OUTSOURCING SUPPLY CHAIN MANAGEMENT – 3 ISSUES TO GO

BEYOND BUYER-SELLER RELATIONSHIP

Companies outsource for many reasons.They look to reduce costs, shorten cycle time,
improve shareholder value, decrease inventory, focus on core competencies, gain
information technology, increase expertise and more.

Likewise transport, warehouse, forwarder and other logistics service providers want to
provide outsource services.They want to improve profits, transition from being a commodity
service provider, gain volumes and throughput by leveraging existing core logistics service,
increase revenues and more.This creates a mutual need between the two parties.Yet despite
this common interest, half of the outsourcing relationships end unsatisfactorily within three
years.Half are not able to go beyond a buyer-seller relationship.

The responsibility for the failure often resides with both parties.Reasons for the failures run
the gamut and include:

*Poor project design

*Lack of metrics or key performance indicators (KPIs)
*Use of improper metrics or KPIs
*Not fulfilling expectations of either or both parties
*No clear lines of responsibility and accountability
*Inability to evolve the relationship from short term to long term and from static to dynamic

Some reasons for failure reflect symptoms, not causes.Failures are not unique to
outsourcing; but outsourcing is unique.Outsourcing goes beyond transport or warehouse
agreements and service.Supply chain management is one of largest costs and has
significant service impact to companies.Some contract logistics projects are critical to a
company’s supply chain and operating success.Therefore outsourcing should be designed
not to fail, especially with supply chain management.The impact can be significant to the
company doing the outsourcing.

Much is discussed about metrics and service level agreements (SLAs) in defining the
outsourcing relationship.These should be after-the-fact and matter-of-fact results of the
project definition and design.

Whether the two parties are trying to develop the contract logistics relationship or are
striving to make an existing outsourced program succeed, there are three fundamental
issues that must be addressed.

     Define what is being outsourced.This may seem obvious.However the matter may
go much deeper and may obscure the real project and program.  Both parties need to
fully understand it.At the minimum, discussion should include:

        Is it transaction or process?Transactions reflect assignment of work; process

reflects delegation of responsibility.  If the topic is using a forwarder to help with
supplier ocean transport or having a warehouse pick and pack products and deliver
them, then those are transactions.Supply chain management should be a
process.So if the contract logistics need is for transactions, then it must be clear as
 to what the transactions are, what triggers them, how they must be performed and,
more importantly, how they fit into the process.  However if the topic is managing
the import supply or managing store inventory and replenishment, then those are
processes.When supply chain process is being outsourced, then very clear
definitions of the process must be developed.

        What is the condition of the transaction or process?Whether the outsourcing

involves transactions or process, it should be assessed.The logistics activity must be
understood.Outsource providers need to understand how the activity operates, both
as its function and how it fits in the overall supply chain and company
operation.  They need to assess as to process, technology and people.Assessment
should address internal and external gaps and redundancies, interactions,
objectives, performance results—both real and perceived—and time requirements
and demands.Strengths and weaknesses must be identified.Not knowing whether
the process is flawed can contribute to the risk of failure.Identifying a flawed
process up front changes the project dynamics to include reengineering to make it
work properly.

     Mutual question of “why”.There is a “why” question.Why does one party want to

outsource part of its supply chain responsibility?Why does the other party want to take
on that activity and accountability?Each needs to define its motives and more exactly
define any hidden reasons.A clear explanation is needed and should go beyond “improve
business performance”, “improve productivity”, “improve delivery” or similar, abstract
reasons.

Unfulfilled expectations by one or both parties can have dramatic impact on sustaining
the program.Each needs to know the desired results and how the outsourcing will
achieve the desired result because the answer can directly and indirectly affect the
project design and operation.

        What is the desired outcome?Each party wants something tactical or perhaps

strategic.This has to be clearly expressed.Both parties need to be clear to each
other.This helps set the implementation plan, timing and direction.  At the same
time, expectations should be reasonable.Otherwise the seeds of outsourcing failure
may be sown.

For the company looking to outsource, it can be an attempt to reduce costs or

achieve other benefits that it is unable to realize internally.A 15% cost reduction
goal may be attainable; while a 40% may be more difficult and require a different
approach as to design, implementation and timing.

Or the desired outcome could be very different, such as an effort to transform the
business.The company may want to create a value proposition and capability for
customers that it does not perform now.Or it may be seeking to transition away
from one business into another or other business transformation.Outsourcing may
present the means to make a significant shift to lean supply chain management.So
the intent goes beyond having a third party perform the existing activity.It means
creating a new operating model, including change management.The “why” can
change the type of outsourcing service provider that the company should be talking
with, such as a 4PL instead of a 3PL.
 The firm wanting to perform the outsource activity may be looking to increase
revenues or profits.It could want a certain volume of ocean containers or square
feet of warehouse usage for economies of scale.The provider could also be looking
to shift into other industries or logistics service niches that have greater growth
potential.So the intent goes beyond performing the existing activity.The provider
wants to reposition itself as an outsource service company..

        Are the risks identified?There are inherent risks with any change; and there are
risks created with the type of change.Outsourcing involves change; so there are
risks.Supply chain management has more experience with outsourcing than other
business functions.Historically using outside transaction-activity service providers--
trucking companies, public warehouses, freight forwarders and freight bill payment
services--has occurred in logistics.Experience can change risk sensitivity; but it
should not diminish risk recognition.  Also risk assessment and mitigation should be
done for Sarbanes Oxley Section 404 and for Committee of Sponsoring
Organizations.

Potential for risks can be hidden.These can include:

      Expectations are not reasonable.The litmus test of reasonableness should be

used to identify risks for each party.Expectations must be known as to where
they are and why.  They must be tangible.The timing of occurrence and
impact should reflect transition, ramp up and learning curve.

      Potential conflict may exist initially between buyer and seller.This means
incompatibility with goal congruence.  The basic foundation is between buyer
and seller.Moving to mutual beneficial development and direction can be
hindered—or not—with this basic issue.

      Supply chain management is a process that crosses the company.This can

put outsourcing and contract logistics provider in conflict with the traditional
organization silos.

      Corporate culture and other differences may exist between the two parties as
to risk aversion which can stifle risk sharing and project success.

     Look beyond the initial twelve months. Outsourcing can start well; keeping it going
well can be difficult.Today’s metrics can become outdated.Mutual interests must stay
aligned even as needs and business can change. Otherwise atrophy can set in as the
relationship struggles to go from static, doing the same things repetitively, to dynamic,
doing it differently. Change is a fact; the rate of change is at issue.How to handle
change can be a delineator as to the end of the arrangement or moving beyond buyer-
seller to relationship management.The outsourcing must be able to adapt, to be agile.

The SLA is not an end; it should be a vehicle for ongoing.It must be flexible for
collaboration, connectivity, integrated, time compression, six sigma and other demands.

Conclusion. Outsourcing of supply chain management should be designed and developed

to succeed.  Both parties must take the dialogue deeper.Whether it      develops into a
partnership depends on mutuality. The three issues frame and drive        the relationship,
its direction, purpose and its continuity.   It should be based on a prudent, rational, open
exchange between the firm wanting to outsource and the firm wanting to handle the
outsourcing.There should be no rush to judgment and have no artificial deadlines for
completion.All this increases the chances for success.Supply chain outsourcing is too
important to fail.