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OUTSOURCING-WHERE IS THE VALUE PROPOSITION?

World Wide Shipping
www.scmnews.com

There has been much written about outsourcing over the years. The topic originally gained much notice in articles discussing how Japanese freight forwarders placed people in their customers' offices to do the export shipping. In reality, if you have an outside firm do things for your company, it could be considered outsourced.

Even before the stories about Japanese forwarders, firms outsourced logistics services. If you hire a trucking company to make deliveries instead of using your own fleet and own drivers; if you use an outside warehouse to store and ship orders; if you use a bank or other service to audit and pay bills, you could be considered as outsourcing these activities. However these were not defined as outsourcing. The advent of the 3PL gave it a different panache.

Given that experience, how well has outsourcing of logistics services to 3PL worked? How well has it delivered expected improvements and benefits? What has worked and what has not worked? There are no real empirical studies of the extensive scope needed. Many surveys are with the buyers only; there are no corollary reviews with the sellers, the providers of the outsourcing service to get a balanced overview of how well the outsourcing did or did not work and why. In addition, press releases are issued when a provider is selected to provide a service for a customer; no press release is issued when the relationship does not work, is terminated or not renewed.

Also with many outsourcing surveys, it depends on the size of the company being questioned, its position in its market and industry, its experience at outsourcing, role in the outsourcing and other issues. And the answer also depends on how high or low, you set the bar. Plus there are no absolute performance measures.

Outsourcing is really creating a relationship. And like all relationships, some work well; some hang on for reasons only known by the two parties and some fail badly. Each outsourcing action is unique. Since outsourcing should be a designed response by a service provider to a defined requirement by the buyer, outsourcing should not be a commodity service, like forwarding, trucking and other logistics services are viewed, where price is the key delineator to measure a firm.

In addition, there are different levels of outsourcing. Outsourcing is not a one-dimensional, homogeneous effort. That lack of progress reflects several issues, ranging from the limited outsourcing scope and requirements sought by buyers of supply chain outsourcing services, skill sets of outsource supply chain management service providers and those supply chain organizations that are not defined as "core" by their companies.

What is outsourced, why it is outsourced, what is expected and how it is achieved can be significant. These differences create the various levels of outsourcing and the need for a value proposition.

Levels of Outsourcing

In some regards, these are like a variation of Dante's Nine Circles of Hell. With each increase, buyers of outsourcing move up into more complex and more important areas. Much outsourcing however is done at the lower levels and the resulting lesser impact of importance to the buyer's firm.

WHAT, WHY, HOW OF ADVANCED OUTSOURCING
The level of supply chain outsourcing needs be escalated. To put the value proposition in perspective, a step back is needed to lay the foundation for the outsourcing effort. The focus on the value proposition moves into outsourcing into an advanced stage, beyond traditional discussions of RFPs, Service Level Agreements (SLAs), contracts, work plans, governance, etc.

Real supply chain management outsourcing is dramatic and creative. It is used to-

With the significant reasons shown above, contacting the "usual suspects" of service providers may not be the avenue needed. New solutions may demand new providers.

When firms going into arenas of outsourcing, the standard approaches will only drive the standard responses. Flexibility is demanded in developing the agreement and the evolving key performance indicators (KPIs) because the parameters, scope and measures will evolve as the outsourcing relationship grows and expands. Relationship is an important term and concept; contracts do not create relationships. Contracts are static and establish walls and barriers. Relationships are dynamic and have no such boundaries.

Companies can be afraid to move into these needed relationships to design and develop the changes they should have in their business model. Losing control is a concern and can be masked by Sarbanes-Oxley or similar issues.

Lowest cost is not the factor here; value is. Collaboration is the vehicle used. Clear objectives of where the outsourcing is to go and the expected result is important and go beyond standard SLAs in advanced outsourcing. Broad outcomes are established early. All parties stay focused on the objective. Rigid structure to the governance is not used; active governance is used.

Shared risks and leveraged gain-sharing of the new activity or enterprise can relieve such concerns because both parties have a vested interest in the results and in the success. In these relationships, leadership on both sides is important, as is trust, open communications, shared objectives, flexibility and mutual accountability.

WHAT IS A VALUE PROPOSTION?
The concept of a value proposition is not unique to outsourcing. It is something that all logistics service providers should have to distinguish them and to draw the attention of potential customers. This applies to 3PLs, logistics centers, trucking companies, freight forwarders, warehouses, and others.

Note, the topic is value proposition, not value-added. Value added is essentially giving something away for nothing, often some kind of technology application. Nor does it involve a creep effect where some buyers attempt to get something.

What is often missing in discussions of outsourcing is the value proposition that the provider is offering. The value proposition is what sets his service apart from others. "Reducing freight costs by 10%" is not a value proposition, or, at best, a weak one. Reducing a commodity service cost is not unique from the competition and puts the service provider back into the realm of being a commodity service provider, back into being what the provider is trying to escape from with the logistics company he is part of.

"Improving inventory turns by 30%" or "increasing market share by 2 points" are value propositions. The scope and complexity goes beyond a function and crosses the organization just like the process that supply chain management should be. Value propositions create the opportunity to move up the levels of outsourcing toward strategic.

CONCLUSION
Outsourcing of logistics often operates are a lower level of outsourcing. It has not been raised to higher levels toward strategic. The responsibility for this failure rests much with buyers who do not raise the bar of what they require and how they will achieve it. Sellers also have a role in this by not presenting true supply chain management as part of their ongoing skill sets and offerings.