Outsourcing and Supply Chain Management

Introduction to Outsourcing

in general we can define outsourcing as contracting out of a company’s non-core, non-revenue-producing activities to domain experts. Outsourcing is different from contracting where outsourcing is considered as a strategic management tool that involves the restructuring of an organization around what it does best—its core competencies.

Outsourcing is primarily viewed at two levels –

• Outsourcing of Products
• Outsourcing of Process

As earlier outsourcing is no longer considered as a tactical option that helps a firm save on financial front. It has rather emerged as a strategic necessity when opportunities are offered at low-cost by countries, like China, India or Mexico, are abound.

Outsourcing allows faster turnaround of resources by allowing the companies to focus on their core competencies, which in turn helps in improving the overall health of the economy.

Third Party Logistics (3PLs)

We will now consider the basic concepts of 3PLs, and the benefits and risks of outsourcing logistics functions to these companies. Some of the most frequently used 3PLs services are –

• Warehouse Management
• Shipment Consolidation
• Logistics Information Systems
• Fleet Management/Operations
• Rate Negotiation
• Carrier Selection
• Order Fulfillment
• Import/Export
• Product Returns
• Order Processing
• Product Assembly/Installation
• Customer Spare Parts Inventory Replenishment
• Services Offered by Third-Party Providers

We can describe third party services on three different levels –

• Basic Service Providers : Third party service provides traditional physical distribution services like warehousing, order processing, order picking, and transportation.
• Value Added Service Providers: Third party service provides the basic services together with value added services like specialized pick and pack operations
• Logistics Integrators: Third type of third party provider assumes full responsibility for managing key supply chain operations on a daily basis under the client’s supervision.

Benefits of Outsourcing

Some of the benefits of outsourcing are –

• Helps to improve company focus by eliminating internal functions not considered as core competencies.
• Helps to access world-class capabilities and new technology since these third party logistics companies’ are a result of extensive investments in technology, methodologies and people.
• Helps in accelerating re-engineering benefits as a 3 PL has already been re-engineered to world-class standards to realise those anticipated benefits immediately.
• In this case 3PL can share the risks across the many companies that it serves to lower risk relative to a company performing the function itself.
• Helps to conserve capital and allows a company to redirect its resources from non-core activities toward core activities and greater return
• Helps in Cash infusion since sometimes, outsourcing involves the transfer of assets from the company to the 3PL.
• Outsourcing gives access to a lower cost structure, that results in greater economy of scale or some other advantage based on specialization.
• Outsourcing helps in arranging resources that are not available internally.
• Companies less often agree to the fact, that outsourcing can be viewed as a way to eliminate labour problems.

Note, perceived benefits do not always materialize.

Risks in Outsourcing

Outsourcing comes with risks. In fact its has been observed the benefits are often more transparent, with the risks often being hidden initially. Some of the associated risk are –

• Cost of Coordination: Coordination cost typically increases when any logistics function is outsourced
• Loss of internal logistics management capability: 3PL company’s management team must have knowledge and expertise generated on the day-to- day operations.
• Reduced contact with final customer: Company might lose direct contact with the end customer (physically).
• Biased choices of service providers: There can be some pressure by the parent company of the 3PL to give a portion of the business, even when it’s not competitive.
• Loss of voice in public policy issues: There is a threat of some legislation that will affect the warehousing and trucking also the company will not be able to represent those interests, since they are performed by the 3PL.
• Sensitive data and information: 3PL have access to a lot of information that might be valuable to competitors, leaving the company vulnerable.

What are the issues in Outsourcing?

The decision to hire a 3PL still appears to originate at the top of the organization chart. The third party logistics companies have had growth rates in previous years of over 100%, but as the industry is reaching the $25 billion a year level (in the US alone), that kind of growth is no longer easy to maintain. A large portion of this growth, is actually not from new clients, but existing relationships with clients that want to extend the scope of services. This trend towards an integrated logistics function is what will most likely generate future business.

Some of the 3PLs are in the business of trading information for inventory. True integration with all of the players in the supply chain — one that is transparent and merges into a true Supply Chain Management (SCM) system — a new class of software technology. SCM will let warehouse operations, suppliers and manufactures better integrate their operations.

Challenges in 3PLs

It is expected that the 3PLs should meet their clients’ logistics needs effectively, they must be able to offer, among other services –

• Real time inventory information
• Scanning capabilities
• Data accuracy
• Reliable service
• Customised management reports
• Competitive prices

Areas for outsourcing

The two major areas for outsourcing are Private Fleets and Warehousing.

Private Fleet Management

• Contract maintenance: Company simply contracts with an outside maintenance shop to handle its fleet maintenance.
  Full-service leasing: Company leases the equipment, maintenance, and reporting services.
• Dedicated contract carriage: In this case outside vendor provides drivers, equipment and management supervision of the fleet operation.
• Logistics and strategic partnerships: Company outsources its fleet operations as part of outsourcing most of its logistics functions. This combined sector is growing at 10-13% annually.

Warehousing

Warehousing is defined as the act of storing goods that will be sold or distributed later. While a small, home-based business might be warehousing products in a spare room, basement, or garage, larger businesses typically own or rent space in a building that is specifically designed for storage.