Strategic Outsourcing

1
Strategic Outsourcing

• Henry C. Co N. R. Creencia
• Technology and Operations Management,
• California Polytechnic and State University

2
What is Outsourcing?
3

• Outsourcing is the act of transferring some of
  an organizations recurring internal activities
  and decision rights to outside providers as set
  forth in a contract.
• Strategic use of outside parties to perform
  activities, traditionally handled by internal
  staff and resources.
• Contracting out non-core and non-revenue
  producing activities to specialized service
  providers.
• Unlike traditional practice of contracting,
  outsourcing is a strategic management tool that
  involves organization restructuring unlike in
  contracting. It allows the organization to
  concentrate on its core competencies

Strategic Outsourcing, A Structured Approach to
Outsourcing Decision and Initiative, (1999)
Maurice F. Greaver II.
Theory Practice of Outsourcing by Dave
Griffiths http//www.kudos-idd.com/outsourcing/the
ory_practice.htm
http//www.adp.com/corporate/es/outsourcing/index.
html
4

• Outsourcing non-core business processes to
  outside service providers like
• Logistics
• Warehousing
• IT Software/Hardware
• Human Resources
• Payroll processing
• Manufacturing
• Enterprise Resource Planning
• A multi-billion industry.
• Visit http//www.outsourcingjournal.com

5
History, Trend, and Growth
6

• The oldest form of outsourcing is specialized
  machinery.
• The original cotton and woolen mills that define
  the start of the industrial revolution were
  self-contained entities.
• Mechanics made everything on site except the
  bricks and mortar for the buildings.
• Over time, people discovered that they could sell
  equipment to mills by designing and making
  cheaper and better equipment.
• They succeeded and gave birth to the outsourcing
  industry.

7

• Many people would argue that this is not
  outsourcing.
• However, it meets the criteria
• A third party is providing a product or service
  designed to meet the buyers specification and
  the buyer is motivated because the seller is
  offering with specialized expertise and/or a
  lower price.

8
Trend in larger organizations is to outsource
entire processes.

• Nike focuses on what it does best marketing, and
  leaves the manufacturing offshore, in places such
  as Thailand.
• Nike designs what they are selling. The Thai
  manufacturer makes and delivers the products.
  Nike receives the products, check them against
  specifications and quality assurance standards.

9
Expected to grow at double-digit rates over the
coming decade.
10
Why Outsource?
11
Benefits

• Focus on core competencies
• Frees management from repetitive/mundane tasks,
  reduces investment, generates cash
• Organization can concentrate on core
  competencies.
• Organizations can adopt best-in class
  practices.
• Vendors have considerable strength and focus on
  outsourced processes. To remain competitive, they
  are continuously looking to improvise their
  services and adopt best practices to make them
  more efficient.
• This helps organizations achieve faster,
  efficient, effective and more economical business
  process.

http//www.ala.org/alcts/now/outsour1.html
http//www.thepldgroup.com/outsourcing.htm
http//www.thepldgroup.com/outsourcing.htm
12

• More competitive
• Can respond more effectively to changing demands.
• Allows companies to gain more scalability.
• Outsourced activities allow companies to
• have greater leverage in responding to changes
• to gain market access, expand.
• Reduced cost and advanced technologies
• Latest technologies
• Vendors often implement latest technologies to
  make their processes and services.
• Companies can take advantage of these
  technologies, which they might not be always able
  to do if they were conducting activity in-house.
• Economies of scale
• Vendors economies of scale helps drive down
  overall cost in the system, thus enabling
  companies to realize more productivity and
  efficiency.

http//www.thepldgroup.com/outsourcing.htm
13
Why Not?

• Loss of Expertise Can lead to decrease or total
  loss of in-house expertise
• Loss of Control Increases organizations
  vulnerability as it becomes partially or totally
  dependent on a service provider
• Conflict
• Need to modify policies/procedures or develop new
  policies/procedures to coordinate with vendor
• e.g., QC policies, problem resolution procedures
  need to be in place to address any situation
  arising regards to quality of services.

14

• Staff Morale
• Layoffs, reallocation or re-training.
• Training and education to help employees adjust
  to new methodologies and new environment.
• Uncertainty
• Cost

15
Outsourcing Logistics
16

• Logistics process of strategically managing the
  procurement, movement and storage of materials
  and finished goods through the organization and
  its marketing channels in most cost efficient,
  effective and profitable manner for the
  organization and the customer
• Outsourcing logistics function to free resources
  (time and finance) to focus on mission-critical
  and core activities
• A multi-billion dollar industry
• George Logemann, director of outsourcing
  consulting outsourcing is 30 bullion to 40
  billion global industry.

Prof. M. Christopher, http//www.indiainfoline.co
m/bisc/sem1.html
http//www.outsourcing-logistics.com/html/yankee.h
tml
17
Third Party Logistics Providers (3PL)

• is the function by which the owner of goods
  outsources various elements of the supply chain
  to one 3PL company that can perform the
  management function of the clients inbound
  freight, customs, warehousing, order fulfillment,
  distribution, and outbound freight to the clients
  customers.

http//www.maxwell.co.nz/whatis3.htm
18
Advantages

• Focus on Core Competencies
• Saves companys limited resources to concentrate
  on what it does best.
• Ryder Dedicated logistics and GMs Saturn Ryder
  fully takes care of Saturns logistics needs
  Saturn concentrates on manufacturing.
• Best Practices
• Organizations may not always follow best
  practices. Outsourcing logistics to third party
  logistics allows companies to implement best
  practices. This allows organization to achieve
  best performance.

Designing and Managing the Supply Chain -
Concepts, Strategies, and case Studies D.
Simchi-Levi, P. Kaminsky and E. Simchi-Levi
Irwin McGraw-Hill,ISBN 0-256-26168-7
http//www.maxwell.co.nz/whyuse3.htm
19

• Enhanced technological capabilities and
  flexibility
• Use of information technology has enhanced the
  efficiency of logistics operations. TPL often
  invest in these technologies to provide
  competitive services.
• Investment
• Organizations can save considerable amount of
  investment that may be required in building
  logistics assets, networks and facilities like
  warehouses. Companies can outsource these
  requirements by outsourcing logistics and invest
  in developing their core processes.
• Economies of scale
• 3PL who own assets would have considerable size,
  large customer base, and considerable resources,
  which in turn mean economies of scale.

http//www.maxwell.co.nz/whyuse3.htm
20
Disadvantages

• Cost
• Outsourced logistics may cost more than running
  in-house operations.
• Customer orientation of 3PL
• How customer oriented or flexible is the 3PL is
  important. These intangible benefits need to be
  carefully evaluated.
• Asset owning versus non-asset owning 3PL
• Whether 3PL owns assets or does not own assets
  should be considered in decision-making.
• 3PL who own assets would have considerable size,
  large customer base, and considerable resources,
  which in term mean economies of scale. On the
  other hand they may tend to favor their own
  divisions and may not be flexible enough.
• Non-asset owning 3PLs may not own assets but
  they would tend be more flexible, allowing them
  to tailor services to suit the client needs.

21
3PL Services
22

• Transportation Management
• 3PLs fleet (or alliance partners) offer
  optimized network to serve their customers.
• Shipment Management System (SMS) allows 3PLs to
  plan load management, routing, and equipment and
  driver management, network freight analysis.
• SMS can be effectively integrated with Warehouse
  Management Software (WMS), to provide integrated
  logistics solutions concepts like multi-stop
  workload or less than truckload are often used to
  serve their customers better.
• Multi-vendor consolidation reduces overall costs.
  Full truckload economies can be used to combine
  freight from different vendor to common
  destinations.

http//www.dsclogistics.com/whatwedo/index.htm
23

• Warehouse management
• 3PLs run and manage warehouses using Warehouse
  Management Systems, radio frequency scanning, and
  bar code labeling
• 3PLs manage and track the movement of goods from
  initial receipt to outbound shipment. Real time,
  periodic and accurate information can be provided
  to manage inventory and demand better.
• Additional services like advanced shipment
  notifications can be generated to inform the
  retail partners in the supply chain.

http//www.dsclogistics.com/whatwedo/index.htm
24

• Packaging
• 3PLs often have ability to do final product
  packaging in their warehouse, thus eliminating
  the need to ship product to off site packaging
  companies. This in turn means reduced product
  handling, reduced cycle time and reduced costs.
• 3PLs can offer variety of packaging services
  like custom pallets, display shippers, inserts
  and coupons, labeling and printing, repackaging /
  conversion and also wrapping and bundling.

http//www.dsclogistics.com/whatwedo/index.htm
25
Extended Capabilities

• Kopczak, L. Trends in Third Party Logistics,
  Ascet, Vol. 1, Stanford University, (4/1/99)
• http//www.ascet.com/documents.asp?d_ID230

26

• Information technology to enhance traditional
  logistics capabilities
• Reduce intermediate stocking, cross docking or
  merge in transit
• Enhance tracking and tracing capabilities
  enabling their clients to achieve better
  coordination and management of inventories and
  goods in transit.

27

• Customized solutions to match customers
  requirements
• Some 3PLs have co-located their activities to the
  shippers site, thus taking over activities
  traditionally performed by the shipper.
• Reassignment of activities enables companies to
  reduce overall processing cost and reduce supply
  chain inventories.
• Some 3PLs act as local agents with complete
  material management, order processing, order
  fulfillment capabilities.
• Some 3PLs are involved with the financial
  process invoicing, credit checks and collection.

28

• Integrate and coordinate activities performed by
  many entities in support of local and global
  solutions
• Integrate order management, payment processing,
  warehousing into the supply chain
• Provide resources to e-business enterprise to
  manage the supply chain.
• Many are equipped with EAI (middleware) to
  interface legacy systems with e-marketplace
  applications.
• Provides customer a single point of integration
  into e-marketplace.
• Examples
• CTI Logistx
• Roadway Express

29

• CTI Logistx
• Network builders are building corporate alliances
  with CTI Logistx to integrate services and
  applications into end-to-end B2B solutions.
• Roadway Expresss website my.roadway.com
• Hosts applications to provide information
  solutions for managing pre-pick up through
  post-delivery shipping transactions
• Provides shipment status, allows them to create
  bills of lading, provide complete view of invoice
  and remittance in real time
• Calculate transit times, provides specific rate
  quotes.
• Generates customized reports
• Supports EDI transactions sets for exchange of
  business documents between supply chain partners.

30

• Dynamic reconfiguration of activities to address
  changing requirements.
• Shippers are demanding logistics providers to
  develop dynamic business structure, so that
  logistics providers can respond to changing
  environment as a result of new product increases
  and changing channel partners configurations.

31

• Canadian-based Unigistix Inc
• Provides highly integrated and flexible services
  for rapidly expanding B2C operations.
• Company has unparallel ability to organize
  space, equipment and storage systems into
  flexible e-commerce-based logistics management
  solutions that can be reconfigured to perform a
  wide range of tasks".
• EDI enables integration of in house systems and
  with those of clients. EDI enables detailed
  capturing and processing of client organization
  that can be used to execute efficiently and
  profitability.

32
Fourth Party Logistics (4PLs)
33

• 4PLs provide comprehensive SCM solutions
• Can assess, design, build, and run integrated
  comprehensive supply chain solutions.
• Implement best of breed approach to provide
  services and technology to a client.
• Leverage the capabilities for 3PLs, technology
  services providers and business process managers
  to deliver a comprehensive supply chain solution
  through a centralized point of contact.
• Integrate clients supply chain activities with
  their own capabilities, providing one-stop
  solutions.

34
(No Transcript)
35
Three phases of outsourcing

• Internal analysis and evaluation
• Needs assessment and vendor selection
• Implementation and management
• http//www.outsourcing.com/BuyerSite/howandwhy/int
  roduction/phases/index.htm

http//projects.bus.lsu.edu/independent_study/vdhi
ng1/outsourcing/index.htm
36
Phase 1 Internal Analysis and Evaluation

• Pre-requisite Top management involvement
• Internal Analysis
• Identify organizational goals understand
  services to outsource
• Identify and understand its core competencies.
  This exercise will allow organizations to
  identify non-core activities and functions.
• Evaluation
• Compare cost of conducting activities in-house
  with outsourcing
• Non-financial questions
• How critical are these functions/activities?
• What are the dependencies on these activities?
• Does this activity tends to become a mission
  critical activity?
• Long term cost and investment implications
• Work morale and support.

37
Phase 2 Needs Assessment and Vendor Selection

• Analyzing needs and requirements
• Information within the organization
• Companies who have outsourced similar services.
• Vendors who can fulfill these services.
• Request for proposal (RFP)
• Helps company evaluate its needs
• Helps vendor understand if they can perform.
• Helps assessment and comparison of vendors.
• RFP should
• Define complete requirements in measurable terms
• Describe the problem that needs to be resolved
• Describe the type of relation the company is
  looking for
• Specify service level

38

• Vendor Assessment and selection
• Assessment by cross-functional team with
  expertise in legal, finance, human resources and
  the specific function being outsourced.
• Evaluate vendor's financial stability, cultural
  fit and proven track record. If possible contact
  vendor's existing clients.
• Contract
• Negotiate and sign contract.
• Performance criteria and how they will be
  measured.
• Define service levels and consequences of not
  meeting them.
• Both the parties should communicate regularly and
  openly and express mutual desire to succeed.

39
Phase 3 Implementation

• Define/identify tasks, establish time frame
• Establish mechanism to monitor/evaluate
  performance
• Training/education to help manage new
  relationships and change
• Identify, communicate and resolve issues promptly
  and fairly.

40
7 Steps to Successful Outsourcing

• Based on
• Maurice F. Greaver II, Strategic Outsourcing- A
  Structured Approach to Outsourcing Decisions
  Initiatives.

41

• Planning initiatives
• Exploring strategic implications
• Analyzing costs/performance
• Selecting providers
• Negotiating terms
• Transitioning resources
• Managing relationships

42
1. Planning Initiatives

• Assess risks
• Announce initiatives
• Form project team
• Engage advisers
• Train the team
• Acquire other resources
• Address issues resource management, information
  management, project management
• Set objectives.

43
2. Exploring Strategic Implications

• Understand organizations vision, core
  competencies, structure, transformation tools,
  value chain, strategies
• Determine decision rights, contract length,
  termination date
• Align initiatives.

44
3. Analyzing Costs and Performance

• Measure activity costs
• Project future costs
• Measure performance existing and future, cost of
  poor performance
• Benchmark costs/performance
• Determine specific risks, asset values, make
  total costs, pricing models, final targets.

45
4. Selecting Providers

• Set qualifications
• Set evaluation criteria
• Identify providers
• Screen providers
• Draft RFP
• Evaluate proposals qualifications, costs
• Performa due diligence
• Determine buy total costs, short-list
  providers, finalist providers, review with senior
  management.

46
5. Negotiating Terms

• Plan negotiations
• Address high-level issues, deal breakers
• Prepare term sheets
• Negotiate contract scope, performance standards,
  pricing schedules, terms and conditions
• Announce relationship.

47
6. Transitioning Resources

• Adjust team roles
• Compare/merge transition plans
• Address transition issues communication, human
  resources, other production factors
• Meet with employees organization, provider
• Make offers/termination
• Provide counseling
• Physically move.

48
7. Managing Relationships

• Adjust management styles
• Set up oversight council
• Communicate
• Define and design meeting agendas, meeting
  schedule, performance reports
• Perform oversight roles
• Confront poor performance
• Solve problems
• Build the relationships.