Outsourcing

Coming together is beginning. Keeping

together is progress. Working together is
success.
Henry Ford (1863-1947)
 Introduction
Outsourcing is generally defined as working with a supplier to
provide a function or service that isnt a part of an organizations
core competence.
The essence is to take advantage of a specialist providers knowledge
and economies of scale to improve performance and achieve the
service needed, usually at a lower cost but not necessarily.
Companies that opt to outsource must ensure that any outsourced
processes remain seamlessly integrated with the rest of the business
and furthermore improve performance.
 Outsourcing Model
Model proposed by Mclvor (2000) describes process for companies that
opt for outsourcing.
McIvor suggests the main areas that need to be assessed are whether
The activity is core to the business, whether there are political considerations,
The potential cost savings are significant enough to make outsourcing viable, and
There are capable and compatible partners in the market.
Vitasek (2010) added one more dimension to this list, i.e.
Whether or not a company has internal expertise that creates value for the
company beyond what the market can provide
The outsourcing decision (McIvor
2000)
 Reasons for not outsourcing
Capgemini (2013) found 5 reasons about why companies
do not opt for outsourcing .
logistics is a core competence within the company;
cost reduction would not be experienced;
logistics is too important to consider outsourcing;
service level commitments will not be realized; and
corporate philosophy excludes outsourcing.
Outsourcing Decision Matrix Vitasek (2010)
 Reasons for outsourcing
Advantage Advantage
Access to greater expertise Concentration on core
competences
Cost reduction Cost control and visibility
Flexibility Shared-user opportunity
Less capital expenditure Innovation
Service level improvement Resource availability
Reduction in management Risk reduction
time
 Core activity/core
competence
Outsource of warehouse operations depend on a firms
perception towards its significance.
Firms that feel it as important handle it on their own and
other outsource it.
Companies that do not have the competencies also opt for
outsourcing of this activity.
There may be companies that donot have the core
competencies but, wish to develop them (in warehousing)
 Tests to identify core
competencies
According to Prahalad and Hamel (1990), core
competencies are the source of competitive advantage.
Three tests to decide on core competencies are:
It provides access to a wide variety of markets.
It contributes significantly to the end-product benefits.
It is difficult for competitors to imitate.
 Preparing (prerequisites) for
outsourcing
Ensure current processes are as efficient as possible: you should
never outsource a problem it only gets worse.
Understand your current cost structure.
Benchmark the operation against your peers both internally and
externally.
Determine your future strategy.
Understand the third-party market which third parties are
operating in your market sector?
Collect the relevant data.
 Issues (for consideration) in
outsourcing
Although tempting, outsourcing a problem is not a good idea. If you
do not have the resource internally then utilizing consultants is an
option.
Its highly important to understand the total cost of current operations
before requesting responses from potential partners. Clarity on your
costs is important to arrive at payments for outsourcing.
Clarity on additional cost due to outsourcing is also important.
Benchmarking your current operations help is outcome expectations,
post outsourcing.
 Request for information

Information from potential candidates few aspects is

important. These include:
Experience in and understanding of your particular market sector;
Availability of resources;
Suitable range of services;
Ability to comply with timescales;
Financial stability;
geographic coverage;
Contract renewal success rates; and
Culture.
 Precautions for selecting
outsourcing party
Provide as much data as possible.
Dont be too prescriptive allow scope for blue sky thinking.
Allow the third parties to visit the existing operation.
Share the questions and answers amongst all participants.
Allow sufficient time for the third parties to respond.
Ensure that key staff are available during the tender process.
Ask for an estimate of start-up costs.
Ensure that all responses include the third-party assumptions.
Request a timetable for implementation.
 Precautions to Choose the right
partner
Strategic synergy: the potential fit of the business model and
strategic priorities of the partner organization are aligned with your
own.
Operational synergy: the potential fit of the relevant business
processes of the partner organization are aligned with your own.
Commercial synergy: the nature of the commercial, risk management
and service level agreements between both companies are aligned.
Cultural synergy: the cultural fit between the two organizations at
strategic and operational level is strong.
Outsourcing decision matrix
 Additional issues considered for
selecting a partner
Creativity and ability to innovate;
Ability to communicate and collaborate;
Trustworthiness;
Flexibility and operational agility;
Cultural fit;
Outsourcing relationships (Why
they fail?)
Why outsourcing fail?
 Reasons for non-renewal of
contracts
Loss of trust.
Reluctance to change during contract period.
Promised flexibility not delivered by third-party logistics.
Poor levels of service.
Higher cost than envisaged and rate hikes during the contract.
Failure to deliver as contracted, charging for services theyre already
contracted to provide.
Cheaper competitors.
Lack of commitment by third-party logistics.
End of the topic Outsourcing