Outsourcing non-core competencies has been a business strategy since the beginning of time. In the supply chain world, we assume that as soon as someone invented the wheel, there was an enterprising cave-entrepreneur ready to move freight for a fee. Similarly, there are a number of reasons why an organization may decide to outsource its supply chain services, but how much thinking have organizations done as to when to pull the trigger?
Reasons to Outsource Supply Chain Services
To set the table for this decision, let’s back up and identify some of the most commonly cited reasons for why companies decide to outsource supply chain services:
- Access to Capacity – Using a third-party logistics provider opens the door to both dedicated and ad-hoc capacity for all sorts of activities, with warehouse space, handling & value-added services, and transportation chief among them.
- Variable Cost Structure – It’s commonly known that no business wants to build real estate if it can’t use that space to ring the cash register. No business wants to invest large amounts of capital into a fixed-footprint warehouse just to hold raw materials or finished goods that haven’t been sold yet. Even when leasing a warehouse, that space (capacity) requires long-term commitments and is difficult to shed when times get tough.
- Offload Non-Core Business Processes – This concept applies well beyond the logistics world, but it’s well documented that companies are often better off by focusing on their own people, process, or technology that differentiates them than the external complexities of business administration. In the operations world, we often call that “outsourcing the headaches.”
There are plenty more, but we’ll stop there for demonstration purposes. We like to say that if we have worked on implementations with 100 different customers, we have seen 101 different reasons to outsource. So with those benefits as the goal, we are left to ask a much more urgent question: When should I do this?
When to Outsource Supply Chain Services
We know we should eat better, and you probably know that you should exercise more. Plenty of people know that they should quit smoking, and executives around the country know that they should offload some portion of their supply chain services in order to better serve their customers and shareholders. So why do so many businesses hold on to those processes for so long, and sometimes for too long? Sales professionals often refer to the concept of B.A.N.T. criteria (Budget, Authority, Need, and Timing). A buyer needs at least three of the four to make a purchasing decision, and executives similarly need some combination of these criteria to make an outsourcing decision.
Let’s focus on the timing piece of that puzzle. Just like in our personal lives, there never seems to be a “good time” to have a baby or start a new business, there never seems to be a “good time” to introduce a strategic change to the way an organization operates. However, we all need to take that leap of faith at some point.
Do you or your business identify with any of these “problems”…continuous growth, business model changes, geographical changes, your startup business isn’t a startup anymore, you lost a key person, or you are launching a new product? If yes, keep reading!
GROWING, AND GROWING, AND GROWING
When your growth continues to exceed everyone’s expectations – Let’s say you manage a consumer products company with more than 10 years of accelerating growth. That 20-40% annual growth curve has required that you grow the organization faster than you can update the HR system. Thankfully you have added enough capacity to grow production tenfold, but the warehouse that holds the raw materials hasn’t grown, and you’re out of land on which to expand your footprint.
Solution: Procure dedicated warehouse space at an off-site warehouse from a provider with the ability to shuttle product back to your distribution center (DC) to be mixed with other SKUs to meet customer demand. Limit space commitments to a year or so, since even if your CEO and bankers green-light a massive distribution center to be built, it’ll be a year or so before it comes online.
WHEN YOUR BUSINESS MODEL GOES FROM MAKE/SELL TO BUY/SELL
Now let’s assume you make children’s toys under a classic brand name. Your outdoor toys are as American as picket fences and golden retrievers, but domestic production costs have soared and executive leadership has decided to outsource production to a lower-cost offshore country. Many organizations, especially if they are in the hands of private equity or other investment partnerships, think about offshoring the production, but often overlook the domestic distribution infrastructure that had been built. However, once production moves, does it really make sense to hold on to that DC in Middle America?
Solution: Outsource all distribution activities altogether – rent an office in a corporate park, and become really good at sales, marketing, and management of vendors. Let the logistics professionals work together between transportation and warehousing to drive out costs. It’s a win-win.
WHEN YOUR GEOGRAPHIC REACH CHANGES
Many companies, especially those in the food and consumer products markets, start small. Very small. Grandma’s pickle recipe or a granola from “the old country” are perfectly good bases for a new business endeavor, but companies like this are often born in home kitchens, local shared-space incubators, and the like. What often separates businesses from local farmers market favorite to legitimate national distribution is the ability to produce at scale. Often, food and consumer packaged goods (CPG) companies will employ a contract manufacturer (also called Co-Man) to do this work, and just as often, that Co-Man is not exactly in your backyard. Let’s say a snack foods company in Texas hires a Co-Man in Michigan to scale up its proprietary recipe of corn chips. That’s great for business and revenue growth, but not so good on your transportation budget if you’re trying to bring product back to your small warehouse in Texas.
Solution: Find a local 3pl to work with your Co-Man and receive fresh product off the line, and use that inventory as your forward position for filling customer orders. Even better if that 3pl offers transportation services from the plant to its warehouse nearby.
WHEN YOUR STARTUP ISN’T A STARTUP ANYMORE
There are plenty of manufacturing startups here in Michigan. Often, they have been in business for three years or fewer, and have procured buildings that are big enough that they never thought they’d run out of room for their little operation. Raw materials, Work In Progress (WIP) inventory, and finished units all fit just fine in the building, with enough space for an employee break room and a few offices. Now assume that the manufacturer has found a need to increase output by 80% in 2018 alone. To meet that capacity, orders of inbound parts from Asia nearly triple, and all of a sudden, “the cage” where materials had been stored is being torn down to create production floor capacity.
Solution: Find a 3pl with space in the area to hold all raw materials and production consumables. Use available shuttling services to bring materials to the line on a Just In Time (JIT) basis according to your production plan. To take full advantage of a manufacturing support solution like this, consider allowing the 3pl full access to your ERP system so that all parties are operating on the same platform.
WHEN YOU LOSE A KEY PERSON
Picture this scene…the VP of Supply Chain is sitting in her office enjoying her morning coffee, and the Sales Manager, Controller, and Plant Manager all arrive at her door at the same time. In a minute, she’s inundated with questions like “Why didn’t the last Target order get the proper labels? You know we have to pay a fine every time that happens? How did our cost for stretch film triple last quarter? Who is managing the vendors? I don’t have anywhere to put the finished goods rolling off the line today, what’s going on down in the warehouse?” To all of these questions, VPs of Supply Chain are too often forced to answer with something like, “Charlie from the shipping department quit last week.” More than anyone would like to admit, individual departments rely heavily on the tribal knowledge carried by a select few individuals. If your company is in a position where the departure of one person or a small number of persons would bring a piece of your supply chain to its knees, then you’d be well suited to have a frank discussion: Get better at it or get out of doing it.
Solution: Engage with a supply chain consulting practice to evaluate your business processes, documentation, and training program(s) and help you arrive at an insource/outsource decision. From there, either continue the engagement for 3pl selection and project management or do it yourself if you have the resources and talent to do it well.
WHEN YOU LAUNCH A NEW PRODUCT OR LINE
Let’s say your company makes a ready to eat breakfast cereal. Now, what if you coated your cereal with peanut butter? Or blended one of your cereals with another to make a variety pack? New product launches like this happen all the time, and their success rate is spotty at best. Every company would love to have a hit with every new introduction, but new products often go the way of Crystal Pepsi and other ill-fated ideas. Should you add on to your primary distribution center just for this new launch? Maybe. But I wouldn’t want to be the one who signed off on a real estate investment to support the introduction of Betamax tapes or Crystal Pepsi.
Solution: Engage with a 3pl to support launches into new products with warehouse space, transportation capacity, and process discipline, but only for a limited time. Even larger-scale rollouts can be supported with relatively short (1-3 year) 3pl engagements, and if the product fails, then the obligation goes away and nobody is worse for wear. If the product is a hit, then you have some time to figure out how to roll it into your existing distribution network in a planful way.
Let’s face it, outsourcing is tough, and there’s never a good time to do it. If it were easy, and if every company were eager to realize the benefits outlined earlier, then we wouldn’t be having this conversation. But if companies can spend a little less time looking at “why or why not,” and more time looking at “when and how” significant gains can be made. Business schools use case studies all the time to demonstrate concepts and to draw parallels for students. If a company’s leadership can use some of the above examples as case studies, they may realize their barriers to outsourcing aren’t nearly as unique as they think they are.