The pros and cons of outsourcing the supply chain
“Outsourcing is the appropriate term to describe the situation when a company entrusts part of its activity or processes to other external businesses.”
“Tertiarisation or subcontracting is the practice carried out by companies when they engage another firm to offer a service that ostensibly ought to be offered by the company itself.”
In these times there is a strong trend to outsource, tertiarise or subcontract certain non-strategic business activities in order to focus resources on key business activity and to reduce costs.
When is it the correct to outsource a part of our business?
There are activities inside a company that can be carried out by third parties, mainly operative or tactical processes such as transport for example, but what happens with supply chain management?
This is indeed a strategic process, and although it is a key piece in the value chain, it is becoming more and more common to take the decision to manage it externally.
Many retailers and international fashion brands count on logistics operators or partners to manage their supply chain whether it be partially or totally, in order to optimise the process and be able to focus on core business activity such as for example product design.
What types of logistics outsourcing exist?
There are actually several different types of logistics operators, from 1PL (that specialise in certain goods or shipping methods) to 5PL (that take charge of the whole supply chain globally). The most common mode is 3PL.
What are the advantages of outsourcing logistics?
The main reasons for outsourcing the supply chain are:
- Lower costs.
- Better control of KPIs that will have a bearing on increased productivity.
- Cost variablisation.
- Better control of the seasonal nature of the business in that peaks in demand can be managed and gains in agility.
- Technology and know-how; extremely sophisticated solutions exist however these are not within everybody’s reach, a specialised logistics operator possesses expertise and the best technology in the field.
- A focus on working capital, a preference to invest in more strategic areas. Organisational capacity: the time available for organisational activity can be dedicated to other areas to avoid getting distracted from the real business.
- Professionalisation of processes: There are companies where the operation remains undefined, and it is better to upgrade and outsource it.
- Time to market: the speed of implementation, long wait times carry more risks, and in the end deflate an enterprise’s expectations.
- Integration and control: the value of integrating all of the links in the supply chain, minimising risks.
When is it not a good idea to outsource?
- In enterprises where logistics is the core business.
- If we have very specific activities which only the enterprise knows or carries out.
- When your own staff are personally highly invested in the business.
- Great control of the operation and great capacity to make changes.
The key to correct outsourcing
In order to correctly outsource logistics processes it is important to take into account:
- CHALLENGES FACED BY THE LOGISTICS OPERATOR: He has to understand and be as one of your company’s sales team. Be able to demonstrate the ability and solve problems as they come up.
- In addition, he must know how to maintain a client, and this is also a challenge because the needs of the company can evolve.
- CHALLENGES FACED BY THE CLIENT: The first step is to have a clear idea of what you need and to keep updating this idea as you go forward, in that your needs will be affected by the passage of time. For this reason it is necessary to be open and honest.
- Shine a light on flow conditions, one most be able to work around the margins in order to avoid future problems.
- Be open-minded in order to know when an operator is providing value.
- Win-win relationships always. It is essential that shared incentives
- And finally a price that is sustainable over time must exist in order to be long-lasting.