Posts Tagged ‘improve profitability’

A company’s supply chain can either be one of it’s greatest competitive advantages or a huge disadvantage it struggles to overcome. Market leaders typically enjoy significant advantages over their competition because of their supply chain. Another characteristic that market leaders share is that the vast majority outsource some or all of their supply chain. Coincidence? Hardly.

Why do leading businesses outsource? The reasons are as varied as the companies themselves. However, it usually boils down to three primary reasons: Need for flexibility, the need for speed, or improving profits.

Walmart has one of the best supply chain networks in the world. However, due to the volatile nature of imports, the cost of real estate around major ports, and the expertise needed to meet customs requirements, they outsource most of their import warehousing.

Some of the leading manufacturers also outsource pieces of the distribution networks. Today Atlanta is one of the biggest supply chain hubs in the world. That wasn’t the case 25 years ago. Milwaukee use to be the center of all things beer related, including supply chain. That isn’t the case today.

The point is that companies realize that great supply chain solutions for today may be a major problem years from now if they are stuck with a building in the wrong location. This could result in a major competitive disadvantage to competitors who built flexibility into their networks.

Often, companies will outsource to 3PL’s to minimize the risk of these major demographic changes. Outsourcing has other advantages also.

Outsourcing requires less up front capital costs and agreements can be structured to avoid impacting bank covenants.

Outsourcing a new operation is usually much faster than building facilities. Companies leverage 3PL’s infrastructure to provide geographic coverage much quicker than they would be able to if they had to go through the building and development process.

Companies often outsource to limit certain liabilities. For example if a company with a non-union workforce needs operations in a highly unionized area, they will outsource to provide protection from their other operations. In addition, issues with health insurance, worker’s compensation, and shrinkage can be limited by outsourcing.

In the right situation, outsourcing can provide a cost effective solution, fast. The result will be a more flexible, more secure, more profitable supply chain.

Many companies today are outsourcing functions in many areas. Call centers, for example, are being outsourced for a lot of good reasons. Executives, however, have to be careful in selecting the provider they use when outsourcing.

To the customer, the party you outsourced to is you.  Customers don’t care who’s name is on the paycheck of the person they are talking to. They will hold you responsible.  Before you blindly follow the recommendation from the VP of Procurement, check out the service provider yourself.

By the way, if you want to eliminate some excess, wasted overhead in your company, cut the entire Procurement Department.  During my 15 years as a service provider, I never saw a Procurement Department that earned their keep.  I also never talked to any insiders that had to use them that thought they were worth a nickle either.  But, I digress.

A good example poor customer service reflecting badly on the outsourcing party is Healthcare Recoveries, working on behalf of Highmark Blue Shield (guess the “blue cross” wasn’t PC). I received two letters from Healthcare Recoveries for claims related to treatment on two of my children. The letters asked me to call an 800# during normal business hours and answer a couple of questions. Of course, they didn’t say what the questions were.  They didn’t offer an simple online solution and most irritatingly,  they wouldn’t answer the phone!

For two weeks, I called the 800# during normal business hours.  I’ve called FIVE times to date and have yet to talk to a human being.  I am concerned about my health insurance so I must keep calling.  However, I’m getting upset with Highmark Blue Shield. They are the ones who continue to raise my premiums and cost me money and it is clear they are wasting it on this call center service that won’t answer the phone.

Bet the VP of Procurement and the CEO of Highmark Blue Shield NEVER actually called the 800 # to see how it really worked. They probably reviewed a great power point presentation and probably actually called the references the potential providers gave them. However, I bet they didn’t put themselves in the shoes of their customers and try to use the service.

Instead of just being bitter, I thought I would offer up a few outsourcing guidelines for all:

1. Don’t use Procurement for anything.  They don’t know anything about the subject matter, providers, or internal needs of the guys who have to live with their decisions.  Procurement people are like the consultants that ask to borrow your watch then tell you what time it is.  Let the internal experts pick the providers when outsourcing.
2. Put yourself in the shoes of your customer and see if the service is as advertised.  Figure out how to mimic your customers and use the service.  Don’t tell anyone, just do it.
3. For every reference a provider gives you, find two more that use the service that they didn’t give you.  A great place to find these “other” customers is from the providers competition.
4. After you’ve hired them, check out their service yourself, regularly.  In a prior life, we started a hot line for employees to call.  Once a quarter a member of our Board of Directors would call to see how we would react to his fake situation.  This hot line was a great success and it’s success was in no small part due to that Board Member who kept us on our toes.
5. Never forget, to the customer, that party you outsourced to is YOU.  You can’t blame anything on them.  The customer doesn’t care.  If they love them, they love you.  If the customer gets upset dealing with them, they are mad at you.

Hopefully, now you can make better decisions in outsourcing.  Shoot, worst case, you can feel good about getting rid of your Procurement Department and cut needless, ineffective overhead expenses!

According to Armstrong & Associates in their newly released report “Trends in 3PL/Customer Relationships – 2009″, seventy-seven percent of Domestic Fortune 500 companies use 3PLs for logistics and supply chain functions.  Now this is a lesson in success for the rest of the corporate America.

Why would 77% the biggest and best of U.S. business outsource such a critical function as supply chain management?

There are many reasons.  One of the most common is that the 3PL’s can do a better job than the company can do themselves.   In fact, they can perform at a level that justifies their fee they add on top of the cost of running the supply chain function. Often companies use 3PL’s to leap frog technology, instantly benefit from best practices, or effectively hire some of the best leaders in the supply chain industry.

There are a bunch of other benefits to outsourcing that you should consider. One is that outsourcing allows your business to focus on your core competencies like customer service, or manufacturing or marketing or merchandising.

Outsourcing can in effect be an insurance policy against shrinkage, worker compensation claims, and  level of service performance issues.  Using a 3PL can act as a protective shield to the rest of business against any labor issues emanating from the outsourced area.

Last but not least, outsourcing can provide flexibility and scalability in areas that typically require significant long term capital investment. Whether you are in the middle of a bear market or a bull market, having flexibility, protection, and options when managing capital intensive functions can have far reaching financial and competitive benefits.