Outsourcing vs insourcing – which is the best route?
The decision to outsource one or more of your supply chain activities such as warehousing, transportation or distribution is influenced by many factors. The most important of these are cost and resources.
Outsourcing means using an external third-party to perform specific tasks that, for whatever reason you choose not to undertake yourself. This costs money and requires use of external resources. Insourcing, i.e. performing all activities internally using your own infrastructure and resources is often not the most economic or effective option. In times of rapid change or when a company wants to expand it is not always possible to operate with existing capacity and limited expertise, so outsourcing is an option.
What are the advantages of outsourcing in supply chain?
- Cost saving
Many full-service outsource providers in supply chain provide a wide range of local and international logistics services, including distribution and transportation. They are commonly called third-party (3PL) or 4PL companies. They have the resources, expertise and economies of scale and hopefully, more efficient operations, supply chain is their core business. Considering costs alone, outsourcing is often the clear winner.
Many companies wishing to outsource have a lack of awareness of their total expenditure on a given commodity or service. A full spend analysis of the activity under review for the previous year is recommended, it will be illuminating. Understanding your current cost structure is vital before leaping into an outsourced contract.
- Resources and flexibility
Outsourcing agreements with third parties should be able to guarantee a certain level of service and customer satisfaction. This is achieved by mutually agreeing on and monitoring performance measurements. Because volumes fluctuate and delivery requirements change, some flexibility can be built into the agreement and adjustments can be made quickly to ensure the continuation of services.
Insourcing is often a more expensive option because new work processes must be developed and implemented. Investment in assets, materials and human resources is required. Dedicated plant and equipment is expensive and is often under-utilised. It is difficult to be agile in times of uncertainty.
What are the disadvantages of outsourcing in supply chain?
- Loss of visibility and control
Companies that outsource distribution services or transportation can have reduced managerial control over the way in which the service provider operates. There may be challenges, for example, in delivery scheduling, inventory control systems and in warehouse space allocation. This compares to having full control over one’s own operations and employees when keeping activities in-house. The chosen outsource company may also have ways of working that do not fit your behavioural style or culture; at worst they may not have the same ethical approach. This needs to be actively monitored.
- Risk management
There is considerable risk in outsourcing; it can be financial, operational or reputational. Supplier failure is a real risk, key performance measurements and reporting tools can bring immediate visibility but the external environment also needs to be closely monitored. Disruption to services can be damaging, both to internal operations and to the customer. Alternative arrangements, i.e. Plan B, must be in place in advance. Reputational risk is encountered when a service provider connected to you is tainted by environmental failures or poor employment practices. Don’t be exposed!
When should we decide to insource?
In a period of rapid and sustainable internal growth, with sufficient funding, this is the time to build a team of skilled people and develop your own expertise. It will enable you to keep up with industry trends and create opportunities for innovation which may not be easily available from your outsource partner. You will have a higher level of control over your own data and operations.
There is a widespread irrational fear that outsourcing is a one-way street and that reverting back to in-house operations is difficult. If handled correctly, outsourced contracts can deliver knowledge and experience that allows a return to an insourced model at a later date.
4 success factors in outsourcing
- Understand what you want and communicate the scope of work clearly when engaging with an outsource service provider
- Ensure that you have a commitment from your executive team. There must be agreement for the engagement and alignment with business strategy.
- A mutually acceptable contract between the parties with key performance indicators that are monitored and measured at stated intervals.
- A commitment to a two-way partnership with agreement on what success looks like. The relationship must be based on trust and each party must work towards continuous improvement.
Outsourcing has become accessible to all types of companies, not only multi-nationals. It is now common practice to outsource non-core supply chain functions. Let third-party supply chain experts focus on their core business for you and you can focus on yours.
Our next two articles explore this topic in a bit more detail. Look out for more about outsourcing transport services and distribution.
Our directors are experienced logistics consultants who have worked closely with clients in a range of sectors and countries to improve or expand their warehouse and distribution centre operations.