OUTSOURCING SUPPLY CHAIN MANAGEMENT-8 ISSUES
World Wide Shipping April
By THOMAS CRAIG
President LTD Management
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
*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
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.
*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.
*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.
*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
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.
*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.
*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.
*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.
*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.
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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.