OUTSOURCING OFFSHORE SUPPLY CHAIN MANAGEMENT -
WHAT IT IS AND WHAT IT ISN'T
World Wide Shipping
Outsourcing is having work or an activity done by people who are not employees of the company. It is not new in logistics. Outsourcing existed before the topic earned a name and became business chic. Trucking companies were used instead of a company having its own fleet. Public warehouses were used instead of employing bricks and mortar to build a company-owned building. Freight payment services paid bills and collected data.
What has evolved with outsourcing is the growth and amount of functions placed with outside firms and has created new businesses with 4PLs and 3PLs. Initially, the outsourced functions often represented non-core or non-vital activities or some other determinant where the company did not want to invest its own resources--capital, people, technology and facilities. Now outsourcing is seen as a strategic way to align the supply chain with the company direction and to become a leading-edge practitioner. It is also recognized as a tactical way to better manage service and costs.
Offshore sourcing has gotten particular attention as an outsourced activity. This business change has been a driver in supply chain management evolving into a global function and in the outsourcing of the import supply chain.
Global sourcing is now a competitive requirement of doing business. This perceived survival imperative has created an extended supply chain, as to distance and time, which has a menu of supplier and logistics demands. Directing the offshore supply chain, as to costs, performance, inventory, visibility, collaboration, integration and agility is an imperative for corporate success.
Effectively managing the offshore supply chain, as to suppliers, logistics service providers and their coordinated integration from vendor door to final delivery location, has caused companies to assess the utilization of outsourced logistics providers, either 3PL or 4PL. Some firms have seized this outsource opportunity to transform their total import supply chain; they see it as a way to compress cycle time and decrease inventory levels. Others have focused on arranging the transportation part as the outsourced need. Such differences raise discussion as to what is and is not outsourced offshore supply chain management.
We conducted a survey of outsourcing. This survey presents a snapshot of who is outsourcing, why and issues they look at. It is taken from the perspective of the outsourcing services user, the buyer. There were 195 respondents. They were with firms that have strong interest in outsourcing or are active in outsourcing. The survey was broad, both as to industry types and to mix of company sizes, and presents a solid overview of what is happening.
The objectives were to:
- Assess the state of logistics outsourcing from the perspective of the outsourcing buyer.
- Measure outsourcing development
- Determine what companies see as future outsourcing of supply chains
- Identify key customer needs
The following points standout from the survey finding:
- 42% outsource half or more of their supply chains. This is a significant percentage and shows the degree of outsourcing acceptance, development and penetration.
- Firms see a 10% increase in supply chain and logistics outsourcing over the next two years. This shows the continuing, positive trend for outsourcing.
- Only 2% cited technology as a reason for outsourcing. This finding runs counter to the perception of outsourcing to gain technology for supply chain integration, collaboration, visibility and other purposes.
- Firms who have not moved into logistics outsourcing cite a range of reasons from adequate in-house resources (16%), organizational resistance (8%), and loss of control (6%). There is likely a correlation with organization resistance and loss of control as a fear-factor in not outsourcing.
- While the function or activity is outsourced is broad, 59% outsource supplier management. This is a significant use of 3PLs and shows the maturation and application of outsourcing from transaction driven to process driven. It also shows recognition that supply chain importance and success begins with suppliers, who can be difficult to manage, especially those thousands of miles away.
- 56% import some or all of their finished products or materials. This also shows the expanding opportunities for outsourcing of offshore logistics. With the continuing use of global sourcing, managing offshore suppliers and supply chains should grow in importance and need for outsourcing opportunities.
- The criteria for selecting outsourcing firms follow general understanding. Interestingly, 53% cite Organizational Culture Fit as a reason. This shows the need for outsource service providers to become partners with their customers and to become an extension of them.
For our purposes, outsourcing the offshore supply chain -
- IS - about the total supply chain.
- IS - taking control of all parts of the supply chain.
- IS NOT - about landed costs. That metric stifles creative supply chain management. Accounting systems date back to Henry Ford and the Model A. They are not good financial tools in the globally competitive world to identify, understand and manage real costs that result from the extended time and distance with offshore outsourcing. Additional inventory, lost opportunity costs, revenue yield and other impact are not accounted for with "landed cost" as a measure with offshore supply chain management.
- IS - using process, technology and people.
- IS NOT - pushing flawed process onto an outside party to handle.
- IS - identifying what is required to be agile and responsive to customers, internal or external.
- IS - understanding the risks associated with not supplying products when needed.
- IS NOT - about only the transportation
- IS - knowing that this is a demand-driven activity.
- IS NOT - about giving up control to an outside company.
- IS - incorporating flexibility that will arise and is needed with product life cycle and the resultant supplier sourcing changes.
- IS - about supplier performance as perhaps the dominant issue.
- IS NOT - simply finding a single-source, one-stop shopping, supply chain service provider.
- IS - a strategic and a tactical tool.
- IS NOT - using one approach to fit all products and needs.
- IS - including alternative supply chain approaches for build-to-order versus build-to-stock, for different value items or for high volatility versus commodity-type products.
- IS NOT - outsourcing freight transactions.
- IS - business process outsourcing (BPO). Supply chain management is a process that runs across a corporation. BPO is a way to break down functional silos that hinder supply chain effectiveness, design and implementation. It also uses technology as a process enabler. The result is to have a lean supply chain by removing waste, time and inventory created by organizational posturing.
- IS NOT - one way or approach for outsourcing.
- IS - blending internal and outside capabilities (4PL or 3PL) into a leading edge, global supply chain model.