The use of outsourcing in supply chain management has been steadily increasing since the 1960s. Today, the number of logistics contractors and the range of services they provide has never been greater. In total, some 70% of transport is outsourced and nearly half of all warehousing.
These statistics might suggest that outsourcing in supply chain and distribution operations is now so well-developed that it can be relied upon to run like the proverbial ‘well-oiled machine’ with perfect processes always delivering clearly defined benefits.
.and, in order to realise these benefits, companies must be realistic about what they can and cannot not expect to achieve through outsourcing to a third party logistics provider.
Good reasons to outsource
- Lower Cost
A contractor will often be able to provide the same or better service levels at a reduced cost through synergies that are not available to the company. However, the customer should be confident that the savings are sustainable and justify the contractor’s management fee.
- Variable Costs
A particularly attractive feature of outsourcing can be the reduction in fixed costs in favour of activity-related charges. The contractor provides a similar or better level of service but the charges are related to activity rather than resources used. This can prove sustainable for both parties where the contractor is able to combine traffic flows in order to maximise resource utilisation. Companies should be wary of cost plus contracts or minimum throughput guarantees however, which can simply reintroduce fixed costs but in a different form.
Flexibility & Speed of Response
There is no doubt that a major logistics contractor has a level of resource and expertise that gives it the capacity… continued on page two to respond quickly and flexibly to operational changes. Companies faced with a period of significant change or restructuring may gain benefit from a contractor able to flex and deploy resources as required.
- Return on Investment
A past justification for outsourcing can be that the company is better using investment for its core business rather than investing in vehicles and supply chain assets. Today, with the extensive availability of leasing and rental there are arguably better ways to minimise investment than resorting to outsourcing.
- Management Expertise
For small companies, recruiting and retaining the required level of expertise can be particularly…
challenging. Outsourcing can be an effective means of ensuring ongoing specialist support. Companies need to be wary however, as they will still need a certain amount of expertise to manage the contractor. An alternative to using outsourcing to gain expertise is the selective use of consultancy or interim management which have the advantage of only incurring cost when they are actually required.
- Systems Support
Whilst the cost of supply chain IT systems has fallen considerably, the cost of installation and the expertise required can be a major obstacle, particularly for small and medium sized companies. An outsourced provider’s familiarity with a particular system can significantly reduce the time and risk in installing a system. However, companies do need to be careful to avoid the risk of ‘lock in’ whereby they become unable to move their contract to an alternative supplier because of their dependence upon the contractor’s system.
A bad reason to outsource
Unfortunately, the premise that ‘a problem shared is a problem solved’ does not extend to outsourcing. Outsourcing to address a logistics operation in disarray not only makes it difficult to conduct a tight tender process but is usually a recipe for ‘paying through the nose’ once the operation… continued on page three settles down. It is far better to use external support to sort out the problems and then tender the operation in a controlled manner when a detailed cost and benefit comparison is possible.
Getting it right
Today’s complex supply chains and high customer expectations have changed the average outsourcing relationship from a simple buyer-supplier relationship into a more….strategic ‘partnership’ deal.
Whilst the justification for outsourcing may well be sound, if these deals are to work properly they require extreme care and due diligence in the planning, selection and transition stages. As a result, companies are increasingly enlisting the help of specialist consultants with the time and expertise to help them successfully negotiate this process.
But, whilst both the outsourcing decision and process require careful consideration and management, getting it right can still pay rich dividends.
Source:http://www.freshbusinessthinking.com/business_advice.php?AID=6136&Title=Getting+Outsourcing+Right
