At first glance, the decision to outsource supply chain seems fairly straightforward. For the minority of companies for whom the supply chain is not critical, the entire business process can be usefully outsourced to a third party logistics provider. Conversely, managing the supply chain is a core activity for most organisations and is usually retained in-house.
However, Tim Payne, European research director for supply chain at Gartner, the analyst, says that a growing trend is combining outsourcing of execution, such as warehousing and transportation, with retaining the critical planning function internally.
However, he warns that the bigger third party logistics providers have a fragmented technology base because they have grown through acquisition. “They have a whole ‘mish-mash’ of warehouse and transportation solutions and in-house software,” he says. “However, customers need more visibility across the network as they increase their footprint and run different fulfilment models, so they are looking for an integrated solution.”
Ian Maughan, a business specialist at AquiTec, a provider of supply chain management software, believes that these third party logistics providers have focused on cost-effective warehousing and distribution and neglected the value-added services that require greater investment and a more strategic approach.
“They tend to look at logistics in its narrowest sense, starting at the point where goods enter the distribution centre,” he says. “They need to promote leaner inventories, lower working capital, higher profits, improved productivity, better customer service and increased competitive advantage.”
Many organisations that wish to retain their software in-house choose to outsource implementation and operational management. “The service provider keeps it up-to-date, maintains it on a daily basis and ‘tweaks’ it to improve reliability and performance,” says Adam Jura, manufacturing technology analyst at Datamonitor. “A dedicated in-house team, has more control to over functionality, but the outside service provider gives instant access to technology skills, although they might not understand the business so much.”
William Barry, a partner at Atos Consulting, says that the larger global organisations have the scale in their technology teams to run and support big systems themselves. They also keep their data under their own control.
The chairman of the National Outsourcing Association, Martyn Hart, points out that people often outsource because they have not got the capabilities internally. “They may want to hit the market fast and may not have time to build the skills and the organisation to do it,” he says. “In a competitive market, if you try to recruit people to build a new service organically your competitors soon get to know about it. However, outsourcing is confidential until the service starts, so it can provide a competitive advantage.”
Accessing skills has always been a good driver for outsourcing and it applies particularly to the more critical areas of supply chain management, such as advanced planning. This gives rise to what Gartner calls “supply chain innovation partners” and i2, a supply chain vendor, calls ”knowledge process outsourcing.”
“It is a big and growing trend,” says John Cummings, senior vice-president at i2. “When a corporation cannot afford to have armies of very smart people in-house to do advanced planning and demand/supply management, it can go out and rent them.”
Mr Payne explains that organisations can bring in differentiation and innovation from vendors that are focused on specific processes, have a deep vertical focus or offer particular areas of functionality. “That can easily be incorporated with some of the non-differentiating internal capability to build the business processes that create a competitive advantage,” he says. “They don’t just offer technology and skills, but services like profiling, analysis and configuration.”
Jaume Ferrer, managing director for supply chain practice in Europe, Middle East and Latin America at Accenture, explains that outsourcing more value-added activities is driven by globalisation. The complexity of supply chain planning grows exponentially, as manufacturers consolidate plants and the lead times from suppliers to point-of-sale increase. Also, the percentage of sales that is driven by recently introduced products is growing, which means complexity of forecasting and supply planning is too.
“That means increasing demand for talent and skills in forecasting, planning, inventory management and procurement,” he says. “The training curve for building those skills is very long and the attrition rates are potentially high.”
Mr Ferrer also points out that many organisations do not have advanced IT and can access state-of-the-art technology and decision support tools without needing to pay for the whole licensing and set-up. Accenture and its competitors are “industrialising” the building of the skills and creating hubs globally. These provide value-added planning activities, not just warehousing and transportation.
The hosted “software as a service” delivery model, whereby the organisations share use of the software in a third party data centre, is a recent innovation, promising superior skills, a better hardware platform and lower costs. Although most organisations will already have their software in house, Mr Barry of Atos Consulting points out that with the current round of mergers and acquisitions, organisations are often divested and need ERP and supply chain software in a hurry. “They may not have the capability themselves and most will not seek to make the investment,” he says.
Ten years ago, internet-based exchanges promised revolution through automated trading and by integrating fragmented supply chains. This was an open version of the old “spoke and hub” electronic data interchange arrangements that have long been set up and outsourced by major manufacturers. The bursting of the internet bubble in 2000 caused most exchanges to sink out of sight. However, Mr Ferrer says that supply chain integration exchanges are alive and kicking.
“They haven’t revolutionised the world, but the trend continues,” says Mr Barry. “More and more people are starting to wake up to the need to manage the longer supply routes they now have coming in from the [south-east Asia].”
The decision of what part of the supply chain to outsource and how to do it has never been so complex. Competitive advantage can be derived by retaining everything in-house, by outsourcing and by a combination of the two.
