Category Archives: Outsourcing

Nearshoring is Finally in Vogue

A recent brief on Purchasing.com noted that, according to a quarterly report on supply chain risk from AMR Research, “buyers are continuing to increase near-shoring as a risk management strategy”. Specifically, AMR Research found that buyers will increase their nearshore sourcing and manufacturing activities by a ration of 5 to 1 (with Mexico, Canada, and Brazil in the lead).

Hear, hear! I’ve always been for nearshore sourcing and home country sourcing not only because it decreases risks, but because it increases competitive advantage manufacturing flexibility while decreasing transportation costs and pollution. Where you see a labor cost savings opportunity, I see an opportunity for innovation. Given that the cost of raw materials and equipment is about the same globally these days, and that transportation costs go through the roof in times of high demand, there’s no reason you shouldn’t be able to make it affordably locally, or at least on the same side of the ocean. And if you say “the labor cost is too high” I say “there’s an opportunity for innovation and automation” … and if you’re the first to find it, think of the huge competitive advantage you’ll have.

When it comes right down to it, the only times it makes sense to source globally are when you have a (relatively) rare raw material that can only be obtained from a few locations, when you need to source out-of-season food that can’t be produced affordably (in both financial and environmental terms) in green-houses, or a good that requires proprietary IP to manufacture that is only held by a small number of suppliers in a certain location. Otherwise, find a way to affordably source it nearshore and you’ll win in the long run.

Shared Legal Services: Risk vs. Reward

The Shared Services & Outsourcing Network recently ran a great article by Leland Forst of The Amherst Group Ltd on mitigating risk when implementing legal shared services that I see as a must read for anyone considering the consolidation of their legal function into a shared service organization.

Most organizations outsource traditional back office functions like Human Resources, Office Management, Accounts Payable, and even invoice management because a specialist organization, that can leverage expertise and shared services, can often do these tactically-focussed functions better, faster, and cheaper when the right processes and controls are in place. Well, unless your primary revenue stream is litigation or IP licensing, these days, legal is also a back office function and one that should be considered as eligible for a shared-services outsourcing model because, as the author points, out, it can:

  • provide lower fees through economies of scale,
  • provide volume leverage to negotiate lower hourly rates with external experts,
  • allow you to scale up or down as required without expensive recruiting or severance costs,
  • provide you access to more subject matter expertise,
  • improve case management,
  • provide alternative methods of dispute resolution (such as negotiation, mediation, and arbitration) with a large pool of personnel, and
  • provide you access to better legal service management systems at a significantly reduced cost.

Especially when you focus on outsourcing your discretionary, and leverageable, legal services. While the following governance services are non-discretionary for most large corporations, and not good candidates for outsourcing (as you often need to keep these functions within your control to insure regulatory compliance and/or trade secret protection):

  • corporate annual meeting preparation and board resolutions,
  • political action committee management, and
  • mergers, acquisitions, divestitures, and joint venture legal support

The following discretionary, and leverageable, law services are great candidates for a shared services organization:

  • litigation / arbitration that is being considered,
  • trademarks, copyrights, and patents are being pursued, and
  • anti-trust/competition scenarios that are perceived.

As the author points out, as long as any risks are properly identified, and dealt with up-front, this model can prove very profitable for some organizations. So if your firm spends a lot on legal, internally or externally, take the bell off that sacred cow, determine whether or not your really getting value for money in the current model, identify any confidentiality requirements or situations which would require a quick response, define key performance metrics, and go to the market. You might just save your organization a few million in the process.

A Handy Guide to the Eight Biggest Mistakes in (Procurement) Outsourcing

Global Services recently published a great piece on the “eight worst mistakes in outsourcing and how to avoid them” that should not be overlooked if you are outsourcing or considering outsourcing one or more business functions (in your supply chain). These mistakes are all too common — and they don’t need to be, especially since they can be prevented up front.

  1. Poor Governance
    A formal governance model, backed by executive sponsorship, is absolutely critical to success. Without a model, which must clearly define the objectives, a collaborative working model, SLAs, and a dispute resolution process, there’s nothing to stop the outsourcer from doing whatever they want, which includes doing nothing at all!
  2. Shortsighted Focus on Cost Savings
    This leads to unrealistic expectations for year over year savings. Done right, outsourcing will save you money, but the savings will not increase continually. If you’re 80% efficient, then you’ll get 20% savings … and that’s it. But that’s still better than what the function is costing you now. The real benefits come in the form of process efficiency, improved planning ability, higher levels of operational reliability, and the ability to divert focus to core business areas where strategic improvements can lead to significant savings.
  3. Lack of Preparation
    Starting the RFP and contract negotiation process before an outsourcing decision has been thoroughly evaluated internally is the wrong way to go about it. First you analyze the cost / benefits thoroughly, then you outline the governance and model, then you evaluate the vendors, then you start negotiations with the preferred vendors.
  4. Outsourcing High-Touch Activities
    Not all processes are ideal for outsourcing. Processes with high business value that you are effective at should be kept in house. Processes that require continual contact with stakeholders are also not good candidates for outsourcing.
  5. Failure to develop an Effective Communication Program
    Poor communication is often the top reason cited for failure of an outsourcing project. Regular information sharing is essential and needs to be addressed up front.
  6. Improper Evaluation of Outsourcing Providers
    Outsourcing is not an instant solution and proper evaluation of providers is crucial. Choosing the wrong solution provider will give you sub-optimal returns at best, and can lead to the outsourcer abandoning the engagement, leaving you high and dry.
  7. Poor Cultural Fit
    At the end of the day, an outsourcing relationship works best when the chemistry between outsourcer and service provider is right. If the evaluation and negotiation process leads you to believe that the working relationship will not be a comfortable one for your people, immediately call off negotiations and move on to the next provider.
  8. Inappropriate Metrics and SLAs
    For example, call throughput is a bad metric. It’s not how many calls a rep takes in a day, but how many issues get resolved in a day.

Hidden Costs of Global Sourcing

Purchasing recently ran a good article on “the nine hidden costs of global sourcing” that should not be overlooked if you think global sourcing is your way out of the downturn. It might be, but if you don’t consider all the costs, you could easily make a wrong decision.

As per the article, the following 18 costs (which includes 9 bonus costs found only in the web version) can add up and turn that 20% labor-based savings you expected to see into a 10% loss over your current solution when compared to your current arrangement.

  • Internal Expenses
    The resource intensity of sourcing in unfamiliar markets with unsophisticated suppliers can easily erode forecasted savings by 5%.
  • Supplier Health
    If a supplier goes bankrupt, there go your savings, and then some, when you have to quickly switch to a (much) higher cost of supply.
  • Post-Contract Lull
    In order to insure that savings materialize, you need to monitor the contract in the weeks and months after it is signed. There is a resource cost associated with the monitoring.
  • Duty and Tariff Changes
    A change in the duty or tariff rate could dramatically affect the cost of a product being sourced and the savings that materialize.
  • Contract Non-Compliance
    If your buyers go maverick, so do you savings.
  • True Inventory Costs
    Sourcing from an overseas supplier lengthens lead times, which increases safety stock, and increase time in transit and this significantly increases your average inventory cost.
  • Logistics Volatility
    Not only does increased distance increase your freight costs, but so do rapid increases in freight demand which could cause freight costs to spike.
  • Technology
    Tracking product flow from global suppliers could require new technology, which will increase costs as well.
  • Quality Breakdowns
    If a contract manufacturer’s quality affects delivery of the part or increases the number of failures, it could wind up costing more than originally forecasted and wipe out the global sourcing ROI. And if it forces a costly recall, it could wipe out your business — period.
  • Transition Costs
    There’s nothing “soft” about this cost which will affect initial ROI.
  • Margin/Burden Stacking
    If supplier sites compete against each other, that can cost you.
  • Lost Tariffs/Taxes
    Improper classifications and missed recoveries on VAT add up quickly.
  • Packaging
    If you’re not careful, your supplier might try to profit off the packaging, taking another chunk out of your ROI.
  • Logistics Costs
    It’s not just freight — it’s handling, intermediate storage, and the costs of inevitable delays.
  • Hardware Costs
    Some overseas suppliers have difficulty obtaining standard parts at your cost. Failure to recognize this, and help them obtain parts cost effectively, also costs you money.
  • Labor Costs
    Failure to understand the labor cost breakdown can cost you.
  • Markup vs. Margin
    Know the difference — it can be very substantial.
  • Burden on High Dollar Parts
    Some suppliers may try to burden a $6 part the same as a $6,000! Be careful!

The Strategic Sourceror’s (Supply Chain) Anti-Trends

The Strategic Sourceror was first to the plate with a trio of home-run anti-trends for 2009.

  • Strategic Sourcing Outsourcing Finally Gets a Good Rap
    The Sourceror notes that even though the list of anti-outsourced strategic sourcing excuses (just like the list of excuses for why we don’t need no consultants) goes on and on and on, this is the year that people who just made a big investment in (e-)sourcing software realize that software alone is not enough and you need to balance the tools with the human expert techniques.
  • Networking Costs You That Job
    Every time the economy takes a bath in the crapper, every person and his dog comes out of the woodwork with a list of techniques for landing that next job, and networking is always at the top of the list. And this time, the media has outdone themselves and convinced people that “networking” means getting in touch with every single person you have ever heard of in your life and bombarding them with your resume and story … every single day. Now, while you should contact everyone who you honestly think could, and would try to, help you, and while you should be persistent in your job hunt … there’s persistence, and then there’s good old fashioned harassment. Go overboard, and you might just find that you’re the first person blackballed next time something opens up.
  • Hasta la Vista to the Fat Cats
    This post is just too good to every try to summarize.