Outsourcing 6a5g1h

Outsourcing as a Strategy

Business world has realized that in order to achieve 100% Customer Satisfaction they need to:           

Handle more customers and volume Give customers’ Choice and control Be more accessible Be innovative and incorporate new technologies Ensure commitment Deliver great service Generate revenues Lower costs Do things faster than competitors Personalize and provide more information and Address complex customer requests

Outsourcing  It can be defined as a contractual relationship where an external organization takes responsibility for performing all or part of a companies functions  Traditionally outsourcing has been used as a tool for cost reduction  Now a days firms have adopted the conceot of strategic outsourcing or smart outsourcing, where the focus of the firm is to satisfy customer needs better than the competitors and hence gain competitive advantage

Outsourcing “Outsourcing is the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers as set forth in a contract.” Strategic use of outside parties to perform activities, traditionally handled by internal staff and resources. Contracting out non-core and non-profit activities to specialized service providers. – Unlike traditional practice of contracting, outsourcing is a strategic management tool that involves organization restructuring unlike in contracting. It allows the organization to concentrate on its core competencies

Outsourcing Outsourcing non-core business processes to outside service providers like – Logistics – Warehousing – IT Software/Hardware (like ERP, EDI, etc.) – Human Resources – Payroll processing – Manufacturing

Why Outsourcing Focus on core competencies Organizations can adopt “best-in –class” practices. More competitive Reduced cost and advanced technologies

Benefits of Outsourcing  Improve company focus: More organizations are eliminating internal functions that are not considered core competencies.  Access to world‑class capabilities and new technology: Often these third party logistics companies capabilities are the results of extensive investments in technology, methodologies and people, over a considerable period of time. Sometimes, these capabilities include specialized industry expertise gained through working with many clients facing similar challenges. Therefore, this expertise is translated into skills, processes, or technologies uniquely capable of meeting these needs.  Accelerate reengineering benefits: Outsourcing to a 3PL already reengineered to world‑class standards allows the company to realize those anticipated benefits immediately.

Benefits of Outsourcing  Share (pool) risks: There are tremendous risks associated with the capital investments an organization makes. A 3PL can share these risks across the many companies that it serves. This allows a 3PL to lower risk relative to a company performing the function itself.  Free-up resources: Outsourcing offers a way to conserve capital and allows a company to redirect its resources from non-core activities toward activities which have the greater return in serving the customer.  Cash infusion: Sometimes, outsourcing involves the transfer of assets from the company to the 3PL. These assets have a value, and in fact are sometimes sold to the 3PL.

Benefits of Outsourcing 

Reduce and control operating costs: Outsourcing to a 3PL most likely will give access to a lower cost structure, which may be the result of a greater economy of scale or some other advantage based on specialization. When calculating the cost benefits it is very important to consider total costs since coordination costs often increase when all or part of a function is outsourced.

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Resources not available internally: Companies might simply not have access to the required resources within the company.

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Eliminate labor problems: While companies are rarely willing to concede this fact, many view outsourcing as a way to eliminate labor problems. This is a two edged sword and one has to be extremely careful here. Perceived benefits do not always materialize.

Challenges for Outsourcing Loss of Expertise – Can lead to decrease or total loss of inhouse expertise Loss of Control – Increases organization’s vulnerability as it becomes partially or totally dependent on a service provider Conflict Need to modify policies/procedures or develop new policies/procedures to coordinate with vendor Uncertainty Cost (perspective) Staff Morale

Risks of Outsourcing 

Coordination costs: When any logistics function is outsourced coordination costs typically increase. It is important for the company to for these and decide how they are to be managed with the 3PL.

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Loss of internal logistics management capability: The knowledge and expertise generated on the day to day operation will reside in the 3PL company's management team. This becomes crucial as a company grows and makes reorganizing decisions. A close relationship with the 3PL can help in this regard.

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Reduced with final customer: Outsourcing the distribution function might force the company to lose direct with the end customer (at least physically). This has a critical impact on customer service. It is hard for a company to define customer service for a 3PL if it does not itself have direct customer . This can also have an impact on the introduction of new products and services.

Risks of Outsourcing  Biased choices of service providers: If a 3PL is owned by a large trucking company and it's managing the distribution function, there might be some pressure by the parent company of the 3PL to give a portion of the business, even when it's not competitive.  Loss of voice in public policy issues: For example, if the distribution and warehouse functions are outsourced, and there is a threat of some legislation that will affect the warehousing and trucking industries, the company will not be able to represent those interests, since they are performed by the 3PL.  Leakage of sensitive data and information : 3PL companies normally have access to a lot of information that might be valuable to competitors, leaving the company vulnerable.

Outsourcing in Logistics Logistics Process of strategically managing the procurement, movement and storage of materials and finished goods through the organization and its marketing channels in most cost efficient, effective and profitable manner for the organization and the customer

Outsourcing logistics Outsourcing logistics function to free resources (time and finance) to focus on mission-critical and core activities

Logistics Outsource Providers – 3PL & 4PL

Third Party Logistics Providers – 3PL Third Party Logistics Providers - 3PL “… is the function by which the owner of goods outsources various elements of the supply chain to one 3PL company that can perform the management function of the clients inbound freight, customs, warehousing, order fulfillment, distribution, and outbound freight to the clients customers.”

Services Offered by Third-Party Providers Third party services can be described on three different levels:  Basic Service Providers: In this case the third party provides traditional physical distribution services such as warehousing, order processing, order picking, and transportation.  Value Added Service Providers: In this case the third party provides the basic services listed above along with value added services such as specialized pick/pack operations, cross docking, case marking and labeling, order consolidation, EDI, management reporting, and ASNs.  Logistics Integrators: In this case the third party provider assumes full responsibility for managing key supply chain operations on a daily basis. All work however is under the clients supervision. The third party provides basic and value added services along with ensuring the seamless flow of products and logistics information among themselves, their clients, and the customers.

List of the most frequently used 3PL's services  Warehouse Management  Shipment Consolidation  Logistics Information Systems  Fleet Management/Operations  Rate Negotiation  Carrier Selection  Order Fulfillment  Import/Export  Product Returns  Order Processing  Product Assembly/Installation Customer Spare Parts Inventory Replenishment

Third Party Logistics Providers – Services Transportation Management – 3PL’s fleet (or alliance partners) offer optimized network to serve their customers. – Shipment Management System (SMS) allows 3PL’s to plan load management, routing, and equipment and driver management, network freight analysis. – SMS can be effectively integrated with Warehouse Management Software (WMS), to provide integrated logistics solutions concepts like multi-stop workload or less than truckload are often used to serve their customers better. – Multi-vendor consolidation reduces overall costs. Full truckload economies can be used to combine freight from different vendor to common destinations.

Private Fleet Management Private fleets are under great pressure these days to justify their existence. However a company needs to be very careful when evaluating whether to outsource some or all of its private fleet operations. A key question is how to evaluate the best mix of asset use and ownership of the trucking operation. The options available to a company are as follows: 

Contract maintenance: In this case a company simply contracts with an outside maintenance shop to handle its fleet maintenance.

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Full-service leasing: In this case a company leases the equipment, maintenance, and reporting services.

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Dedicated contract carriage: Here the outside vendor provides drivers, equipment and management supervision of the fleet operation. This segment grew at a double digit rate during the 1980s but has slowed to between 6-9% annual growth rate.

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Logistics and strategic partnerships: In this case a company outsources its fleet operations as part of outsourcing most of its logistics functions. This combined sector is growing at 10-13% annually.

Third Party Logistics Providers – Services Warehouse management – 3PL’s run and manage warehouses using Warehouse Management Systems, radio frequency scanning, and bar code labeling – 3PL’s manage and track the movement of goods from initial receipt to outbound shipment. Real time, periodic and accurate information can be provided to manage inventory and demand better. – Additional services like advanced shipment notifications can be generated to inform the retail partners in the supply chain.

In warehousing, the options available to a company are:  Own warehouses operated by self  Own warehouses operated by third party  Contract warehousing  Public warehousing

Third Party Logistics Providers – Services Packaging – 3PL’s often have ability to do final product packaging in their warehouse, thus eliminating the need to ship product to off site packaging companies. This in turn means reduced product handling, reduced cycle time and reduced costs. – 3PL’s can offer variety of packaging services like custom pallets, display shippers, inserts and coupons, labeling and printing, repackaging / conversion and also wrapping and bundling.

3PL - Extended Capabilities Information Technology to enhance traditional logistics capabilities – Reduce intermediate stocking, cross docking or merge in transit – Enhance tracking and tracing capabilities enabling their clients to achieve better coordination and management of inventories and goods in transit.

3PL - Extended Capabilities Customized solutions to match customer’s requirements – Some 3PLs have co-located their activities to the shipper’s site, thus taking over activities traditionally performed by the shipper. – Some 3PLs act as “local agents” with complete material management, order processing, order fulfillment capabilities. – Some 3PLs are involved with the financial process: invoicing, credit checks and collection.

3PL - Extended Capabilities Integrate and coordinate activities performed by many entities in of local and global solutions – Integrate order management, payment processing, warehousing into the supply chain – Provide resources to e-business enterprise to manage the supply chain. – Many are equipped with EAI (middleware) to interface legacy systems with e-marketplace applications. – Provides customer a single point of integration into emarketplace.

3PL - Extended Capabilities Dynamic reconfiguration of activities to address changing requirements. – Shippers are demanding logistics providers to develop dynamic business structure, so that logistics providers can respond to changing environment as a result of new product increases and changing channel partners configurations.

Challenges for 3PLs Third party providers have significant opportunities, but they must overcome some problems. A key is the perception that third parties have “over promised but under delivered.” This is a perception that must be reversed. 3PLs must also focus on developing and perfecting those systems capabilities which differentiate the top companies from the rest. If 3PLs expect to meet their clients’ logistics needs effectively, they must be able to offer, among other services: Real time inventory information Scanning capabilities Data accuracy Reliable service Customized management reports Competitive prices.

Fourth Party Logistics (4PLs) 4PLs provide comprehensive SCM solutions – Can assess, design, build, and run integrated comprehensive supply chain solutions. – Implement “best of breed” approach to provide services and technology to a client. – Leverage the capabilities for 3PLs, technology services providers and business process managers to deliver a comprehensive supply chain solution through a centralized point of .” – Integrate clients supply chain activities with their own capabilities, providing one-stop solutions.

Three phases of outsourcing Internal analysis and evaluation Needs assessment and vendor selection Implementation and management

Phase 1: Internal Analysis and Evaluation Pre-requisite –Top management involvement Internal Analysis –

Identify organizational goals – understand services to outsource

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Identify and understand its core competencies. This exercise will allow organizations to identify non-core activities and functions.

Evaluation –

Compare cost of conducting activities in-house with outsourcing

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Non-financial questions –

How critical are these functions/activities?

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What are the dependencies on these activities?

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Does this activity tends to become a “mission critical” activity?

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Long term cost and investment implications

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Work morale and .

Phase 2: Needs Assessment and Vendor Selection Analyzing needs and requirements – – –

Information within the organization Companies who have outsourced similar services. Vendors who can fulfill these services.

Request for proposal (RFP) –

Helps company evaluate its needs

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Helps vendor understand if they can perform.

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Helps assessment and comparison of vendors.

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RFP should: –

Define complete requirements in measurable

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Describe the problem that needs to be resolved

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Describe the type of relation the company is looking for

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Specify service level

Phase 2: Needs Assessment and Vendor Selection Vendor Assessment and selection – Assessment by cross-functional team with expertise in legal, finance, human resources and the specific function being outsourced. – Evaluate vendor's financial stability, cultural fit and proven track record. If possible vendor's existing clients. Contract – Negotiate and sign contract. – Performance criteria and how they will be measured. – Define service levels and consequences of not meeting them. – Both the parties should communicate regularly and openly and express mutual desire to succeed.

Phase 3: Implementation Define/identify tasks, establish time frame Establish mechanism to monitor/evaluate performance Training/education to help manage new relationships and change Identify, communicate and resolve issues promptly and fairly

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