Better out than in

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Today’s economic climate makes it virtually impossible not to outsource as companies strive to do more with less and yet still compete. A
number of forward-thinking companies have had considerable success outsourcing supply chain operations such as manufacturing, logistics and distribution. Strategic outsourcing can improve performance and result in cost savings. It is paying off in areas we could never have dreamed of a decade ago.

For some companies however, the plunge into outsourcing has adversely affected their bottom lines and reputations. Why is this? It is because they lack a core competency in the process of outsourcing. Simply put, the biggest winners in the outsourcing game will be the companies that are best at the very process of outsourcing. For outsourcing to be truly successful companies must either become adept at outsourcing or be willing to outsource the outsourcing process to experts. Organisations should recognise this challenge and develop a core competency in outsourcing.

We recognise our core competencies as the unique business functions that make our organisations successful; the critical activities that allow them to thrive. For example, a research organisation may also do some manufacturing and distribution but its core function is research. But we also know that companies cannot exist by performing only core functions. Other functions are necessary too — payroll, audit, janitorial and food service are tactical, non-core functions that are necessary — but the point is that they should not, by definition, have an impact on the bottom line.

Confused terms
It’s important to note here that outsourcing should not be equated with offshoring. Because so many companies have outsourced manufacturing to overseas locations, executives and pundits tend to confuse the terms. Yes, many outsource providers are located overseas — in Asia or India, for example. But the two things are not the same. Offshoring is an outsourcing option, just as contracting to a domestic service provider is an outsourcing option. Companies must look at the total supply chain costs and make their service provider decisions based on what will best achieve long-term goals.

Outsourcing can be a double-edged sword as it presents both challenges and opportunities. Some companies are wary of outsourcing manufacturing, logistics or other functions for a number of reasons. Some think if they outsource they will lose control of the product’s manufacture and delivery. Some feel that since they are not actually making the product and/or shipping it, once they outsource quality will be lost or the customer will not receive it at the right time. They may also believe the outsourcer won’t understand their customer and supplier base.

Then there’s the matter of a company’s sacred knowledge base. After all, if the company is an established organisation, it might at one time have recruited some heavy hitters in the fields of logistics, manufacturing, and operations. If those functions are outsourced, it must rely on another company’s stars, and what if they aren’t big or don’t know as much?

Feeling vulnerable
It might even feel that it is vulnerable to being held captive by its service provider because once the outsourcing is in place, many of the stars are no longer employed and expertise and leadership in these areas is gone.

One of the biggest fears, however, is that operations outsourcing venture might fail and prompt a customer service/public relations nightmare. There are prominent public stories of outsourcing failure — about how many out sourcing contracts don’t last a year, or how some companies that had decided to outsource have had to bring work back inhouse. Anyone who reads these stories understandably has fears. They might ask: ‘How much is lost when outsourcing fails, and do you ever get back, in terms of costs and knowledge, what you have lost?’

Legitimate questions
These questions are legitimate. Outsourcing is a risky business and if it isn’t done correctly it can hurt a company. The good news is that this doesn’t have to happen. If you follow a robust process with outsourcing it can have tremendous payback in cost reductions, improved customer satisfaction and accuracy, improved quality, and greater access to global networks and superior technology.

The future is diffcult to predict for a variety of reasons. For one thing, predictions cannot be based on the past even though the past is all most company leaders know. For another, while change is expected the kind of change companies experience is, for the most part, unexpected. Who knew, even 10 years ago, that people would be able to connect to companies all around the world through their computers, and not only communicate with them but conduct business with them as well? In 1996, the internet was a new place for businesses to advertise. Now an infinite number of programs and hardware at different locations can be controlled by one application accessed via the web. Who could have predicted that?

That’s not to say nobody should try to predict the future. It just means that when a company starts making plans it must take into account the unforeseen. With that in mind, I venture to make a few predictions about the future of outsourcing.

The percentage of budgets spent on outsourcing and contracting will continue to rise for many years to come.

Outsourcing providers will be the leaders in IT and technology innovation as companies reduce their investments in technology and extend their capabilities through outsourcing arrangements. Moreover, outsourcers will bring a new dimension to the marketplace in terms of speed to market and rapid deliveries to support the conduct of business over the web.

There will be a growing sensitivity to product life cycle as outsourcing is used earlier in the cycle to minimise upfront capital investment and later in the cycle when the investment is no longer justified.

The reach of outsourcing will extend beyond manufacturing or logistics to encompass the entire supply chain, and industry-specific solutions providers will continue to grow. Service providers will become the leading supply chain strategists.

Global talent pool
Companies will use outsourcers to gain access to the global talent pool. With that will come greater contact between service providers and companies’ customers. These developments will contribute to the maturing of the outsourcing movement and increase the emphasis on building relationships.

So, the future of logistics and manufacturing outsourcing overall is bright. However, to bask in this glow companies must move forward with careful planning and complete understanding of their business processes and core competencies.

When applied properly, outsourcing can help companies meet today’s business challenges with measurable success.

James Tompkins is president and founder of supply chain consultants Tompkins Associates. Jim is the author or contributor to more than 24 books including his most recent in 2004 The Supply Chain Handbook. He is also co-author of Facilities Planning, the world’s standard science text for the planning and designing of industrial facilities. This article is based on ‘Logistics and Manufacturing Outsourcing: Harness Your Core Competencies’, a book written by Jim Tompkins and his colleagues.


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