Is It Too Risky to Outsource Your Supply Chain?

Once considered a great way for a smaller company to streamline operations and compete with larger businesses, even the big boys are seeing the potential of outsourcing. Before making a decision about outsourcing your supply chain management however, it pays to understand the advantages and the potential drawbacks.

Why Do Business Owners Consider Outsourcing?

The main reason for business owners thinking about supply chain outsourcing is the same reason they would outsource accounting or IT support. They want to reduce business expenses and increase the amount of net profit generated. With more profit on hand, it’s easier to fund marketing campaigns, provide employee benefits, and in general use the money to strengthen the entire operation.

Think of the challenges associated with managing a supply chain in-house. Purchasing departments must be staffed and trained. Relationships with vendors must be established and maintained. Overseeing usage and setting up ordering schedules takes time, even with the aid of software. Add these factors to the potential to increase net profits and it is easy to see why a business owner would rather outsource than take on the challenge of managing the supply chain.

How Outsourcing is Done

Supply chain outsourcing focuses on securing a partner who will manage all or at least most of the day-to-day tasks associated with maintaining a steady influx of raw materials while also ensuring the production of finished goods is sufficient to meet demand. That partner will utilize a combination of practical experience and technology to ensure there is always enough to work with, but not so much that the company ends up paying higher taxes on supply inventories.

The key to success is a partner who understands the business model well and can create a plan of action that minimizes delays in the delivery of goods needed for production, can keep lean inventories, and ship orders to customers on time. The partner will also make use of GPS technology to monitor inbound and outbound shipments to ensure all activity is online.

The partner will watch the rate of production closely. In order to keep the raw materials inventory low, this means scheduling inbound deliveries so the materials arrive shortly before they are needed; utilizing software to track usage and, setting up ordering parameters to accomplish his goal. A manual override can be used if the business receives an unusually large order. At that point, the partner will know exactly where to go for the materials needed and how to get them to the production facility quickly.

Outsourcing Supply Chain Management: Two Success Stories

General Motors employed this strategy in 2010 by partnering with Comprehensive Logistics Inc. to create a just-in-time schedule for the delivery of components needed for manufacturing automobiles. The outsource partner took on the tasks of vetting suppliers, setting delivery schedules, and being ready to jump in if a shipment was delayed.

The arrangement allows General Motors to focus more on setting reasonable production quotas and devoting more time and resources to marketing its vehicles. The connections provided by the partner helps to ensure quality components are purchased and volume discounts are employed to keep overall costs lower.

Associated Grocers has used a similar strategy offered by Ryder Logistics. Thanks to the careful balance between deliveries and meeting customer demand, their stores are fully stocked and there are no worries of not having what shoppers want.

Volume purchasing results in lower cost per unit for AG, which further helps to keep general business costs in check. The result is higher customer satisfaction, lower warehousing costs, and less taxes to pay on goods on hand.

Making a Decision

There is no one-size-fits-all solution when it comes to deciding if outsourcing the supply chain management is the right move.

The only way to make an informed decision is to sit down with a partner and work through the logistics needed to make the relationship work. This is not something that can be done during a quick afternoon meeting.

Keep in mind that while it could take weeks or even months to develop a viable outsource plan, doing so could position the company for saving a great deal of money. Take the time to find out how this approach could be integrated into the operation.

If it will reduce costs, free up revenue, and in general make the operation stronger, it is worth pursuing.

Information sourced from: Business Bee, Industry Week, and Forbes