LATEST DEVELOPMENT IN SUPPLY CHAIN OUTSOURCING

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1 LATEST DEVELOPMENT IN SUPPLY CHAIN OUTSOURCING TFS Exclusive Whitepaper mark MILLAR Knowledge for Innovation

2 FOREWORD On the basis that modern-day supply chains inevitably involve several organisations working together for a common purpose, then - by the very nature of them comprising multiple participants - supply chains must inherently involve outsourcing in one form or another. There are increasingly blurred boundaries within-and-across the complex international structures of trade and commerce that businesses deploy in order to efficiently and effectively plan, source, make and deliver their products and service offerings, such that we are now firmly in the domain of global Supply Chain Ecosystems. 1 Latest developments in Supply Chain Outsourcing

3 Supply Chain Ecosystems As a result of recent and rapid developments in the global business world, we have seen supply chains evolve into extended complex international networks, which can no longer be appropriately described in the linear fashion of a chain. The depth and breadth of complexity and interconnectivity involved in today s universal commerce has resulted in the emergence of Supply Chain Ecosystems globally inter-weaved multi-layered networks of partners, suppliers, regulators, service providers and customers. Within any given supply chain ecosystem, each configuration is unique to the specific enterprise that owns that supply chain. The ecosystem s chosen participants are all coupled together for the common purpose of providing an end-to-end channel of distribution - all the way from the suppliers of materials and components, extending through manufacturing processes whether in-sourced or outsourced - to the distributor and retailer, and ultimately to the customer, typically the end-user or consumer. In this context, distribution, once referred to by Peter Drucker as the dark continent of the economy, encompasses all elements of supply chain management, logistics and transportation, and is increasingly both a key driver of profitability and a critical source of competitive advantage. Each commercial enterprise forms their own unique supply chain ecosystem, adopting a different configuration of similar participants, or in several cases, particularly within industry sectors, many of the same participants. And so it goes on, such that numerous multi-layered cross-enterprise connections generate a complex web of interdependencies, frequently spanning the globe, in order to optimise the three critical attributes that drive differentiation within the supply chain ecosystem speed, agility and resilience. 2 Latest developments in Supply Chain Outsourcing

4 As modern supply chains begin to resemble more complex ecosystems rather than linear chains, suppliers, manufacturers and service providers that work together to service one client s supply chain, may in fact be fiercely competing against each other to win business to service a different client s supply chain. Indeed, whilst each company has their own supply chain ecosystem over which they have control, that same company will most likely be a participant in several other supply chain ecosystems, for example for their customers and their suppliers. For global businesses, the supply chain is increasingly becoming a key source of competitive advantage and differentiation. Brands need supply chains that enable and empower them to get their product to market faster and more efficiently than the competition. Businesses are now competing as much on the basis of their supply chain management capabilities as their product or their brand. In this context, organisations must develop the capabilities to work effectively with multiple partners for successful operation and execution of their supply chain ecosystems, thus leading to the trend of increased levels of supply chain outsourcing. 3 Latest developments in Supply Chain Outsourcing

5 Outsourcing Defined as the act of one company contracting with another company to provide services that might otherwise be performed by inhouse employees, outsourcing is generally undertaken in order to benefit from using an external provider - typically through gaining economic advantages and leveraging specialist expertise. In our globalised world, outsourcing is often confused with offshoring, however one refers to the Who the organisation performing the services, and the other refers to the Where the location where the services are performed. Outsourcing is still outsourcing irrespective of where the outsourced services are actually performed whether onshore or offshore. Offshoring refers to moving business activities out of the existing host organisation to another location in a different country in many cases to an outsourced partner (Outsourced Offshore), but in some cases to a subsidiary division of the same company (Offshore). Adopting the Tom Peters mantra Do what you do best and outsource the rest, organisations have taken the approach of focusing on their core competencies whilst seeking external organisations to undertake activities that are non-core and that can be undertaken by third party service providers. Outsourcing partners typically have specialist expertise and economies of scale that enable the activities to be performed better and cheaper than could be achieved using in-house resources. The business activities that are most commonly outsourced include information technology and telecommunications infrastructure and services (ICT), administrative business processes including payroll, accounting and customer service (BPO and Call Centres) and transportation, warehousing and logistics activities (3PL). These have in turn led to the rapid development of whole industry sectors with numerous outsourcing firms that capitalise on the economies of scale achieved through the increased volumes and activity levels that accumulate through serving multiple customers. These outsourcing firms also develop specialist subject matter expertise, domain knowledge, streamlined processes and technology platforms that are above and beyond levels that any single organisation might cultivate in-house. Therein lies the value proposition for outsourcing contracting out your business processes to a specialist service provider that can perform those services more efficiently and more cost effectively than you could do yourself, enabling your organisation to focus its precious resources on your core competencies. 4 Latest developments in Supply Chain Outsourcing

6 Defining Core Competencies Accenture contend that what matters most is not who executes a given function, but who executes it best - and that who executes it best will usually be the organisation with the most economic incentive to improve that function. They extend the Prahalad and Hamel definition of what actually is a core competency and propose Core Competency 2.0, such that for an activity to be a core competency within a given supply chain function, it must satisfy three conditions: Under their expanded definition, deciding whether a company should be executing a function internally or externally depends not only on whether that function creates a real or perceived competitive advantage, but also on whether an outsourcing services provider can perform that function better than the company itself. Based on their analysis of numerous supply chain management outsourcing contracts, they argue that in some cases engaging an outside company to handle activities such as inventory optimisation or forecasting is actually superior to hiring, training and providing for those functions in-house. Therefore many non-logistical supply chain functions that thus far generally remain in-house, including forecasting, supply planning and inventory management, are now becoming suitable activities for consideration of outsourcing options and alternatives. Only in the case where an activity depends mostly on company-specific knowledge might the choice favour keeping the function in-house It creates real or perceived competitive advantage It cannot be done better at an acceptable higher cost, or equally well at a lower cost, by an outside specialist Any increased risk in externalising the function is both understood and manageable 5 Latest developments in Supply Chain Outsourcing

7 Outsourcing Success not Guaranteed Prentice and Hall argue that, irrespective of geographical location considerations, if an external outsourcing provider can perform activities more productively than the client firm, then the outsourcing provider should do the work. Their survey found that the most important reasons for supply chain outsourcing were: 1. Achieving Cost Savings 2. Gaining access to Outside Expertise 3. Improving Service 4. Focusing on Core Competencies 5. Gaining access to Technology It should be noted that outsourcing in itself does not guarantee success and should not be undertaken lightly. Their study found that 35% of businesses said they would continue or expand their outsourcing, 40% said they would continue outsourcing but revise their arrangements, whilst several companies said they would reduce outsourcing. There are many reports of failed outsourcing experiences with examples where companies have taken outsourced activities back in-house ie reverted back to an insourced model. However, the outsourcing challenges experienced by companies often relate to the process and / or partner, rather than the decision to outsource being the wrong decision for the business. Regarding third-party logistics and approaches to outsourcing, a recent leadership discussion reinforced that the principle of outsourcing is based on the ability to access and leverage a third party s scale and capabilities but also with the appropriate economic justification. Three keys to successful outsourcing were cited first that it is a strategic decision whether to outsource or not; secondly, for outsourcing to be successful both parties need to be fully committed, including an open approach to appropriate information sharing, and thirdly, it is imperative to measure the success of the outsourcing partnership through a combination of key performance indicators and business metrics. Organisations need to become skilled at selecting, on-boarding and managing supply chain outsourcing partners. This requires expertise and skills that may need to be developed or acquired. Successfully managing outsourced partners needs the right systems, processes and organisational management structure to be in place. Services to be provided and measurements to be reported need to be diligently documented. Controls and systems need to be developed and deployed to manage multiple information flows between and across separate companies. Conclusion - Supply chain outsourcing requires a collaborative management approach in order to successfully appoint and manage third party partners for the provision of logistics and other services. In such scenarios, success is all about multiple entities coming together for the purpose of successfully executing supply chain ecosystems on behalf of customers. We can expect further collaborative outsourcing developments in global supply chain ecosystems. 6 Latest developments in Supply Chain Outsourcing

8 Industry thought leader Mark Millar has been engaged by clients as Speaker, MC, Moderator or Conference Chairman at more than 250 events in 20 countries and is recognized by the Global Institute of Logistics as "One of the most Progressive People in World Logistics" WHITEPAPER