Wednesday, October 03, 2007

Creative outsourcing


All businesses today have to focus on core processes. For most of them the list is not only short but fairly standard: product development, activities around selling and route to market, and supply chain. Relinquishing control of core processes is not a decision that is taken lightly.

At the same time it is becoming increasingly difficult for companies to maintain expertise in all these areas. There is a global 'war for talent' underway with the best people understandably preferring employers that can offer the greatest opportunities in their chosen field. The world is increasingly complex, too, with product sourcing across continents and an ever burgeoning raft of regulations to cope with.

To remain an expert in all core processes becomes increasingly difficult. Few organisations would contemplate giving up product development - that generally is their key differentiator. It is the same with sales and marketing - brand image and compliance are increasingly important.

That leaves the supply chain. For a growing number of businesses, it is an area seen as ideal for outsourcing - not just of basic logistics and warehousing functions but of product sourcing and manufacturing as well. Today's supply chain directors are no longer just responsible for trucks and sheds but for procurement, manufacturing and logistics.

If you look at what constitutes a 'core process' then these supply chain activities are on the margins. Global datapools and trading exchanges - as well as the internet - has vastly simplified procurement activities making it far easier to seek out components or raw materials from the optimal supplier. Cost factors have already driven much manufacturing offshore, subcontracted to low-cost producers in China, India, Eastern Europe or wherever. As for logistics - well that seems to have been on the outsourcing list some considerable time.

It all adds up to a 'core process' that is perhaps not quite as core as was once thought.

Total outsourcing of this entire supply or value chain is not something which most companies are prepared to adopt overnight: it's generally a development with three clear phases. Initially there is straightforward substitution - simply handing over basic activities to a third party logistics supplier who does whatever you were previously doing. This frees up both management resources and investment funds within the organisation to focus on areas which can deliver benefit and differentiation.

Strategic phase

It's a pattern we have seen repeated many times and it has typically taken companies up to 10 years to move from the substitution to the strategic phase. It has much to do with trust and building a long-term relationship with your chosen supplier. In the past few years there has been a rapid acceleration in such transitions: the importance of new and rapidly developing markets - as with Russia and Eastern Europe - and the complexities of sourcing products in low cost Asian markets has encouraged this trend for strategic outsourcing.

At the same time the 3PLs themselves have increased in the scale and variety of their operations. Co-manufacturing and co-packing activities are now commonplace and we have seen an escalation in such activities as floor-ready merchandise in the fashion sector - deconsolidating stocks, sorting size packs, hanging or unpacking product ready for sale - or retail ready packaging in grocery with products pre-sorted and packaged for delivery direct to the shelf by the service provider rather than store staff.