Outsourcing in logistics sector
Nowadays, many organisation are outsourcing their non- core activities to an external agents. Distribution is one of these activities as distribution consider as a non-core activity for many firms. Although, there are many advantage for outsourcing, there are also risks and disadvantage in this process. In this essay I would explain the term outsourcing and explain why organisations are preferring to outsource some of its functions in todays environment. Also, in this essay it has been tried to analysis the advantage and disadvantage of the outsourcing process and its risks towards the organisation.
The word outsourcing could be described as the contractual relationship with a specialised outside service provider for work traditionally done in-house. Outsourcing could also be defined as the use of external agents to perform one or more organisational activities. In the last decade or so there has been a trend, particular among large scale companies, to hand over the whole or part of the distribution function to the external agents.
One should emphasis that outsourcing is an issue that is not specific to distribution. Many other organisational functions, such as information system, building maintenance, etc, have been outsource for many years in organisations.
There are different reasons for organisations outsourcing their distribution function. More and more organisations today face a dynamic and changing environment. This, in turn, is requiring these organisations to adapt. Competition is also changing. The global economy means that competitors are likely to come from across the ocean as from across town. Successful organisations will be the ones that can change in response to the competition and changing environment. In other words, they will be flexible.
Therefore, todays organisation stand in sharp contrast to the typical bureaucratic organisations that have many vertical levels of management and where control is sought through ownership. In such organisations, Research and Development are done in-house, production occurs in company-owned plants, and sales and distribution are performed by the companys own employees. To support all this, management has to employ extra personal including accountants, human resources specialist and supply chain management specialists. However, nowadays successful organisations outsource many of these functions and concentrate on what it do best.
Outsourcing can help organisations to reduce the impact of change in the environment by outsourcing some functions to specialist companies on that function who have more expertise and focus to concentrate on managing change. So, outsourcing could consider as a strategy to manage change in the external environment.
Globalisation is another aspect which has impact upon increasing outsourcing. Nowadays, many companies are turning their attention to foreign markets, the number of global companies are accelerating. But these companies do not have in-house expertise to negotiate or operate the supply chain process in international markets. So, they need to outsource their supply chain to logistic companies which have international expertise in the distribution function. The another reason for increasing outsourcing is the increasing complexity of distribution networks. Storing and moving goods have become more complex as the technology is advancing too fast. A manufacturing organisation normally do not want to waste its management resources to this functions. Therefore, they prefer to outsource this function to logistics companies which possess all the necessary skills and technology in this service.
For example, Marks and Spencer, one of the worlds leading retailers has outsource its distribution function to Exel , one of the leading companies in supplying logistic service. M&S has approached Exel to take control of its complex distribution service. Now, Exel provides a distribution service for 23 M&S stores in South England, and also deals with M&S in France, Spain and Hong Kong. Exel has bought a revolutionary technology to M&S export operation by enabling 10 suits to be shipped in the space normally occupied by four garments. In addition, M&S customers start to get a high level of service because stores could be replenished quickly. All these and other benefits M&S has gained through outsourcing its complex distribution service.
There are many advantages which a company could get from outsourcing its distribution functions. It could reduce the operating cost of the firms. A study which has been conducted in 1993 reported that a company could reduce 9% of its operating costs by outsourcing. When a company is outsourced its distribution function to world-class provider, it would reduce the cost of this function as the provider would be more efficient and specialist in this function. Also, by outsourcing non-core activities like distribution, a company could focus on its core activities and increase revenues. . Managers realise that by outsourcing their routine, nonessential operations, they can better focus on the core competencies that truly differentiate them from competitor. For example, Ericsson one, of the leading companies in the telecommunication industry, wanted to reduce its costs in the supply chain by finding a solution to its warehouses in Philippines. Ericsson is always trying to reduce costs in different areas of business, this is including, the supply chain so as to save money and focus on Research and development. Therefore, Ericsson turned to Exel. Ericsson has leased the warehousing operation to Exel on a two years contract. Exel has provided a flexible service to Ericsson which has resulted in cost saving and made Ericsson concentrate on its core businesses. Before Ericsson has to handle the warehouse operation in-house but it was not the core competencies of the business.
Another advantage of outsourcing is the reduction of the need to invest in non-core business assets such as warehousing and carriers. This will allow the firm to make the capital funds more available for core functions such as research and development in the telecommunication industry. For example, Northern Telecom manufacture enterprise which is operating in 130 countries have outsourced its distribution service to Ryder Dedicated Logistic. The main reason for Northern Telecom to outsource its distribution function, it did not want to invest in non-core activities. The core competency of Northern is not fleet management. If the president of our company has a million dollars to invest, will he put it into fixing tracks or a new telecommunication system? says David Grant, General Manager, Global Logistic.
The development and increasing implementation of outsourcing has not been without its problem. The cost escalation and lack of quality of service are two of the more frequent complaints from firms towards the third party, although contractors argue that these problems often stem from firms failure to be precise about what they want by outsourcing their distribution service. Clear objectives need to be set by and to achieve this a high level of communication and understanding between firm and service provider must be established.
There’s no magic solution, experts agree. But organisations can reduce outsourcing anxiety — and boost their chances for success — by carefully assessing their needs, finding outsourcers that match those needs and, above all, engaging those outsourcers in a functional, committed relationship. More and more, outsourcing deals are not being patterned after the traditional vendor/client relationship but are being forged as intensive, long-term and highly interdependent partnerships in which value and risk are shared.
Another risk outsourcing is the impact of outsourcing on those currently responsible for management of the function is fundamental. If the service is outsourced, the management of the provision of the service from within the organisation is radically changed from management of a function to management of the business relationship with a contractor. The lack of control posed by movement of this function outside of the organisation is often seen as the greatest risk of outsourcing. Therefore, it needs to be carefully planned and managed.
In reality, the effect of outsourcing can simply be seen as a shift in focus from managing a function to managing a contractual relationship. If properly implemented, it need not represent a loss of control. Careful planning together with a contract written to provide for control measures such as performance monitoring, and good contract administration will minimise or negate any lack of control.
Outsourcing now commonly includes asset transfers. Examples are transfers of staff, sale of existing equipment, and/or a transfer of existing contracts used in the provision of the service. It is common for specialist outsourcing companies to seek a transfer of existing staff to do the work. An organisation can facilitate this process by allowing communication between staff and bidders about options for staff.
Many staff view the opportunity to work with an organisation that specialises in their field as valuable; others will prefer redeployment or simply a redundancy.
Sometimes the sale, lease or sublicense of a site is also involved. It is therefore important that a complete asset valuation is undertaken as part of the process of defining an organisation’s current service and preferred requirements. An examination of relevant documentation should also be undertaken. The organisation must know what equipment and other physical property it has, including consumables, what contracts are currently used in the provision of the service and relevant details of those contracts.
It is common for specialist outsourcing companies to seek a transfer of existing staff to do the work. An organisation can facilitate this process by allowing communication between staff and bidders about options for staff. All these need to be consider when the company decide to outsource its distribution activities to the external agents.
As noted, there are many advantages for companies who choose outsourcing as a means of satisfying their logistics need, but just as there are advantages there are also disadvantages.
Outsourcing is based upon fundamental principles and, if those are applied at the outset of a relationship, the parties will most likely have an effective, successful relationship. But if the parties enter into an agreement that is not based on those principles, the result will be an unsatisfactory relationship and, probably, an early termination of the contract.
The first of these basic principles is for the buyer to determine the scope of services and the metrics for the performance levels it wants from the supplier. This is the only way a buyer can achieve a comfort level with turning over its process to the supplier and ensuring that it gets what it pays for. This is the only way to ensure accountability from the supplier. It must be done up-front, before the contract is signed. A certain cause for failure in an outsourcing relationship is for the buyer to let the supplier dictate what the services and performance levels will be. Another sure cause for failure is for the buyer not to completely describe the scope and boundaries of every component of the service. This can lead to a supplier providing something that was not agreed upon and then charging a premium for it or the supplier not providing something the buyer assumed it would be getting for the price it is paying.
There’s no magic solution for these problems. But organisations can reduce outsourcing anxiety — and boost their chances for success — by carefully assessing their needs, finding outsourcers that match those needs and, above all, engaging those outsourcers in a functional, committed relationship. More and more, outsourcing deals are not being patterned after the traditional vendor/client relationship but are being forged as intensive, long-term and highly interdependent partnerships in which value and risk are shared.
Another disadvantage of outsourcing is the loss of control, especially when small organisation outsource its distribution service. The way to get around that problem is to be careful when selecting vendors and when crafting outsourcing contracts. For example, contracts should include objective measures of performance and a timetable for meeting those objectives. Should a vendor’s performance fall below a performance standard or otherwise come up short, the company should have a course of action to take.
In addition, the logistic company may be distributing the products, but ultimately the manufactory are responsible for the customer relationship. The customer only cares about receiving the product – not who sent it or how it got there. The company need to monitor and evaluate the work of the third party and need to be firm in its needs as the poor performance from the logistic will lead the firm to loose its customers and eventually loose its market share.
A firm should outsource any activity which reduce or distract from its ability to focus on core activities of the firm. If the organisation do everything, it would not have the ability to develop its core competencies and gain competitive advantage. But there is important point, which is, firms should be careful when they select the company which will provide the necessary service. The relationship between the company and the outsourcing vendor is of the utmost importance. Effective and thorough contractual agreements are the key to a successful distribution outsourcing experience. The specific needs of the organisation should be matched with the supplier’s capabilities during negotiations, to develop a contract around a shared vision.
Also, the firm need to check if the provider are capable to do the job in proper way. Most of the failure of outsourcing cause when the third party do not provide the desire service to the firm. Also, the firm should be monitor the third party to check if they are doing the right job