Supply Chain Outsourcing (E)
What is the Supply Chain Outsourcing? What is the organizational efficiency element of Supply Chain?
Posted: Jan 2009
In contemporary business world there is a fierce struggle among competitors. The competition is strong in almost every industry branch. Even if there is a new industry established, soon it becomes filled of competitors with different approach strategies.
In such environment, with many sharks in a small pool, it takes a lot of smart, effective and efficient strategies and actions for the company just to stay in the game. It is even much harder to be a leader in the industry. In order to achieve such organizational and cost efficiency, any company need to have subtle approach that will give the way to sustainable competitive advantage. One of the methods of organizational and cost efficiency is the supply chain outsourcing.
The supply chain outsourcing is the method of dislocation of supply chain activities to the third parties, with the purpose of organizational simplification and expenditure flexibility. The supply chain outsourcing is a business opportunity that can cover several different segments of supply chain or several of them combined.
Production outsourcing is the type of supply chain outsourcing where the part or whole production process is given to the third party producer. The production outsourcing can be partial in case when company wants to reduce complexity in its own plant. Another reason for production outsourcing is the testing production, where the production is outsourced for a specific period, until is possible to start with in house production. Finally, there are situations where the company totally outsourcers production in case that the priority is development, marketing and sales, or simply in situation when the sales volume does not satisfy the minimum financial justifiability for local production.
The advantage of supply chain outsourcing of production is simplification of processes, cost efficiency and focusing on other business functional activities. The disadvantage of production outsourcing is lower level of control, possible quality issues, waiting for production window and loosing of cost efficiency element in case of large volume. If the volume grows, than it make sense to move production in house.
Warehouse outsourcing is another method of supply chain outsourcing where the part or the whole warehousing is outsourced. For example, the company may keep its own central warehouse, while outsourcers peripheral warehouses. In this case it is wise to have own central warehouse, due to proximity of local production, handling of raw material and having overall high warehouse throughput. On the other hand, peripheral warehouses have lower volume and utilization; therefore it is reasonable to outsource them.
Advantage of warehouse outsourcing is the simplification of stock handling and cost reduction. The warehouse outsourcing is especially cost efficient if the payment of outsourcing service is calculated based on number of units handled in a given period, since the cost is proportional to the business volume. Disadvantage of warehouse outsourcing is lower level of control, possible problems with inventory control and possible problems with proper stock handling ( FEFO, breakage ).
Delivery outsourcing is the third important method of supply chain outsourcing. The delivery outsourcing gives opportunity to the company to relieve organizational pressure of delivery, while keeping focus on sales. The company pre-sale products through its own sales force, while 3rd party logistic delivery agent conduct the distribution.
This method is cost efficient, in case that payment is done on volume delivered basis. It is necessary to be careful during the contract negotiation. If there is minimum agreed quantity clause placed in the contract, then it should be respected, in order to avoid penalties or contract termination. Another significant drawback of delivery outsourcing is potentially lower service level ( delay ) and problems with relationship with customers.
Supporting Services Outsourcing
Beside these three main types of supply chain outsourcing, there are possibilities for outsourcing of many other supporting services. That can be seasonal workers in own production or warehouse process. Also, any other supporting services, e.g. Maintenance can be hired.
Where the strength and cost efficiency comes from in case of supply chain outsourcing? Basically, the logistic outsourcing partner is usually external partner specialized in one segment, like delivery or warehousing. Narrow, niche approach of logistic partner enables those service owners to specialize and achieve potentially higher capability in that segment, than the hiring company itself. Also, outsourced logistic partner is usually more cost efficient due to specialization and the economy of scale, in case that is engaged on more than one outsourcing contract.
On the other side, there are negative sides of supply chain outsourcing. The hired agencies sometimes are not showing the same level of respect to the whole process, since they covers only one part. Another danger is potential leaking of business data and knowledge that can be used as backfire to the company that hired supply chain outsourcing.
As a bottom line, the conclusion is that the supply chain outsourcing is a business opportunity for development in any industry. Specialization in one segment gives factors of high efficiency and lower costs that produces as result the sustainable competitive advantage.