Supply Chain Management Outsourcing – What’s the Verdict?

Supply Chain Management Outsourcing has been on many experts’ lists (including Gartner) in regard to the supply chain trends to watch out for in 2020.

However, unlike blockchain, artificial intelligence, the Internet of Things or even 3D printing, supply chain management outsourcing makes a rather unexpected new appearance in these forecasts and seems to have been bubbling away in the background for the last few years. But with new research from Gartner suggesting that 85% of supply chain managers expect their outsourcing budgets to grow by 5% in 2020, with a sizable portion being aimed at choosing multiple 3PL providers, is this trend good for the industry?

What is Supply Chain Management Outsourcing?

Supply chain management outsourcing is allowing another company to be part of the process that sees the product go from development to consumer. However, contrary to many people’s perceptions, supply chain management outsourcing usually does not involve outsourcing production to another company in a country where production costs are cheaper. Often firms that undertake supply chain management outsourcing will use other firms that specialize in supply chain management and logistics in order for them to handle the company’s distribution needs, with domestic transportation, warehousing and freight forwarding being among the most frequently outsourced activities.

The Benefits

• Reduced costs: When firms undertake supply chain management outsourcing, they partner up with another firm, which has knowledge and expertise in the sector they are outsourcing. These are usually known as – in the case of logistics – third-party logistics providers or 3PLs. By partnering with the right 3PL, the original firm has access to the 3PLs knowledge and expertise which in the long run leads to a lower cost structure due to specialization. As a result of a more streamlined and efficient service, some of the unnecessary cost associated with inventory, cold storage, sampling, overheads and staffing can be reduced. This can be achieved, for example, through better inventory management or transport optimization.

• Competitive Advantage: Sometimes when a firm tries to achieve everything by itself, it proves unsuccessful, results in higher costs and/or is inefficient. Overall this results in the business becoming less competitive. However, by outsourcing to a specialist, the company gains access to facilities, knowledge, capabilities, competencies and infrastructure that may have been inaccessible or unaffordable for the firm before. As a result, the firm will become more efficient due to specialization. This increased efficiency alongside a reduction in costs gives firms increased economies of scale and therefore is likely to give them a competitive advantage over their competitors.

• Adapting to change: Being able to adapt quickly to change is becoming increasingly important for firms. However, firms can often find themselves stuck or left behind because they cannot adapt quick enough to current market developments. The reason: trying to do everything while often specializing in nothing. By outsourcing to a specialist provider, this allows a firm to react quicker to demand by expanding and downsizing as necessary, allowing them to remain more competitive.

The Potential Drawbacks

• Unexpected Costs: While some companies can benefit from a reduction in costs due to outsourcing, others find that their costs may unexpectedly increase. For example, coordination costs typically increase when any logistics process is outsourced. While this is quite obvious and not at all unexpected, some 3PL providers are not being completely transparent with their cost model. Consequently, some firms could find themselves paying out additional costs for things such as labelling, boxing and pick & packaging.

• Quality: Firms may experience issues with the quality of their product when undertaking outsourcing due to everything not being controlled in-house. If a 3PL decides to either use cheap materials or try and cut corners, this can often lead to reduced quality of the finished product, which could ultimately lead to a reduction in sales. For example, if cheap packaging is used on a product, there is the possibility that it will be damaged in transit. As a result, the original firm may develop a bad reputation leading to an overall sales reduction. Alongside this, returns are likely to increase. Due to the costs associated with poor or substandard quality, often representing 5-12% of buyers revenues, concerns over the quality of service provided are likely to influence whether a company chooses to outsource.

• Integration: The process of outsourcing does not happen overnight. When the contract is signed, the likelihood of a perfect service by the partner straight away is pretty slim. Often there will be a transition period over which information will be shared to the partner. However, there are no guarantees that this will be smooth. In order to fully integrate, a lot of time and effort as well as good communication must be put in by both partners – and even this doesn’t guarantee an easy transition or a successful relationship. For example, in the case of the Dollar Shave Club, their relationship with their 3PL appeared to work at first but ultimately the company ended the relationship with the 3PL provider. With data sharing between shippers and 3PLs becoming increasingly important, the impacts of a lack of communication are likely to have a bigger effect.

What’s the verdict?

Like many things, supply chain management outsourcing comes with its benefits and its drawbacks. While many of the drawbacks appear like they could be more major problems, they are often either solved and worked through in time or can be prevented through picking the right partner or 3PL. With 93% of shippers reporting that their relationships with 3PLs have been successful and a further 83% reporting that it improved their customer service in the 2020 Third-Party logistics study, it appears that supply chain management outsourcing can prove successful to companies who choose the right 3PL to fit them.

Header Photo: Pattanaphong Khuankaew – Getty Images