Supply Chain Outsourcing: More Choices, Tougher Decisions
By Patrick M. Byrne -- Logistics Management, 5/1/2006
Increasingly, organizations are outsourcing part, or even all, of their supply chains. Most often, they're looking to reduce operating costs and more effectively deploy working capital. But in a recent survey, Accenture found that 86 percent of decision makers also believe that outsourcing gives them more control over their operations. And 55 percent believe outsourcing helps them implement changes faster and more effectively.
Supply chain outsourcing used to focus mainly on transportation and warehousing. Now it encompasses anything from demand planning to procurement and reverse logistics.
With so many functions being outsourced and so many third-party providers, it's harder than ever to align structures, requirements, strategies, and capabilities with a prospective third party's offerings. The following framework can help executives make some of these tough decisions.
1. Am I a good candidate for outsourcing?
The only guidelines or clues for answering this question are internal problems, pressures, or shortcomings, such as insufficient planning, alignment, or control; limited visibility; poor process integration; or lack of coordination across multiple supply chain channels. The table above contains a more comprehensive list of issues and warning signs.
2. What function(s) should be outsourced?
Outsourcing can address one, several, or all components of a company's supply chain. The challenge is to know which function(s) would perform more effectively in an outsourced environment and how the outsourcing of one or more functions would benefit the entire supply chain. Key decision criteria for frequently outsourced functions might include:
Transportation. Inability to capture volume discounts; unacceptable or inconsistent delivery performance; insufficient carrier capacity; poor shipment visibility.
Warehousing. High employee turnover; excessive inventories; low productivity; a surfeit or shortage of warehouses or space; a network that hasn't kept pace with service or inventory changes; a need for new warehouse management technology or additional process skills.
Network planning. Increased supply chain costs, insufficient synergies or degraded service following a merger or acquisition; operational shifts, such as new technologies and business changes.
Procurement. Need for new technology or expertise; high levels of "rogue" spending; too many/too few suppliers; inconsistent processes across units and geographies.
High-quality relationships increase the value of the processes and functions a company opts to outsource as well as those it keeps in house or outsources in the future. This layering of services is key to achieving continuous improvement and building a supply chain that accommodates new opportunities.
3. What kind of organization should handle outsourced function(s)?
Outsourcing options used to be limited to third-party logistics providers (3PLs), most of which developed solutions to complement their assets. But another kind of provider has emerged: integrated-services coordinators. These global, "asset-agnostic" organizations manage clients' supply chains by synchronizing the services of 3PLs, functional providers, and internal business owners.
Companies should expect either type of outsourcing provider to demonstrate mastery of appropriate functional domains. Each should also be able to demonstrate its understanding of the shipper's business, its change management capabilities, command of metrics-driven behaviors, scalability of services, ability to leverage best practices from multiple functions/industries, and record of innovation.
Outsourcing relationships should also address the totality of a shipper's supply chain goals. This is where integrated-services coordinators have the advantage. Because their core competence is aligning and maximizing the contributions of multiple parties, they often are better able to help clients capture synergies. They may also be better equipped to help increase visibility across the entire supply chain, improve alignment of supply and demand, and identify improvement opportunities.
Some companies may find that integrated-services coordinators offer more capabilities than they need. But regardless of which type of partner it chooses, the potential for continuous improvement should be every outsourcer's first line of inquiry: "Does my prospective partner offer new opportunities for sustained, global improvement, or is its value proposition simply a fresh coat of paint that will quickly fade?"
| Outsourcing attractiveness | ||
| Business issue | High | Low |
| Organization-specific | ||
| Supply chain leadership | Status quo | Strong/visionary |
| Need for radical change | High | Low |
| Recent merger/acquisition activity | Yes | No |
| Organization's ability to execute quickly | Low | High |
| Frequent boom and bust cycles | Yes | No |
| Speed a critical factor | High | Low |
| Information technology as a competitive differentiator | Low | High |
| Ability to implement long-lasting process changes | Low | High |
| Financial | ||
| Steadily increasing supply chain costs | Yes | No |
| Cost of goods sold (COGS) | High | Low |
| Need to free up investment capital | High | Low |
| Pressure to reduce costs | High | Low |
| Need to develop or enhance supply chain capabilities | High | Low |
| Consistently missed service or availability targets | Yes | No |
| Supply chain-specific | ||
| Ability to view inventories across divisions/groups | Low | High |
| Need to invest in new supply chain technologies | High | Low |
| Inaccurate forecasts or supply chain plans | Frequent | Rare |
| Visibility of orders in transit | Low | High |
| Linkage between demand signals and logistics | Weak | Strong |
| Global integration of supply chain processes | Weak | Strong |
| Levels of WIP, finished goods, or obsolete inventory | High | Low |
| Consistent best practices across the organization | Low | High |
| Number of skilled, available supply chain resources | Low | High |
| Performance metrics | Inconsistent | Consistent |
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