Gartner Inc. says so many companies are turning to supply chain outsourcing that the strategy calls for some best practices of its
“For many areas of supply chain outsourcing, the decisions were driven from a tactical, cost-basis-only perspective,” said Michael Dominy, the Gartner research director who wrote the recommendations, basing them on vendor briefings, client visits and a round-table discussion at Gartner’s supply chain executive conference. Now supply chain managers want to do a better job of including other factors in their demand planning, such as quality, agility and service, Dominy said.
The savings mentality was especially prevalent when North American manufacturers first decided to outsource production to places like China because of their cheaper labor, according to Dominy. But now high-end apparel makers, for example, are factoring in the true cost of the months of ocean shipping required to bring Asian products to the U.S. retail market.
“Demand- and supply-side planning when you have a number of outsourced partners is different from traditional inside planning,” and requires a cloud-based “supply chain control tower” that provides broad visibility, control and performance analysis of the partners, Dominy said.
“What’s necessary is a solution that’s pre-built, pre-defined and has the integration to the trading partners,” he said. Major ERP vendors are providing this level of control and visibility by offering out-of-the-box integration between supply chain modules like transportation and warehouse management and cloud-based trading partner networks.
Inside advice on business process outsourcing
Outsourcing providers divide into three major categories, according to Dominy. Execution-oriented service providers take on transportation and warehousing tasks and include third-party logistics providers (3PLs), among others. Contract or outsourced manufacturers, along with business process outsourcers (BPOs) -- which handle what Dominy calls “white collar supply chain management” jobs like procurement and ERP purchase-to-pay processing -- are the other two.
In his Gartner report, Dominy recommends the following best practices companies can use to manage outsourcing providers effectively.
- Align the outsourcing strategy with the company’s overall business and supply chain strategies. For example, manufacturers that make “high touch” customer service a priority will need partners with agile and flexible delivery models, while those competing mostly on price will seek lean, low-cost partners. Most companies operate several supply chains, each with its own volume, cost and customization requirements, and outsourcing partners should have capabilities that fit each segment, Dominy writes.
- Assess the company’s existing ability to manage outsourcing partners. The report recommends using a maturity model to evaluate stakeholder interactions with partners and identify new outsourcing that is needed to become more demand-driven. The most mature companies set up centers of excellence and dedicate staff to managing their outsourcing.
- Understand the company’s core competencies and where they overlap with those of supply chain outsourcing providers. Major players in the three main categories are expanding onto each other’s turf, so it’s important to know which services are core to each provider and which are not. The report cites an example of an anonymous high-tech manufacturer that experienced significant customer-service and order-fulfillment problems when it reassigned outbound logistics from a 3PL to a contract manufacturer. Dominy advises striking a balance between too few and too many providers. For example, using a single provider can reduce complexity but lead to service failures or higher costs if the provider strays too far from its core competency.
- Make outsourcing decisions based on strategic and tangible factors, not just cost. Some companies that have outsourced functions such as manufacturing later found customer-service and quality problems ate into their savings. Dominy advises companies to do a cost-service analysis before outsourcing production and include quality, responsiveness, references and risk in the decision criteria.
- Consider the corruption and intellectual property risks of outsourcing to specific regions such as Asia. The data can then be useful in defining policies, procedures and governance for doing business in those countries.
- Maintain a regular flow of supply chain data, information and ideas and share it regularly with outsourcing partners. Share information that directly affects the partner -- such as promotions and supplier changes -- on a weekly basis. Establish a mechanism for collecting ideas for improving performance and visibility and discuss them at regular intervals, such as monthly or quarterly.
- Define service-level agreements and key performance indicators that are linked to business goals, then track them. Companies that do so tend to have more positive relationships with outsourcing partners and achieve better results, according to the report. “You want to have clear rules and responsibilities and the kind of seamless, fast information flows between your company and supply chain partners,” Dominy added.
- Leverage the outsourcing partner’s processes, technologies and capabilities if it’s warranted. Providers can sometimes do the job better, and they might be able to do it faster and more easily with their own technology.