Making sense of outsourcing

Most decision makers have a general idea of what they wish to outsource, but two key questions to consider prior to moving forward are “why are you outsourcing?” and “are you really outsourcing?”

Maybe it’s not an outsource project at all, particularly if you currently perform little of the potential “outsourced” function in-house. To say, for example, you want to outsource your Transportation Management suggests you actually do this in-house. If you don’t – then is it really outsourcing?

A company will not see that there is a particular outsource need if the job is not being fully administered in-house right now. When it comes to logistics processes, you need to develop criteria for fully identifying the need, prior to outsourcing. You must also understand the full potential for the identified function, and must not qualify the process based solely on how you do it now.

Take for example a manufacturer or distributor that has customers arranging their own freight and being responsible for these costs. It might see outsourcing of transportation management as a non-factor because it doesn’t pay the freight invoice. In reality it could very well be an outsourced and controlled cost – a competitive advantage perhaps.

As another example, consider the scenario where you feel you don’t have a need for warehousing and so don’t consider using a third-party warehouse provider. However, a more in-depth review of your logistics processes may determine that a strategically placed warehouse offers a more effective solution from a competitive, transportation, customs, environmental, or tax based perspective. How would you know? How do you determine whether you have the opportunity to be better served if you can not identify the potential? Having someone review your current practices for these opportunities might resolve the issue.

Logistics is not a stand-alone function. It is quite often an integrated process that requires someone with the ability to review your business climate and understand the “trade offs” that might be necessary to enhance your services and/or reduce your costs.

To identify some of the areas of sourcing/outsourcing potential we have drafted up a small check list of items with which you may need support:

Transport/Carrier Sourcing and Rate Negotiation: Perhaps you need someone to assist in identifying and sourcing appropriate transport providers, and negotiating the rates, services and terms. Industry experience in this area is extremely important.

Measurement and Controls: Do you know what you should measure, how often, what it means, how to control? You may need help in determining the right type of measurements, reports and controls. What does the information gathered tell you? What should you do with the findings? Should this process be done in-house with your current information management system (my preference), by sourcing a Transportation Management System or should it be outsourced entirely?

Freight Invoices: Outsourcing your freight invoice payables is often a good idea due to the sheer volume of the transactions.. But don’t give up your audit controls and make sure to get the detailed report information necessary to manage costs. If the third party is only seeing your freight bills and checking it against a rate table, can it truly provide logistics consulting? The third-party provider must be intimate with your business – its operations, corporate strategies and logistics needs – in order to provide these services effectively. Shop around carefully or better yet get help in reviewing this outsource.

Warehouse Management: Review the entire impact of warehousing on your business and not just the savings you might have in manpower and building costs before you outsource. What if it was determined that your reliance on an in-house warehouse could be reduced? Remember you cannot outsource a component “function” without a review of the entire associated process.

If you choose to outsource a segment of your transportation, distribution or logistics process, consider having someone assist you with that process or at the very least review the offerings made by the potential service providers. Most outsourcing proposals commit you to substantial terms. You must ensure you have what you need and are not paying for something you don’t.

You have to review your entire logistics involvement prior to outsourcing any one segment. In order to do so, you need to know that you have outsourcing potentials. An outsource will take place for a number of reasons, not the least of which is to reduce costs. Understand where these costs are being reduced and how you plan to track the savings.

One outsource potential I recall was designed to save the client 10%-15% of costs in handing over its private fleet to a contract provider. Upon further investigation the savings were in the areas of reducing the already reasonable driver wages and there was a miscalculation in potential fuel savings under the outsourced proposal. The company chose to stay the course with its own fleet but the exercise helped identify other savings opportunities that were eventually implemented.

Outsourcing is a very difficult process to reverse once you’ve done the deed. Be sure to conduct a complete and thorough evaluation. Understand the scope of the outsourced function, real and potential. These decisions are usually long term, met with some internal resistance and may require some support in selling the concept and in the implementation. Get the help you need along the way.