Category Archives: Outsourcing

Has the Outsourcing Craze Finally Stopped?

According to a recent article in the CPO Agenda, in the recessions and its aftermath, companies are re-examining the business cases for keeping processes in-house or outsourcing them. It’s “return of make or buy”. And it’s about time.

Not that I have anything against outsourcing, if it’s the right function to the right provider in the right location at the right price point, I just have something against outsourcing everything you can put your hands on. At some point, there’s more being done outside your four walls than inside. At this point, chances are that if you haven’t already outsourced most of the value your organization produces, you’re pretty close to that point. And once most of the value is elsewhere, what reason do people have to invest and support your company?

If Back Office Boys are handling your back-office tasks, Marketing Madmen are handling all your marketing and advertising, Rocket Resellers are handling your sales and account management, Stylized Support is doing your support and CRM, Custom Manufacturing Inc is doing your product design and production, and Total 3PL is doing all of your forward and reverse logistics, what are you doing? Okay, you’re orchestrating, but how are you any different from anyone else with the same skill set? So if someone else comes along, builds the same relationships, and finds a way to produce a competing product 20% faster, 20% better, and 20% cheaper, how long are you going to last?Not long. Not to mention, if you are producing 100% custom products, or 100% (very) high volume products, there’s a good chance you can do it cheaper in-house if you build and retain differentiating expertise.

And if you have to invest capital in a supplier’s business to keep your own afloat (as 9% of CPOs in a recent survey by CPO Agenda had to do), or acquire a failing and/or strategic supplier (as 3.6% had to do), it kind of kills the argument for (going overboard on) outsourcing, doesn’t it?

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ISM’s Prediction for the Supply Chain of the Next Decade

A recent article over on the ISM site on “Globalization: An Endeavour in Fluidity” laid down some predictions for supply chains in 2010 and beyond which were pretty interesting as some of them indicate that supply chains will finally in a direction they should have moved five years ago (as regular readers of Sourcing Innovation and Spend Matters are well aware).

The six predictions made were the following:

  • Networks will be demand basedinstead of being inventory-focussed with the intention of pushing as much product into the market. Every market becomes saturated at some point. A supply network has to be demand based to be profitable over the long term. And sometimes, selling less at an optimal price point is more profitable than selling more.
  • Debt load will hinder, advance initiativesWhile many companies will still file for bankruptcy, those companies that have been aggressively working to eliminate debt will be left with more growth possibilities, which will allow them to fund new supply chain initiatives.
  • A shift in the value of innovationThe focus will start to shift away from LCCS (Low Cost Country Sourcing) to LCCI (Low Cost Country Innovation) as companies shift their focus to harvesting the innovation potential in the LCCS markets.
  • Sourcing markets become buyersAs the emerging markets gain a greater share of global purchasing power, organizations will repurpose their networks to supply these markets with goods and services in addition to sourcing from them.
  • Corporate responsibility as a competitive advantageSustainability and corporate responsibility is front and centre in the thoughts of every consumer these days. Those companies seen to be responsible now enjoy greater mindshares than their competitors, and this is leading to greater market shares as well.
  • United States a viable sourcing optionDue to the weakened dollar, the US will continue to remain an attractive location for foreign investment. Furthermore, home cost country sourcing will begin to take hold as many firms realize that it’s just as cost effective to source and produce locally, as it is to source and produce half-way around the world once you take into account rising transportation costs (as oil prices rise again), uncertainties, the weakened US dollar, and the savings from government subsidies and tax-breaks being pumped into the economy to stimulate it.

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U of T Has Some Great Tips for Successful Outsourcing

A recent report from U of T, Georgia Southern, the Cranfield School of Management, and the IACCM titled on Unpacking Oliver: Ten Lessons to Improve Collaborative Outsourcing that was based on the Nobel Prize winning work of Oliver Williamson had ten great tips for successful outsourcing. The following five are particularly relevant:

  • Outsourcing is a continuum, not a destination

    To Outsource or Not to Outsource is an eternal question that never has a final “yes” or “no” answer. It’s a never ending trade-off of cost, quality, risk, and value. The best answer today might not be the answer tomorrow and probably won’t be the best answer in five years. It’s a constant re-evaluation.

  • Understand the transaction attributes and their impact on risk and price There’s product cost — which is a composition of raw material, labour, and overheads, transportation cost, import and export costs, storage costs, losses due to transit times, disruption costs associated with higher or lower risks, and so on. Any decision that increases or decreases one of these costs will likely increase or decrease risk.
  • Use a contract as a framework – not a legal weapon

    Contracts don’t have the same meaning in many countries as they have in the US or the UK. In many countries, the relationship means a lot more than the contract, which only serves to define an outline of the responsibilities of both parties.

  • Your style of contracting matters; be credible

    If you use “muscle” for a quick win, you’ll lose in the long term as the supplier will not be inclined to go beyond the minimum requirements of the agreement.

  • Build trust; leave money on the table

    Good faith will go a long way to insuring that the supplier not only adheres to the agreement, but works with you to find new ways to save cost and go beyond the mandated service levels.

For a summary of the other five tips, see this great summary over on Supply Chain Brain.

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Three Great Tips for Redesigning Your Logistics Network

A recent article in Logistics Management contained 6 Network Redesign Tips designed to help you reduce distribution costs. The following three tips are particularly relevant regardless of the type of supply chain you operate:

  • Being Green Can Bring More Green If it’s truly green, it saves you money. If a solution that purports to be green increases costs, then you can be sure it’s another example of greenwashing, because truly green solutions reduce the requirements for energy, water, and other natural resources, which ultimately decreases costs. Examples given in the article include replacing high-intensity discharge lights with energy-efficient fluorescent lighting, installing solar panels, and utilizing fans for air circulation, but there are dozens of ways you can reduce costs. See the green and sustainability archives for other items.
  • Get Creative With Transportation As per the article, start by finding ways to eliminate empty miles and increase truckload utilization, but don’t stop there. It’s not just plane, train, and truck … there’s also bus and even automobile. Busses often have empty space and are used in some countries regularly to haul small loads, and sometimes you should off-load your smaller shipments to Fedex and UPS who use smaller, energy efficient vehicles.
  • Create an Off-Shore, On-Shore, Near-Shore Blend for FlexibilityThe last thing you want to do, as a result of a supply disruption in your factory half-way around the world, is expedite multiple shipments by air that would normally go on a single ocean carrier. Not only does this send transportation costs sky-high, but it can also increase your carbon footprint. (Yes, ocean carriers, which aren’t subject to the same clean-air requirements of land-based vehicles, are dirty … but your footprint is often just a fraction of the carbon-produced as you’re sharing the load with dozens [or hundreds] of other shippers. However, if you’re filling multiple planes worth of merchandise, that carbon footprint adds up fast.) However, if you also sell into foreign markets, the last thing you should be doing is on-shoring everything. The best strategy for today’s multi-national is a blended strategy. This will minimize disruptions and costs.

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There’s Opportunity in Global R&D …

… but there’s also risk as well. In fact, I’d say the risk is as big as the opportunity presented in this Global Services article on the “globalization of R&D and Product Development” which claims that there is a tremendous opportunity for growth based on the fact that only 5% of current R&D spend is based on outsourced partnerships.

While it is true that the average small to mid-sized software product company will continue to be faced with cost pressures and increased revenue expectations, that headcount in other economies like China, India, Poland, and Russia are considerably cheaper, and that a few of these countries are as likely to produce as least as many software geniuses as North America, it’s also true that there are disadvantages and risks to outsourcing. The first is market risk. Does the outsourced R&D provider’s team truly understand the market needs? The second is education. The educational systems in these countries traditionally pump out some of the world’s greatest mathematicians, but mathematicians (and pure mathematicians in particular) are often the world’s worst coders. They can come up with the most brilliant algorithms on the planet, and maybe even code an initial version of them, but good luck integrating and maintaining their code as part of your code base — because no one but them will be able to understand it, ever.

Then there’s the ever-present culture risk. Will your North American or Western European or Australian team be able to work with them to produce great results, or will they continually misunderstand each other? Then there’s the performance risk. You might get the hardest, best trained worker, or you might get the ultimate slacker who’s there because his father, brother, or uncle is in management or has a strong say over who is hired. Arun Krishnan of Cutting Chai didn’t address outsourcing and how to threaten your outsourced employees, by telling them “I will single out every one of you and kill you”, in Hindi in his first “Learn Hindi from Bollywood Movies” podcast just to be humorous. If you’re unlucky with your hires, you really will want to yell that!

Finally, there’s the cost risk. The only way to insure success is to build a relationship and understanding with the outsourced team, work closely with them, and manage the integrated team on a regular basis. This will require regular trips to their location to find the team, train the team, and manage the team, and then multiple trips for your employees who will have to take turns visiting each location to build the camaraderie required for them to truly work as a team. Early on, this will likely cost a lot more than you budget for.

Now, I’m not against the globalization of R&D, and, especially if you’re a multi-national, I think it’s a great idea, but it has to be done right, and you have to move slow at first. Otherwise, like many companies that don’t properly plan and rush right in, you’ll see nothing for your efforts but huge losses.

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