University Of Lima

Business and Economic Sciences Faculty

International Business Career

ESSAY ABOUT OUTSOURCING AND

DISTRIBUTION WITHIN THE SCM
Research work for the International Logistics Course

Fernando Diego Carhuas Bastidas

Code 20192552
Yaskara Ghianara Carrasco Ferrari
Code 20190379
Joaquin Alejandro Gomez Reategui
Code 20190858
Jorge Arturo Santillan Stella
Code 20193446
Sebasthian Alexander Perez Aparco
Code 20191535

Advisor

Mariela Beatriz Ortega Meneses

Lima – Perú

November 2021
ii
ESSAY ABOUT OUTSOURCING AND
DISTRIBUTION WITHIN THE SCM

iii
 TABLE OF CONTENTS

1 ABSTRACT.......................................................................................................................v

2 INTRODUCTION............................................................................................................1

3 CONCEPT, DEFINITION AND DESCRIPTION........................................................2

4 IN WHICH PROCESS OR PROCESSES OF THE COMPANY IT IS USED..........5

5 BENEFITS AND DISADVANTAGES FOR THE COMPANY THAT USES IT......7

5.1 Capital savings and cost reduction..............................................................................7

5.2 Flexibility to expand and economies of scale..............................................................7

5.3 Provides services that add value to the supply chain...................................................8

5.4 Access to industry knowledge and experience............................................................8

5.5 They offer innovative and impactful solutions............................................................8

6 SUCCESSFUL USE CASES IN COMPANIES OR IN A SUPPLY CHAIN............10

6.1 Kubota Corporation...................................................................................................10

6.2 Primark......................................................................................................................11

6.3 Iberia Mantenimiento................................................................................................11

7 ANALYSIS AND CONCLUSIONS..............................................................................13

8 REFERENCES................................................................................................................15

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 1 ABSTRACT

In a globalized world where companies have a commercial presence in different countries, it

is necessary that procedures and logistics management are as optimal as possible. In order for
this to be possible, it is often required that these companies look for strategies in their supply
chain that allow them to be competitive in the market. This essay seeks to identify the
principal purpose of outsourcing distribution in supply chain management for companies. In
this opportunity, the study used a non-experimental descriptive qualitative methodology
based on secondary sources as main references. As a result, we were able to recognize the
value of outsourcing in any part of the supply chain with an emphasis on distribution
logistics. Furthermore, the principal processes where companies can use this strategy and the
variables that determine this were identified. Finally, this theory of logistics was put into
practice through real-life company cases which chose to sub-contract these distribution
services and the advantages of these acts were highlighted.

Line of research: 5306 - 3.D1

Key Words: Outsourcing, distribution, supply chain management, logistics, competitive

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 2 INTRODUCTION

In recent years, companies have become increasingly competitive and seek to take advantage
of their other competitors in any aspect. A great aspect to take advantage of is the issue of
costs, since, by reducing them, the company leaves more room for what its profit margins are.
In the same way, certain expenses related to the infrastructure and technology of the company
can be saved. However, a key factor in opting for outsourcing is comparative advantage, that
is, outsourcing allows a company to focus most of its resources on the main activity of the
company or on strategic areas and the other areas to be operated by subcontracted companies,
thus it is more profitable for them to subcontract to another company to carry out these
activities and the company can improve its efficiency in the key activities of the company.
Similarly, there are several types of outsourcing, but the one that will be discussed in this
paper is distribution outsourcing.

First, the work begins with a brief definition and description of outsourcing, followed
by an explanation of what distribution outsourcing is and the levels it has. There is also a
section that explains the process or processes of the company where distribution outsourcing
is used and executed by the subcontracted company. In the same way, the main profits or
benefits that the fact of subcontracting a company for the distribution part brings for
companies are mentioned, the benefits refer to monetary benefits as improvement benefits for
the company. Finally, it concludes with the exemplification of 3 success cases where
companies use distribution outsourcing or where distribution outsourcing was used for the
supply chain, and with the respective analysis of all the work and their respective
conclusions.

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 3 CONCEPT, DEFINITION AND DESCRIPTION

Outsourcing of distribution involves the procurement of physical and/or service inputs related
to distribution from outside organizations either through cessation of an activity that was
previously performed internally or abstention from an activity that is well within the
capability of the firm; in other words, outsourcing of distribution implies handing all the
operations related to warehousing and distribution to a third party.

Distribution logistics, in particular, involves planning, realisation and control of the

movement of goods or services. It is an inter-organisational logistics system, where the major
objective is to make the logistics channel from the supplier to the customer qualified,
especially, in terms of costs and performance.

The nodes of a distribution network include:

● Factories where products are manufactured or assembled

● A deposit

● Distribution centers for order processing, order fulfilment and receiving returning
items from clients

● Transit points for cross-docking activities

● Traditional retail stores, supermarkets, hypermarkets, among others (Stark, 2019)

There are three levels of outsourcing should be evaluated before taking the decision to
hand these operations, according to the goals a company has, the managers must decide
which level of outsourcing could be the best option, there are 3 options:

● A transactional relationship with a service provider with agreed deliverables but

no long-term agreement.

● A negotiated term agreement for the provision of services that also allows for the
exchange and free flow of information.

● A true partnership contract that defines the relationship and provides full
visibility into each other’s operations with possible gainsharing. (SCGG, 2018)

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 The outsourcing choice can be developed in the following way: companies can either
contribute in building a logistics organization, or they can contract this work out. It is
significant to consider components related to quality, capacity, labor, planning and aptitude to
be critical in this decision. The company moreover should decide the benefits of outsourcing
agreeing to a few criteria, such as, return on assets and incorporate the hazard figure within
the sourcing choice. According to Abdur and Chen (1998), this decision must be analyzed
properly through the next series of questions:

● What are our company’s most significant logistics considerations: Competitive

position? Bottom-line cost? Inventory control of finished goods? (Abdur & Chen,
1998)

● Do we have adequate manpower for these functions? Do we have a

knowledgeable distribution staff, enough support, and third-party help? (Abdur &
Chen, 1998)

● Have we made a current cost-benefit analysis of internal staffing versus

outsourcing to accomplish our goals? (Abdur & Chen, 1998)

The answers, or indeed the method of looking into these questions, ought to give the
company’s administration an understanding of the qualities, shortcomings and future needs of
its logistics operations. Companies ought to select third-party distribution services providers
by coordinating up the requirements of their companies with the basic competencies of the
potential distribution suppliers.

Traditionally handled by the firms internally as support functions, logistics activities,

including distribution have been given low priority compared with other business functions.
However, the need for developing sustainable competitive advantage, the growing emphasis
on providing a fast and effective service, and the strategic value of focusing on core
businesses resulted in the evolution of outsourced distribution which is very different from
internal distribution. (Reeves et al., 2010)

Thus, understanding what drives outsourcing decisions is an important step in

building a successful process of distribution and logistics activities, in general. The main
reasons behind choosing to outsource the distribution of a company are the following:

Reduced Capital Investment: Having an outsourcing service in terms of distribution

can considerably reduce the expenses of this element within the Supply Chain Management
process, since adopting an in-sourcing management carries several fees related to

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warehousing, fleet management, security, temperature controls, among other costs. (APS
Fulfillment, Inc., 2017).

Eliminate Labor Issues: Labor issues and personnel costs play an important role
within a company’s decisions, in that way, managers tend to favor hiring outsourcing
companies with previous experience and a positive reputation in warehousing and
distribution. (APS Fulfillment, Inc., 2017).

Increase Customer Satisfaction: According to APS Fulfillment, Inc. (2017). Assuming

more and more responsibilities within the company carries greater risks of making mistakes,
the responsibility for these will fall entirely on the company without outsourcing and will
negatively affect its reputation. This is another reason why some companies try to avoid these
drawbacks and only focus on activities in which they are fully capable.

Fluctuations in Seasonality: In research from APS Fulfillment, Inc. (2017). There are
numerous peak sales periods during the year, in which the operations of a company are
overloaded, and it is necessary to hire or train extra personnel and rent additional equipment
for a short period, and then get rid of these temporary elements, when this season is over.
This added burden can be handled by a distribution outsourcing company that has the means
to do a successful job in these periods.

Experience and knowledge: An external company dedicated to distribution already

has the technology, personnel, and experience necessary to carry out activities within this
area, compared to a company that has little experience and many limitations. (APS
Fulfillment, Inc., 2017).

Security issues in distribution: There are numerous security compliance issues that
must be addressed when distributing. This includes elements such as certifications,
availability of spaces and people, among other matters. Implementing the various necessary
measures can be extremely difficult along with other management tasks. The outsourcing of
companies with operations related to distribution provides access to third-party specialists
and their existing security infrastructure. (APS Fulfillment, Inc., 2017).

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 4 IN WHICH PROCESS OR PROCESSES OF THE
COMPANY IT IS USED

It is relevant to mention in this section that it is important for today's companies to be quite
clear about the management and proper handling of the distribution chain. The reason for this
is because it is governed by different models, where the objective to be met must be aimed at
reducing storage costs, increasing the quality of customer service -which is a valued point
and increases the added value of the product that the company is offering to its consumers-,
and therefore, allows them to have a competitive advantage over other competing firms in the
market in which they are. (Chavez & Martin, 2018).

In line with the previous paragraph, and for companies to achieve this advantage over
their competitors, which represents an increase within the institutional organization, today's
companies must focus on the use of technologies and the development of innovations in their
processes. The purpose of this is to make a difference compared to its direct competitors.
However, the question that arises in this section is the following: How will they achieve these
objectives? Well, a quite acceptable and suitable answer is to resort to outsourcing of
distribution, which will allow them to have a series of advantages and benefits that their
direct rivals do not have.

First, it is important to mention that a distribution channel is made up of people and

companies, which are committed to transmitting merchandise from the manufacturer to the
final consumer of this product. The channel is always influenced by the entire chain, from
beginning to end, involving producer, distributor, wholesaler, and end-user. (Willian, Michael
& Bruce, 2007).

In the same way, Ballou (2004) affirms that the distribution channels are intermediary
companies that manage the arrival of the products to the end-users. In addition to this, he
defines it as the optimal route for the product to reach the consumer from the factory, to meet
the objectives of the company and customer satisfaction.

According to Longenecker, Moore, Petty and Palich (2010), the distribution channel
is made up of the route that the merchandise or service must follow from its origin or

5
production to its consumption and, in addition, by all people and companies who intervene so
that this operation can become a reality.

As for outsourcing of distribution, we can find various processes in which companies

adopt it; However, this depends a lot on the sector to which the company belongs. If we focus
on a trading company, the processes include activities such as product storage, warehousing,
order preparation, inventory control, package and packaging, cross-docking (which
corresponds to a type of order preparation without placing merchandise in stock, operation or
picking), reverse logistics (which serves as a way of sustainability for the company) and the
traceability of the good and the supply chain. (Airpharm, 2020).

Regarding the storage of products, a good contract with an outsourcing company will
in turn allow us to have greater control regarding the rotation of our inventories and have
greater control and attention regarding the resources used. Regarding the preparation of
orders, a greater control could be established regarding the delivery and dispatch dates of the
products to our suppliers, which will be mainly focused on the final consumers. Then,
regarding cross-docking, which according to the ESAN Connection Web Portal (2018) refers
to the following: “logistics tool promotes cost savings, increases product quality and reduces
delivery times. This not only contributes to optimizing logistics processes but also to
increasing customer satisfaction”, it will allow us to have a broader control of our line of
business, which in turn will be closely related to the good application of reverse logistics,
which refers to the planning, implementation and control of the flow of products back to the
point of origin, always seeking efficiency and profitability. (ESAN, 2015). This last term will
help us to have a better relationship with customers, create a company image with social
responsibility with the environment, minimize the impact on the environment and reduce
costs. In addition to this, it could also be implemented in the transportation process, since
they could offer us discount packages for longer routes or for the volume of products that we
want to transport from one place to another.

If the processes can be outsourced in the best possible way, and with companies that
offer the best packages and quality provided, a series of good results can be established, and
the company can achieve its objectives in terms of profitability, costs and work capital
Management. In addition, with this, it will be possible to have better management, study and
control of the KPIs of the activities of the logistics chain. If the distribution is outsourced
within the company's supply chain and in each of its processes, the company will be able to
focus on other areas of its business, so that it can subsequently increase its sales volumes.

6
 5 BENEFITS AND DISADVANTAGES FOR THE
COMPANY THAT USES IT

The distribution strategy is an increasingly critical aspect of the business, it requires a great
deal of planning and meticulous logistics, from stock control, order management, packaging,
shipping, and delivery of products. Many small companies are not able to finance the
performance of all these activities on their own, there are also large companies that want to
avoid this process and focus their growth in new areas, in these cases companies should
consider partnering with logistics companies for the outsourcing of the distribution of
products that brings many benefits such as the following.

5.1 Capital savings and cost reduction

Leasing warehouses and infrastructure for distribution require a large capital investment, it
also immobilizes capital that can be used for business expansion, labor costs, property,
equipment and transportation are expensive and represent a risk, but if they are operated By
third parties, this risk of the company is eliminated and costs are reduced, allowing expansion
without having up-front capital. In addition, the savings that can be achieved in the process
are improved productivity due to the optimization of labour and the automation of processes
that will allow redirecting time and energy to the main operations of the business, the
elimination of waste in an operation allowing greater efficiency with the company's
resources, optimization of shipping and transportation, since the outsourced company will
choose the correct way to serve customers with the right balance between cost and service
level.

5.2 Flexibility to expand and economies of scale

It will provide the flexibility to configure and scale your distribution model as business
demands change, order volumes fluctuate seasonally throughout the year, and some rush
orders may be unplanned and you have to sacrifice cash or service personnel when customer,
logistics and distribution companies are efficiently adjusted to meet their compliance needs,

7
as they can expand or reduce their resources as their business changes because it works in
combination with the needs of other companies when it enters new markets or introduces new
products, your need for distribution and warehousing services increases. "Outsourcing
distribution eases the transition and can renegotiate your volume requirements, mitigate
increased costs, and reap benefits from your economies of scale" (SCCG, 2021).

5.3 Provides services that add value to the supply chain

In addition to saving money in distribution, they provide value-added services to improve the
supply chain such as preparation of packages in the last process before the product goes to the
market to drastically reduce inventory and transportation costs; returns processing, reverse
logistics and inspection, according to the distributor Legacy (2021) in e-commerce it is
normal that between 30% and 40% of online clothing orders end up being returned, then the
supplier will take care of the processing of return, ensuring that the customer receives a
replacement item or is properly reimbursed and this is important because managing the
logistics of a return is a key step in all supply chains.

5.4 Access to industry knowledge and experience

The distribution of goods and operations in the supply chain are usually not very
knowledgeable by managers and business owners, so you can take advantage of the years of
experience and knowledge of the external provider in operational processes and the network
of contacts within your industry that are strategic advantages that are obtained through
outsourcing.

5.5 They offer innovative and impactful solutions

There are “warehouse management systems (WMS), transportation management systems

(TMS), radio frequency identification (RFID) and electronic data interchange (EDI)
integration capabilities” (Legacy, 2021) are technological solutions that add visibility and
connectivity to the supply chain, create efficiencies and streamline supply chain processes, as
well as allow real-time access to detailed inventory information and allow you to forecast
upcoming trends.

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 In the same way, there are some disadvantages inherent to these kinds of services,
these may include certain risks, the most prominent examples are the following:

● Service delivery, this activity may fall behind time or below expectation, and this
complicates the distribution of the merchandise.

● Confidentiality and security, a terrible performance by a third company, may

put at risk the main company’s reputation. As with any business interaction there
must be some diligence to mitigate these risks as much as possible. (NI Business
Info, 2020).

● Lack of flexibility, the contract could prove too rigid to accommodate change in
the company. (NI Business Info, 2020).

● Management difficulties, changes at the outsourcing company could lead to

friction and issues in management and lead to some problems. This does come at
the cost of losing some control of that function as there must be some freedom of
control with the supplier to do things the way they see fit. In this case, there must
be direct work with the supplier to have successful results. (NI Business Info,
2020).

Furthermore, these disadvantages can be detrimental to the coordination process, and

an increment in dependency on outdoor organizations; if outsourcing is implemented within a
company, there will be a lack of development in related skills in the company's employees.
In the long term, this dependency can lead to poor attributes and the company can be more
susceptible to changes within the environment in which it operates. To eliminate this concern
a plan should be created to do additional external training when a company brings the
function back in the house.

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 6 SUCCESSFUL USE CASES IN COMPANIES OR IN A
SUPPLY CHAIN

The next section will show three success stories in companies where outsourcing of
distribution is successfully used within the supply chain.

6.1 Kubota Corporation

Kubota Corporation is a company headquartered in Osaka - Japan and is mainly engaged in

the development and commercialization of solutions to sectors such as the environment,
agriculture, and social infrastructure through technology and/or products. The company also
has operations in other countries, such as the United Kingdom, focusing on the production
and sale of heavy machinery and engines for agriculture and other utilities.

On the other hand, Unipart Group is a British company with a global presence that
specializes in providing logistics and consultancy services to third party companies in order
to obtain an efficient supply chain. Its main logistics services include customer service
solutions, advanced warehouse solutions, production logistics, packing solutions, inventory
optimization, integrated distribution solutions and many others.

In 2015, Kubota Corporation decided to take an alliance and outsource to Unipart

Group for the distribution operations of a line of its products in the UK. Unipart Logistics
would be in charge of the warehousing and distribution of parts as well as the supply of
mission-critical components (Unipart, 2015), making a positive impact on its entire supply
chain.

This alliance provided great advantages for Kubota Corporation as the order delivery
times were significantly reduced, improving the quality of customer service. It also allowed
the company to expand and grow because space that was previously used for these tasks was
available. Finally, Dave Roberts, CEO of Kubota UK said that this decision would help to
increase the product range but more significantly, it would help them to have a greater market
share as they would be able to expand and satisfy the needs of more customers.

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6.2 Primark

According to Primark (2021), it is an international company dedicated to the sale of fashion

accessories and various home items that differentiates itself from its competitors by offering
its products at a low-price level. It started operations in Dublin approximately - years ago, but
nowadays we can find one of its 380 shops in America and European countries.

On the other hand, according to Wincanton (2021), it is the leading supply chain
support company for UK businesses. Services such as transportation, repacking,
warehousing, and other services enable Wincanton to generate added value for its customers.

In November of this year (2021), Primark signed a contract which states that the
logistics company Wincanton will now oversee certain supply chain operations for the
company. Of these, the most relevant outsourced operation is the distribution operation.
Wincanton now takes on the role of transporting Primark's merchandise and delivering it to
different areas of the UK. Another important point is that because of this, Primark will be
able to benefit from Wincanton's technology platform called 'Winsight', which will allow it to
monitor in real-time the transport management of its supply chain. This outsourcing means
the safe and efficient delivery of Primark's products without delay, involving a total of 191 of
the fashion retailer's stores.

6.3 Iberia Mantenimiento

According to Grupo Iberia (2021), Iberia Mantenimiento is a provider of maintenance,

overhaul, and repair (MRO) services for the airlines of the International Airlines Group,
manufacturers, and the industry in general. With online and on-base maintenance activities
covering all Airbus fleets at International Airline Groups, including the most modern, A350
and A320neo.

In accordance with DHL (2021), DHL Supply Chain is a part of DPDHL Group, this
company recorded a revenue of approximately 56,600 million euros. It is also the world's
leading provider of logistics contracts. It offers integrated and customized logistics solutions,
also combining value-added management services with traditional order fulfilment and
distribution to ensure efficiency, improve quality and achieve a competitive advantage.

In 2021, Iberia Mantenimiento and the DHL Supply Chain company reach an
agreement and sign what is a strategic alliance between them. In the agreement, it was
detailed that DHL Supply Chain oversees supplying the materials that Iberia's maintenance

11
technicians need. Similarly, DHL Supply Chain is responsible for the global distribution of
spare parts when requested anywhere in the world where the airline needs it. This benefits
and is successful for Iberia, since it allows integration between the MRO (Material, Repairs
and Operations) logistics operations interface and the control tower (external shipment
management team).

This agreement is a reflection and a continuation of the good and successful

relationship that DHL and Iberia have maintained since 2008 when it was agreed that Iberia
Maintenance would oversee reviewing and repairing the RB-211 engines used by the air fleet
of DHL.

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 7 ANALYSIS AND CONCLUSIONS

To build a competent distribution network, a company must have one of the reasons
presented in the first chapter as a driving force, and it must contrast the benefits and
disadvantages that outsourcing would have in general terms of the performance of the
company; Likewise, through the questions raised, a plan can be structured according to the
objectives of the company and also regarding competitiveness and other factors, this plan will
serve to develop certain steps and stages to follow after the choice of outsourcing in the
distribution.

With respect to the processes in which a company can use outsourcing of distribution,
these are oriented towards cost efficiency and obtaining greater profitability from the
company. If the company can find a trusted outsourcing company, and that provides effective
plans and solutions for its operational activities, it will be able to achieve the objectives that
have been set and increase its performance in the different KPIs of the same.

After having collected information from different reliable sources, such as specialized
web pages, Government Organizations, e-books, among others, we have been able to
establish a series of analyzes and conclusions based on SCM's outsourcing of distribution
within.

This will develop in the following points:

● Within the data collected, it could be found that outsourcing is required in certain
aspects like as mentioned above, there are three levels of outsourcing. The
company should evaluate all the perspectives before selecting one; in the same
way, there are many drivers behind choosing to outsource, the key ones are the
reduced capital investment that is necessary if saving money is a priority,
eliminating labour issues is another important reason because it will help reduce
some financial burden; and finally, fluctuations in seasonality is another leading
reason, because it contributes at reducing the costs in chaotics periods in a year,
with an organized warehousing and distribution process, the company could focus
on doing other activities.

● It is important to mention that companies that engage in outsourcing of

distribution may present more advantages and benefits than those that do not use

13
 it, this activity generates greater added value to the supply chain, so they can
lower costs and, finally, obtain greater profitability. The processes in which it can
be outsourced are related to storage, inventory control, transportation, package
and packaging, cross-docking, reverse logistics, among others. All these activities
mentioned will allow, if there is a good outsourcing plan, that economies of scale
can be achieved within the company, and that there is better management of the
resources used.

● Distribution is a key aspect in business and not many companies have the capital
to pay for the entire process independently, so it is important to outsource the
distribution of products that brings many benefits such as capital savings and cost
reduction; the flexibility to expand based on seasonal demand and brings many
benefits to economies of scale because it allows cost savings; it also provides
value-added services to the supply chain such as packaging and the order return
process; It gives you access to a broader network of contacts in the sector and
they share with you the many years of experience that the provider has,
generating a strategic advantage over your competitors in the market. On the
other hand, outsourcing could be detrimental to the coordination process, leading
to an increment in dependency on outdoor organizations and will be a lack of
development in related skills in the company's employees.

● The outsourcing of distribution has brought many benefits to companies that have
chosen to use this strategy, there is the case of Kubota corporation that decided to
subcontract to Unipart Group for the distribution of its products in the United
Kingdom, which allowed the reduction of delivery times. of orders, improved the
quality of customer service, also allowed the company to expand and grow
because there was space that was previously used for these tasks. Also, Primark
signed a contract with the Wincanton company to take over certain operations of
the supply chain which allowed monitoring in real-time the management of the
transport of its supply chain, the safe and without delay delivery of its products.
Finally, there is Iberia Mantenimiento and the DHL Supply Chain company that
allowed the integration between the MRO (Material, Repairs and Operations)
logistics operations interface and the control tower.

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15
 8 REFERENCES

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