Category Archives: Outsourcing

If You Are Using a 3PL, Should You Focus on Outcome-Based Pricing?

Yesterday we discussed whether or not you should hedge your transportation costs, given this recent article in Canadian Transportation & Logistics (CTL) that found “global shipping lines grapple with plunging rates, overcapacity, and faltering recover”. Today we discuss another recent Canadian Transportation & Logistics article on “why it pays to focus on outcomes rather than transactions in procuring supply chain services”.

While an outcome-based focus is starting to take hold in some leading Supply Management organizations in their strategic sourcing processes, it’s often focussed on more traditional services where outcomes are easily defined and well understood by the organization. For example, procurement back-office functions where it’s all about throughput improvement (in terms of invoices processed), customer service (where it’s all about trouble-ticket resolution), and preventative maintenance (where it’s all about reducing downtime).

But back-office, customer service, and system up-time are not the only things that can be measured as outcomes. So can 3PL. As per the CTL on global shipping challenges, only 56% of containers delivered on time globally. Fifty-six percent! For those of you going for the perfect order, that’s 44% of your orders that rely on globally sourced products that won’t be perfect as of day one! (That’s why Maersk launched its Daily Maersk service in late October of 2011 which, with daily cut-off and built-in safety margins, allows it to guarantee virtually total reliability between select ports in Asia and Europe.)

Of course, this will require a shift in mindset in both buyers and 3PLs, but if both parties are willing to share greater risks, both parties could reap greater rewards. Current trends seem to indicate that. For example, by focussing on outcomes, Microsoft saved $30 Million by outsourcing its procure-to-pay operation to Accenture One, which doubled profit by focussing on value add activities. And Proctor & Gamble saved $1 Million in the first year of outsourcing $70 Million of facility management to Jones Lang LaSalle.

When the 3PL focusses on process and productivity improvement, and not price reduction, the efficiencies that fall out will most likely lead to cost reductions in the long term. For example, just getting the on-time delivery rate to 94% from 56% will likely decrease expediting costs 86%. And reducing “empty miles” will reduce costs (and likely speed up delivery time-frames as well, shortening lead times).

Have You Outsourced Too Much of Your Analysis?

Over on Deal Architect, Vinnie Mirchandani wrote a great post on the 7 Signs You’ve Outsourced Too Much of Your Analysis that was great. In a Top 10 Letterman style list, Vinnie notes that:

1. The T-shirt collection in your closet, your jar of pens and your collection of USB drives are a gallery of vendor logos.

4. Your most anticipated report or post is a Magic Quadrant, Wave or some other vendor ranking write-up.

and …

7. Even your kids don’t want to join you on your 10th trip to Orlando this year for yet another vendor event!

For the other 4, check out the top 7 Signs You’ve Outsourced Too Much of Your Analysis.

The Case for Onshoring … Is A Damn Good One!

Upon a closer look, offshoring is not always the right answer for all products, especially those sold in America. For one thing, labor costs in general are shrinking as a share of the total cost for many items. Moreover, average factory wages in many developing countries are rising, as is the demand for America’s sophisticated just-in-time, cost-saving, logistical systems. When common shipping problems are added into the mix — natural disasters, security threats, political instability, theft and other risks — more manufacturers are concluding that the savings offshoring had promised are just not there.
Guy Morgan, BBK Managing Director
from “The Case for Onshoring” (Industry Week)

You’d almost think he was trying to get in the doctor‘s good book! Truer words could not be spoken and I could not have said it better myself.

And these words are true whether you are talking manufacturing, software development, back-office functions, or call-centre outsourcing. We’ll review some high points of the article and then discuss these other points.

I think the author is right when he quotes Harry Moser, retired chairman emeritus of GF AgieCharmiles, who argued that many companies began moving production to low-cost countries mainly because they thought everyone else was. The worried that a competitor might gain a cost advantage; and, in the process, they put a limit on their thinking by fixating on a component’s sticker price rather than considering its total cost. But this leads to problems, especially since as per a 2009 analysis by Archstone Consulting and Duke University, most manufacturers use “rudimentary total cost models” that ignore 20% of the offshoring’s cost. And when you add to this the fact that the prices for Asian manufactured products have risen 15% to 20% in the past 4 years, there aren’t that many cost advantages.

And then, as the author astutely points out, you need to factor in excess inventory to replace poor-quality products and insure against late shipments, stolen intellectual property, rising fuel costs, environmental impact and more … which all adds up to more cost!

Add it all up, and it’s often cheaper to produce your product in North America. And this is sometimes the case even if you have to produce it in or near a major city that you would normally consider to be a high-cost locale!

It is time for the home-shoring renaissance that the doctor has been predicting since 2007 (which is well before the Boston Consulting Group figured it out, as mentioned in the article, but we’ll forgive them because they’re still ahead of the curve). What everyone is forgetting is that, despite higher labour costs, good ol’ (North) American ingenuity and innovation always leads to much higher rates of productivity and lower component costs in the end that always more than cancel out the labour costs. The proclamation that some U.S. states will become among the most cost-effective locations for manufacturing in the developed world is a correct one and it will happen. The only question is will your organization be one of the few who will lead the way and reap the greatest rewards?

And if you want to get an idea of how big those cost savings associated with onshoring could be and you’re in manufacturing, checkout the FREE TCO Estimator associated with the Reshoring Initiative over on ReshoreNow.org. It’s not perfect, but with 29 cost factors, it’s a good start.

As for the other industries I mentioned, you’ll save money bringing those back as well.

If your software development is outsourced to India, there are big savings to be had. Labour costs are still rising and the average skilled worker now costs (at least) 40% as much as his American counterpart. You might say that he’s still cheaper even after communication, remote management, and reduced productivity costs are factored in, but, if it’s innovative development, he’s not — especially if you reshore to Canada. Up here, we have the Scientific Research & Educational Development tax credit which can refund you up to 75% of approved research and development costs. And if you need money up front, it can always be stacked with the National Research Council’s Industrial Research Assistance Program. And since, up here, a software development resource costs at most twice as much as a resource in India, after these programs are applied, our world-class developers, who speak your language in your time zone and understand your business, cost half as much.

With respect to back-office functions and call-centres, there are a large number of small, rural, towns with low costs of living that would thrive off your operation and staff it at very affordable rates. And while the North American minimum wage might be three or four times as much as a prevailing wage for an English speaking call center or back office resource in Asia, when you consider that many calls will be resolved significantly faster as both parties will understand, and be comfortable, with each other from the first “hello” (as many North Americans aren’t comfortable with Asian call-centre support and have problems understanding their accent), the higher labour cost is negated with higher productivity. Plus, and this is key, no long-distance costs, no remote infrastructure costs, and significantly lower training costs (with much lower turnover). Win, win, win.

Bring the work back home. Unless you’re a Fortune 500 (like Apple) with demand for your product so big that it has to be made in a city (like Foxconn), and in the top 0.01%, it will be more cost effective to do so. And the higher quality and lower risk will make it all worth while.

Non-Traditional Opportunities Abound in Legal Process Outsourcing

A recent article over on SIG on “sourcing legal process outsourcing services” did a great job of pointing out that sourcing legal services is not the same as sourcing other types of services if the goal is cost reduction or value generation. Traditionally, an outsourcing project looks for savings by way of:

  • Headcount Reduction
    by outsourcing FTE roles to resources who can do the same job at a lower cost
  • External Spend Reduction
    by moving spend to those firms that can perform a set of functions at an overall lower cost

Headcount reduction works fine for accounting, where there are rows and rows of AP/AR people reviewing invoices, collecting payments, and making payments, or marketing, where advertising, print media, video, and radio are best outsourced on a project by project basis than staffed in house. This doesn’t work that great for legal where, given the size of an average legal department, the scope of an LPO engagement may be 10 FTEs. Given that average in-house legal spend is 40% of total legal spend, that, on average, only 25% of these roles can be outsourced, and that the maximum savings is 50%, the maximum savings achievable is 5% of total legal spend. Average is probably about 3%. No outsourcing effort is worth it if only 3% can be saved.

And external spend reduction works great for marketing which has outsourced an entire project, including brand building, message generation, and print production to a single firm when brand building should have been outsourced to brand specialists, messaging to advertising specialists, and print production direct to a printing shop that can offer steep discounts for high volume. Bur for legal, where you are simply shifting cookie-cutter legal tasks (such as fixed-form document review, property titles, etc.) from a legal firm to an LPO, savings are minimal given that outsourced spend is typically 60%, less than 50% of the tasks will typically be transferrable, and savings will probably only be 20% as they are still skilled tasks, for a maximum savings of 6%, with an average savings of 3% to 4%. Again, not worth it.

Outsourcing legal is all about value identification and generation. First, as the article points out, the supply management team needs to figure out what legal services can be “unbundled”, which of these could be outsourced, and whether the savings opportunity is there. Then, when they have identified those opportunities that could generate enough savings to be worthwhile, supply management needs to determine how to maximize the non-financial value-generation opportunities that are quite real and more valuable than any cost savings that may be achieved. Specifically,

  • Resource Re-Allocation
    Existing legal staff needs to be focussed on high-value work as there are very limited resources. Legal staff should be focussed on risk-management, not document review. On forth-coming compliance requirements, not process improvement. And on supply management contract simplification, not one-time contract generation.
  • Acquisition of New, Previously Unavailable, Services
    There are only so many legal resources in-house, and their knowledge is limited. They will not be able to provide guidance on every potential market that the business might want to enter, or be aware of all of the impending regulations in the US, EU, and China that might affect the business, or provide detailed due diligence on every contract presented to the business by a potential customer.

In many legal departments, counsel spends 90% of their time reviewing every routine change requested by a counter-party in a legal negotiation instead of focussing on what the real risks are and how to negate them. They spend a lot of their time reviewing existing processes with respect to current compliance regulations to insure reasonable efforts are taken to ensure compliance instead of focussing on what is coming down the pipe and what significant organizational shifts will be required. And on generating a custom contract for each major supplier instead of optimizing a contract generation and management system that will allow negotiators to generate a customized starting contract with all relevant clauses and terms at the press of a button. That’s why in-house resources need to be focussed on high-value tasks.

And with global market penetration becoming more and more important as first-world economic growth declines by the year, the ability to access more expertise than can be found in house is becoming more and more critical.

Thus, a sourcing team that adopts a value-based approach to legal services can provide the organization with value that goes well beyond what any cost savings could possibly achieve.

Is It Time To Move Your (Supply Chain) Operations to an Emerging Economy?

After reading this recent piece in Chief Executive (CE) on how US companies are “garotted by red tape”, SI is wondering whether the time has come to follow the lead of IBM and other big multi-nationals and move your supply chain, followed by your headquarters, to China or another emerging economy. Even though I still think North America is going to retain the edge in High-Tech Innovation for a few more years (despite the fact that the numbers say that both India and China should be producing four times as many geniuses each year), the cost of doing business, or at least of keeping your supply chain and headquarters, in the US is becoming too high.

Consider these vary scary stats from the CE article:

  • In 2010, the Feds spent 55.4 Billion enforcing regulations
  • In 2009, economists Crain and Crain estimated the true cost of the Feds’ regulations was 1.75 Trillion – or 12% of GDP – compared to only 1.46 Trillion in pre-tax profits businesses earned
  • The Federal Register that compiles regulations is over 81,405 pages long
  • Since Obama took office, regulators have imposed 38 Billion in new costs
  • There are 2,785 proposed rules in the pipeline and 144 are economically significant and will add burdens of over $100 Million each for a collective burden of over $14 Billion on this 5%!

At the moment, federal regulations are a runaway train that no one can stop. And until the US gets a Denzel Washington or a Keanu Reeves that can deal with the situation, it’s only going to get worse before it gets better.

As a result, it might be time to consider moving your supply chain operations somewhere where the regulations are a little less severe … even if you have to pay a few government bribes or deal with a few pirates. After all, 238 Million (which is the amount paid to pirates in 2010 for ransom) is a lot less than 1.75 Trillion (at 0.01%), and a few hundred thousand goes quite a long way in developing economies where bribes are concerned. And while SI is not condoning bribery or pirate ransoms, there are much better uses from an innovation and jobs standpoint for 1.75 Trillion dollars than red tape.

Maybe if a few big companies start leaving and the feds realize that if they don’t stop the runaway train that the city will be empty by the time it arrives they’ll bring in a Denzel or Keanu to deal with it. SI doesn’t know, but thinks it’s a good question to ask.