Today, a growing number of organizations are choosing to delegate non-core activities, such as distribution, to external agents. Despite the advantages and risks associated with outsourcing, this essay seeks to define the concept and explore why organizations are increasingly embracing this approach. Furthermore, it will analyze the pros, cons, and potential hazards that outsourcing poses for these entities.
Outsourcing is when an organization hires a specialized external service provider or employs external agents to perform work that is normally done in-house. This has become more common among large corporations who delegate their distribution function, either completely or partially, to these external agents.
Outsourcing goes beyond the distribution aspect and includes a range of functions within organizations, including information systems and building maintenance. These functions have been outsourced for a considerable duration.
Organisations outsource their distribution function for various reasons in today’s dynamic and changing environment. Such environment necessitates adaptability from organisations as competition undergoes transformation. With the global economy, competitors can emerge from either across the ocean or across town. The organizations that can effectively respond to competition and the changing environment are the ones that demonstrate flexibility.
Today’s organizations differ greatly from traditional bureaucratic organizations in terms of their management structure and control methods. In the past, bureaucratic organizations relied on multiple levels of management and sought control through ownership. These organizations would conduct their own Research and Development, have company-owned production plants, and employ in-house sales and distribution teams. To support these functions, additional staff such as accountants, human resources specialists, and supply chain management specialists were required. However, contemporary successful organizations have shifted towards outsourcing many of these functions and focusing on their core competencies.
Outsourcing is a strategy that organizations can employ to manage change in the external environment. It involves delegating certain functions to specialist companies with more expertise and focus on managing change, thereby reducing its impact.
Globalisation is having an impact on the growth of outsourcing as more companies are looking to expand into foreign markets. However, these companies often lack the expertise to handle the supply chain process in international markets. As a result, they turn to logistic companies that specialize in this area. The increasing complexity of distribution networks is another factor driving the trend of outsourcing. With advancements in technology, storing and moving goods has become more complicated, and manufacturing organizations prefer to outsource these functions to logistics companies that have the necessary skills and technology.
For instance, Marks and Spencer, a leading global retailer, has opted to outsource its distribution function to Exel, a top provider of logistic services. M&S has enlisted Exel’s assistance in managing its intricate distribution service. Currently, Exel handles distribution for 23 M&S stores in South England and also maintains partnerships with M&S in France, Spain, and Hong Kong. A noteworthy advancement brought about by Exel is a cutting-edge technology that allows for the shipment of 10 suits in the space typically occupied by four garments, thus enhancing M&S’ export operations. Moreover, M&S customers now receive a heightened level of service as the stores can be swiftly restocked. All these benefits and more demonstrate the advantages M&S has gained from outsourcing its complex distribution service.
Outsourcing distribution functions can benefit a company in several ways. It can lower operating costs by about 9%, as reported in a 1993 study. When a company outsources distribution to a world-class provider, the function becomes more cost-effective and specialized. Additionally, outsourcing non-essential activities like distribution allows a company to focus on its core activities and generate more revenue. Managers understand that by outsourcing routine operations, they can concentrate on their core competencies, which sets them apart from competitors. For example, Ericsson, a leading telecommunication company, aimed to cut costs in its supply chain, specifically in its warehouses in the Philippines. To achieve this, Ericsson turned to Exel and leased the warehousing operation to them for two years. Exel provided a flexible service that led to cost savings and enabled Ericsson to focus on its core business areas. Previously, Ericsson had managed the warehouse operation internally, which was not aligned with its core competencies.
Outsourcing has the benefit of reducing the need to invest in non-core business assets like warehousing and carriers. This allows the firm to allocate more capital funds towards core functions such as research and development in the telecommunication industry.
One example is Northern Telecom, a enterprise operating in 130 countries, which has outsourced its distribution service to Ryder Dedicated Logistic. The primary reason for this outsourcing decision was that Northern Telecom 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.
Outsourcing has encountered challenges in its development and implementation. Complaints from firms often revolve around cost increases and inadequate service quality provided by third-party contractors. However, contractors argue that these issues often arise due to the firm’s failure to clearly communicate their expectations for outsourced distribution services. To address these concerns, it is essential for both the firm and the service provider to establish clear objectives and foster effective communication and understanding.
Experts agree that there is no magical solution to outsourcing anxiety. However, organisations can increase their chances of success by carefully evaluating their needs and finding outsourcers that align with those needs. It is crucial to establish a functional and committed relationship with these outsourcers. In recent times, outsourcing deals have moved away from the traditional vendor/client dynamic and are evolving into long-term partnerships that are highly interdependent. These partnerships involve the sharing of value and risk.
The fundamental impact of outsourcing on current management of a function is a significant risk. When a service is outsourced, the role of managing the service within the organization undergoes a radical transformation into managing the business relationship with a contractor. The loss of control resulting from moving this function outside the organization is often perceived as the highest risk associated with outsourcing. Consequently, careful planning and management are crucial.
When outsourcing is done correctly, it does not necessarily lead to a loss of control. It can be seen as shifting from supervising a particular task to supervising the related contract. By careful planning and creating a well-crafted contract that includes provisions for performance monitoring and efficient management, the drawbacks of reduced control can be reduced or eliminated.
The process of outsourcing now often involves the transfer of assets. This can include transferring staff, selling existing equipment, or transferring existing contracts used in providing the service. It is common for specialized outsourcing companies to request the transfer of existing staff to carry out the work. To facilitate this process, the organization can allow staff and bidders to communicate about staff options.
Some staff find it valuable to work with an organization that specializes in their field, while others prefer redeployment or redundancy.
Sometimes, the sale, lease, or sublicense of a site may also occur, making it essential to conduct a comprehensive asset valuation as part of the process to determine an organization’s current service and preferred requirements. Additionally, it is necessary to review pertinent documentation to understand the organization’s equipment, physical property, consumables, current service contracts, and the important details of those contracts.
When organizations decide to outsource distribution activities, specialist outsourcing companies often ask for the transfer of current staff to handle the assigned work. To facilitate this process, organizations can encourage communication between their staff and potential bidders about options related to the staff. All these factors should be considered when choosing to outsource distribution activities to external agents.
While there are advantages of outsourcing for companies looking to meet their logistics needs, there are also disadvantages associated with this strategy.
Productive and prosperous relationships in outsourcing rely on following essential principles from the beginning. Disregarding these principles can lead to dissatisfaction and potentially early contract termination.
The first principle in outsourcing is for the buyer to establish the desired scope of services and performance metrics from the supplier. This step ensures that the buyer can have confidence in entrusting its processes to the supplier and receiving the desired outcomes. It is also important for holding the supplier accountable. It is crucial to define these expectations before signing a contract. Allowing the supplier to determine the services and performance levels often leads to failure in an outsourcing relationship. Failure can also occur if the buyer does not clearly communicate the boundaries and details of each service component. This may result in the supplier providing unagreed services at a higher cost or not delivering what the buyer expected for the price paid.
Organizations can mitigate outsourcing concerns and increase their likelihood of success by evaluating their requirements, selecting outsourcers that align with those requirements, and establishing a functional and dedicated partnership with them. Rather than following the conventional vendor/client dynamic, outsourcing agreements are now evolving into long-term partnerships that are mutually dependent, collaborative, and involve the sharing of value and risk.
When a small organization decides to outsource its distribution service, one drawback is the lack of control. To solve this problem, it is important to be cautious when choosing vendors and creating outsourcing contracts. The contracts should include specific performance measures and a defined timeline for achieving goals. If a vendor fails to meet the required standards or falls short in any way, the company should have a predetermined course of action.
Additionally, the manufactory is responsible for maintaining customer relationships, while the logistics company takes care of product distribution. Regardless of how or by whom it was sent, customers are primarily concerned with receiving the product. Thus, it is vital for the company to monitor and evaluate the performance of the third-party logistics provider and enforce necessary requirements. Failure on the part of the logistics provider to meet expectations will lead to a loss of customers and a decline in market share.
When a company is unable to concentrate on its primary tasks, it should contemplate outsourcing those duties. By trying to handle everything internally, the firm may impede the growth of its core strengths and fail to acquire a competitive edge. However, caution must be exercised when choosing an external provider as the relationship between the organization and vendor is critical. To guarantee a prosperous outsourcing experience for distribution purposes, it is essential to establish comprehensive and efficient contractual agreements. Throughout negotiations, the company should align its specific requirements with the capabilities of the supplier in order to create a contract founded on shared objectives.
In order to prevent outsourcing failures, the firm must assess the provider’s capability to effectively perform the job and ensure accurate performance of tasks. These failures typically occur when the third party fails to deliver the desired service.