Outsourcing Part 1

Out-sourcing gets a bad name from time to time, too often associated with cost cutting, off-shored call centres ‘taking jobs from the UK’, apparently poorer service quality and long waits (both of which may have been as true even if they remained in the UK).

Out-sourcing is not a modern concept, just a modern term. Centuries ago, armies were in effect out-sourced to the top lords. The pre-industrial revolution cottage based manufacturing was a form of outsourcing. In modern times, businesses started out-sourcing with basic services that clearly were not core to their proposition or skill-base – e.g., cleaning or catering. Outsourcing spread to areas where economies of scale, specialist skill requirements or irregular work volumes determined it was a lower cost or more effective answer: some smaller businesses effectively outsource the sales function by using agents or self-employed, commission based sales people; few businesses have more than a skeleton legal department; smaller businesses often out-source accounts functions; many larger businesses sub-contract the development and operation of their IT. Most recently, few businesses would now consider buying and operating their own business system server – often requiring frequent maintenance and capacity upgrades, as well as the operational and commercial risks associated with downtime or peak usage – when the option to sit on the huge capacity of something like Amazon exists.

However, many businesses struggle with the concept of out-sourcing the core processes and skills of creating their products for customers (either by sourcing or manufacturing) and getting them to their customers. At most, businesses use a haulier’s vehicles rather than their own, and do not think of this as out-sourcing.

But, at either end of this spectrum, out-sourcing is set to grow – in the design of products or services, where specialist agencies or knowledgeable and incentivised suppliers can sometimes out-perform in-house functions. And in logistics provision.

Designing, sourcing and manufacturing products and understanding the consumer and trade customer environment for those products is a coherent set of inter-locking skills. Running a managed warehouse - including picking products and putting loads on vehicles - is not part of that set. Additionally, with end to end logistics costs averaging 12% of sales value, not doing it as efficiently as possible can make a material difference to competitiveness. If you make widgets, you are likely to be an expert on widgets; less likely to be an expert on cutting edge logistics provision. For a third party logistics provider , this 12% is its 100% - the focus of their business, for which they can win or lose customers if not executed with the appropriate lowest cost/ highest service mix. A 3PL has the vertical and horizontal experience of logistics to build skills and capabilities from shared experience. At its most basic, outsourcing logistics will have a lower fixed costs from the economies of scale of shared facilities, outweighing the profit the third party needs to make.

Zupplychain’s mission is to help make outsourcing temporary or permanent warehousing easier, quicker, more flexible and lower cost. The key to successful outsourcing is efficient communication, real time information and clear performance metrics, all of which have influenced the development of Zupplychain, in particular our pallet database. Our vision is to enable businesses to take advantage of ‘pop up warehousing’ and ‘dynamic warehouse networks’ (for more on this see our previous blog .). As such, we hope Zupplychain can help businesses as they go through the three stages of logistics outsourcing:

  • ‘Emergency outsourcing’ – the short term solution to peaks in requirements, whether expected or unexpected.
  • ‘Tactical outsourcing’ – the mid-term approach to particular circumstances such as needing to store some products closer to a customers or a port; or for a specific contract.
  • ‘Strategic out-sourcing’ – the long term alternative to owning or leasing warehouses and operating them by building the whole supply chain around third party provision, possibly with multiple third parties for cost, service or geographical reasons.

That’s Part One of ‘Out-sourcing’, we hope you enjoyed it. In Part Two, we will summarise the advantages of outsourcing.