Creative outsourcing

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All businesses today have to focus on core processes. For most of them the list is not only short but fairly standard: product development, activities around selling and route to market, and supply chain. Relinquishing control of core processes is not a decision that is taken lightly.

At the same time it is becoming increasingly difficult for companies to maintain expertise in all these areas. There is a global ‘war for talent’ underway with the best people understandably preferring employers that can offer the greatest opportunities in their chosen field. The world is increasingly complex, too, with product sourcing across continents and an ever burgeoning raft of regulations to cope with.

To remain an expert in all core processes becomes increasingly difficult. Few organisations would contemplate giving up product development – that generally is their key differentiator. It is the same with sales and marketing – brand image and compliance are increasingly important.

That leaves the supply chain. For a growing number of businesses, it is an area seen as ideal for outsourcing – not just of basic logistics and warehousing functions but of product sourcing and manufacturing as well. Today’s supply chain directors are no longer just responsible for trucks and sheds but for procurement, manufacturing and logistics.

If you look at what constitutes a ‘core process’ then these supply chain activities are on the margins. Global datapools and trading exchanges – as well as the internet – has vastly simplified procurement activities making it far easier to seek out components or raw materials from the optimal supplier. Cost factors have already driven much manufacturing offshore, subcontracted to low-cost producers in China, India, Eastern Europe or wherever. As for logistics – well that seems to have been on the outsourcing list some considerable time.

It all adds up to a ‘core process’ that is perhaps not quite as core as was once thought.

Total outsourcing of this entire supply or value chain is not something which most companies are prepared to adopt overnight: it’s generally a development with three clear phases. Initially there is straightforward substitution – simply handing over basic activities to a third party logistics supplier who does whatever you were previously doing. This frees up both management resources and investment funds within the organisation to focus on areas which can deliver benefit and differentiation.

Over time more activities are outsourced as companies see the benefits 3PLs can deliver through their scale of operation: shared facilities in emerging markets, for example, can enable phased business growth and reduced capital investment. Finally there is the strategic decision to outsource the entire value chain.

Strategic phase
It’s a pattern we have seen repeated many times and it has typically taken companies up to 10 years to move from the substitution to the strategic phase. It has much to do with trust and building a long-term relationship with your chosen supplier. In the past few years there has been a rapid acceleration in such transitions: the importance of new and rapidly developing markets – as with Russia and Eastern Europe – and the complexities of sourcing products in low cost Asian markets has encouraged this trend for strategic outsourcing.

At the same time the 3PLs themselves have increased in the scale and variety of their operations. Co-manufacturing and co-packing activities are now commonplace and we have seen an escalation in such activities as floor-ready merchandise in the fashion sector – deconsolidating stocks, sorting size packs, hanging or unpacking product ready for sale – or retail ready packaging in grocery with products pre-sorted and packaged for delivery direct to the shelf by the service provider rather than store staff.

It can now take just three or four years to move from substitution to strategic and this is putting more pressure on supply chain directors and senior managers to choose the ideal outsourcing option for their business.

Some industrial sectors are more advanced in their adoption of the strategic approach than others. It started in information technology with Dell – now a classic example of using extensive outsourcing to manage costs, production and customer services. Consumer products are now racing up the curve, as is the automotive industry.

War for talent
That ‘war for talent’ is also becoming more important. A fashion retailer, for example, needs talented people to develop ranges and assortments that will appeal to customers. These are the activities that initially differentiate the business from its competitors. Buying, merchandising and selling is where the retailer wants to first invest in people and may not have the additional capacity to recruit, retain and develop supply chain executives with a more left brain, analytical and operations emphasis. With only so much capacity and resource available to any mangement team, decisions may need to be made to ensure the best is avalable across the business and that means accepting that in some areas third party supply chain specialists may add more value.

It can be a particularly painful decision for manufacturers. Companies which began life as producers can be reluctant to give up their traditional facilities and functions entirely: they always want to keep some production in-house. Manufacturing, is however, an extremely competitive activity these days with low cost countries delivering high quality products at a fraction of the price.

Managing such offshore operations in Asia or Africa is a complex business requiring skills which few traditional companies have previously needed to develop in house. It also requires good understanding of the various trade-off options: is it better to manufacture in remote areas and hold higher stocks at home to cope with demand? Is partial assembly and onshore finishing to personalise the product the answer? Or a single European stock facility or airfreight or… the list of options is long and complex.

First hand knowledge
Finding a business partner to manage and advise on this multitude of options and operations is vital. We came across one company recently that had been advised by a consultant to set up a centralised distribution operation in Egypt. Geographically it was the perfect solution, ideally placed to minimise distribution costs and service the key markets for this particular business. However, the consultant failed to consider the practicalities of moving goods across Egyptian borders as he lacked first hand knowledge of just how frustrating this can be. The company needed to accept a trade-off balancing increased trucking costs against reduced customs delays and its customers receiving goods on time.

Having identified potential service providers with the right range of skills and operations you also need to make sure that they really understand your business. Talk, at length, both to them and their customers. Find reference businesses comparable to yours on their customer list and visit them – get on that plane to Brazil or Hong Kong or wherever and make sure that the service provider is really delivering what the customer needs and wants.

You also need to think about what happens if the relationship does break down and you need to bring operations back in house. It is important to have an exit strategy. What happens to the management team and joint investments? Is outsourcing really just a temporary option until you grow a market sufficiently to support in-house operations?

A couple of years ago conversations about outsourcing usually focused on cost. Not any more. Today companies planning to adopt a strategic approach are more concerned that their chosen provider can deliver the flexibility and agility needed to maintain a lean supply chain and adapt to the rapidly changing consumer demands and business conditions facing us all. You need to know that your supplier can ramp up operations quickly to cope with unexpected peaks and has the expertise to support you in new markets or global sourcing initiatives.

Even more importantly you need an outsource operation than can deliver innovation – and increasingly that innovation involves expertise in information technology. We have fashion retail customers, for example, for whom we prepare floor-ready deliveries taking stock not just to the back door but putting it on the fixtures, so freeing store staff for more profitable customer facing activities. Once the delivery is made, alerts are sent using SMS messaging and mobile phones to confirm goods are in place.

Technology expertise also crosses industry boundaries delivering innovation to new product sectors: we’ve learned a great deal about RFID from the grocery sector. We now have healthcare and pharmaceutical customers starting to use RFID to monitor the temperature of goods throughout the global supply chain to ensure there is no degradation in heat sensitive products.

Choosing the right business partner can bring expertise and innovation to deliver original solutions that can impact many areas of your business – helping with expansion or strategic planning, improving customer-facing activities, transforming sourcing solutions and much more.

Nick Cullen is chief business development officer for DHL Exel Supply Chain, EMEA

Key points

  • 3PLs have increased the scale and variety of their operations. Co-manufacturing and co-packing are now commonplace and we have seen an escalation in such activities as floor-ready merchandise
  • Having identified potential service providers with the right range of skills you need to make sure that they really understand your business. Talk, at length, both to them and their customers.

Further reading

  • With transport costs rising and green issues increasingly on the agenda, the FMCG sector needs to adopt a more collaborative approach.
  • Ensuring that an organisation”s supply chain supports the delivery of its business strategies, whilst raising shareholder value, is a great  challenge.
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