcing relationship, with overall savings then increasing later. Companies can try to improve overall cost reduction by lengthening the term of the agreement, although this then also increases risk.

On the other hand, enterprises have come to realise that smart supply chain outsourcing opens up other opportunities as well, notably to:

Provide new, profitable services to their own customers
Expand into new markets
Achieve competitive advantage or defend against competitor menaces
Adjust flexibly to changes in levels of demand
React swiftly to evolutions in markets.

From an initial cost-centric approach, the notion of added value has gained ground, encouraging both organisations and their outsourcing suppliers to work together on more bases than just dollars and cents saved.

Does Geography Affect Outsourcing?

While geography certainly has an impact on the optimisation of outsourcing, the ‘global-local’ debate is really of secondary importance. The golden rule is to work with outsourcing suppliers that best meet a company’s needs, whether these are defined in terms of cost, knowhow, capacity or corporate social responsibility. The knee-jerk reaction of looking for cheaper outsourced manufacturing in Asia for instance is increasingly hard to justify. In the same way that the label ‘Made in Japan’ was transformed from cheap and cheerful to upmarket and sophisticated, the ‘Made in China’ label may well change in the near future too.

Rising standards of living and workforce pay-rises in emerging nations are narrowing down cost differentials and leading to enterprises in developed nations to ‘nearshoring’ or ‘reshoring’ manufacturing. An increasingly balanced economy worldwide, not to mention ecological considerations and pressures, suggests outsourcing will be increasingly pulled back to be physically closer to the initiating company. Quality, costs and service then all benefit. Alternatively, outsourcing services may simply transcend notions of geography altogether as they move into a cloud computing format that is accessible anytime and anywhere.

Does Size Matter for Outsourcing?

Large corporate enterprises, mid-sized public sector organisations and small businesses all have good reasons to outsource – although not necessarily the same reasons.

The variety and richness of specialist expertise and resources available for hire mean there is something for everybody. Where a small business may use supply chain outsourcing to gain access to manufacturing facilities it does not have, a budget-restricted public sector organisation can use it to hire a procurement director part-time instead of full-time, with a multinational using it to put new logistics models in place, such as omni-channel distribution.

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What Stops People from Using Supply Chain Outsourcing?

Although supply chain outsourcing possibilities continue to grow, common misconceptions or ill-founded fears still hold organisations back from getting the benefit.

“Only large corporations do outsourcing”

Large corporations may have been at the beginning of supply chain outsourcing, but now everybody can get in on it. One person can form a virtual web-based company and outsource the whole of the supply chain from raw material supply through production to order fulfilment and customer service. The Internet has also brought thousands of third party specialists into the limelight, from independent consultants to regional, national and international 3PLs and professional service companies. There are service offerings to suit practically all needs and budgets.

“Supply chain outsourcing is too risky”

All business activities have a degree of risk, including both in-house projects and outsourcing agreements. Outsourcing risk is lessened by choosing reliable, competent partners with demonstrable track records. Risk mitigation (possibly at the expense of some efficiency) can be accomplished by maintaining a compact panel of outsourcing suppliers, so that there is no single point of failure. Outsourcing may even reduce overall organisational risk by giving your enterprise access to knowledge, resources and resilience unavailable inside it.

“Outsourcing internationally hurts the domestic economy”

Supply chain outsourcing should normally be done where it brings the most advantage and adds the most value. Corporate social responsibility that costs too much by insisting on using uncompetitive local resources may damage an enterprise to the point of failure. Neither competitors nor customers will let a company’s higher prices and lower quality go unsanctioned for very long. International outsourcing that allows a company to protect its market share and its profitability then helps the domestic economy instead of hurting it.

“Outsourcing will be more expensive compared to in-house”

There are two cases: outsourcing is either less expensive or more expensive. The “2014 Third Party Logistics Study: The State of Logistics Outsourcing” report produced by Capgemini Consulting and others shows logistics costs going down by 11%, inventory costs by 6% and logistics fixed assets by 23%, for the companies surveyed for the report. Yet outsourcing could justifiably lead to an increase in costs too, on condition that it led to a proportionately greater increase in value, such as clinching profitable deals with major new end-customers. Expense is one consideration, but so is added value.

“Customer satisfaction will drop if we don’t do it ourselves”

Customer satisfaction could go up instead of down, if you select the right outsourcing partner. Specialists can offer experience and knowledge in their specific supply chain domain, drawn from a range of different company contexts and sectors. Their best practices can become your competitive advantages if you make sure they are properly integrated into your routine planning, monitoring and analysing activities.

Supply Chain Outsourcing Ventures that Fail

Any claim that supply chain outsourcing is automatically successful would be wrong. It has its failures like any other area of business. A survey conducted by the Business Continuity Institute and the Zurich Insurance Group at the end of 2012 put outsourcing failures in the top three causes of supply chain disruption (contributing to 35% of such problems).

Reasons for such failure are varied. To paraphrase Tolstoy, every successful outsourcing venture looks alike, while every unsuccessful outsourcing venture fails in its own way. Committing one of the errors below may be enough to knock your outsourcing on the head. Conversely, avoiding them all will put you well on the way to outsourcing success:

Failure to understand the real needs of your business (or to look beyond cost reduction)
Ignoring stakeholder likes and dislikes, or approval and disapproval (where stakeholders include end-customers and your own employees)
Selecting unsuitable outsourcing providers
Ignoring expectations of your outsourcing service provider
Allocating insufficient time to managing outsourcing relationships (there is no ‘set it and forget it’ in successful outsourcing)
Poor outsourcing project design: for instance, unclear definition of roles and responsibilities, or insufficient preparations for handover of activities or processes
Lack of appropriate metrics or key performance indicators (KPIs)
Bungled transition from initial to long term interworking

High profile problem cases have included:

Boeing’s 787 Dreamliner outsourcing of design and manufacturing to service providers that could not do the work required and that used unauthorised subcontractors
Apple and Nike manufacturing outsourcing providers allegedly using cruelty towards their workers
Menu Foods pet food products altered by the use of unauthorised ingredients by the outsourcers handling materials procurement and falsifying procurement documents
Toysrus.com using Amazon for logistics activities to find that its outsourcing provider then became a competitor.

All of the companies except one (Menu Foods, bought by Simmons Pet Foods) still exist as independent entities, even after their supply chain outsourcing debacles. However, if these cases were ‘learning experiences’ for those involved, they were certainly expensive ones.

Conclusion

Supply chain outsourcing offers both gains for savvy and traps for the unwary, but it is not a case of being caught ‘between a rock and a hard place’. A refusal to use outsourcing could limit the competitiveness of an enterprise. On the other hand, willingness to think it out, plan it, do it and monitor it can enhance the enterprise’s profitability and sustainability.

Neither should any notion of the proportion of success or failure be read into the fact that we cite two companies successfully using supply chain outsourcing and four companies that ran into problems. There are many more cases of outsourcing success in the world. It’s just that companies that have discovered how much outsourcing can boost their business may not want the others to find out.