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 organizations 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 worldclass 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
worldclass 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.

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

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 organizations 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 account for these and decide how they are to be
managed with the 3PL.

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.

Reduced contact with final customer: Outsourcing the distribution function might force the
company to lose direct contact 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 contact. 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
3PLs fleet (or alliance partners) offer optimized network to serve
their customers.
Shipment Management System (SMS) allows 3PLs 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.

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

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.

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
3PLs run and manage warehouses using Warehouse Management
Systems, radio frequency scanning, and bar code labeling
3PLs 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
3PLs 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.
3PLs 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 customers
requirements
Some 3PLs have co-located their activities to the shippers
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 support 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 contact.
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

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

Non-financial questions

How critical are these functions/activities?

What are the dependencies on these activities?

Does this activity tends to become a mission critical

activity?

Long term cost and investment implications

Work morale and support.

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

Helps vendor understand if they can perform.

Helps assessment and comparison of vendors.

RFP should:

Define complete requirements in measurable terms

Describe the problem that needs to be resolved

Describe the type of relation the company is looking for

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 contact 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

Thank You