Worley Blog

STRATEGIC OUTSOURCING

Posted on: June 8th, 2020 by Clifford F. Lynch

 

With the introduction of omnichannel into the supply chain, many firms have found that their distribution systems lack the flexibility necessary to accommodate the increasing number of smaller, on-line orders. While E-Commerce has increased dramatically over the past few years, the impact of Covid-19 has pushed it to a new level. The virus has resulted in new buying habits that to some extent, will probably become permanent. A number of firms, in order to gain flexibility and outside expertise have turned to outsourcing. As I have written before, the best solution may be LSEDI (Let someone else do it.)

It is important however, to enter into relationships with logistics service providers (LSP) carefully and thoughtfully. Keep in mind outsourcing may not be appropriate for every firm. Do not enter into an outsourcing arrangement simply because it is written or talked about frequently, or because others in your industry are doing it. A sure recipe for disaster is to embark on a program that is not suitable, not understood clearly, or one that is full of unrealistic expectations. In my experience, many major failures in outsourcing relationships occur when a firm outsources an activity that its own personnel don’t totally understand and the provider promises to meet objectives that have not been clearly defined, communicated, or understood. Outsourcing should always be carefully thought out and measured against an in-house solution. This planning and analysis will be tedious and in some cases downright unpleasant. Collecting data will require valuable time and resources, and the entire process will require patience, perseverance, and persuasion in dealing with other internal functional groups. This will be necessary however to identify relative strengths and weaknesses for each alternative. It is also important to include the potential provider in the process from the beginning. But wait. What if the provider hasn’t been selected yet? Then in my opinion, you have the cart before the horse.

In this age of supply chain enlightenment, it is surprising how many firms develop outsourcing relationships by traditional methods. This is particularly true as “professional” buyers with little supply chain knowledge or experience negotiate for the lowest rate. In these firms, a Request for Proposal (RFP) is prepared, outlining the task to be performed and specifies the contents and format of the proposal. The RFP is presented to three or more providers who are asked to submit bids to perform precise tasks in precise ways. The contract is then awarded to the provider who demonstrates the best cost benefit ratio. I strongly recommend the Request for Information (RFI) approach which gathers information about potential providers that are known to have experience in the client industry. Not only will these responses aid in narrowing down the list of providers, but they will help identify a qualified provider to include in the planning process.

The RFP makes providers’ proposals easier to compare am evaluate, but ignores the basic issue of determining the most cost and service effective logistics process. A true partnership or relationship suggests input by all parties, and the most successful ones have been those that were established through joint analysis and resolution of the logistics objective. Make the provider part of the process. This method requires the qualifying of LSPs before the cost of their services is known, but this will be offset by the advantages of bringing the provider into the discussion early.  Almost always, the pricing can be resolved to the parties’ mutual satisfaction. Today’s LSPs, for the most part, have developed more sophisticated technology and analytical capabilities  and are well equipped to participate in a collaborative, design-based approach to meeting clients’ needs.

If you are going to enter into an outsourcing relationship, it makes infinitely good sense to leverage the provider’s knowledge and expertise early in the process. After all, isn’t that what outsourcing is all about?