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Strategic Outsourcing


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Title: Strategic Outsourcing

Strategic Outsourcing
  • Henry C. Co N. R. Creencia
  • Technology and Operations Management,
  • California Polytechnic and State University

What is Outsourcing?
  • Outsourcing is the act of transferring some of
    an organizations recurring internal activities
    and decision rights to outside providers as set
    forth in a contract.
  • Strategic use of outside parties to perform
    activities, traditionally handled by internal
    staff and resources.
  • Contracting out non-core and non-revenue
    producing activities to specialized service
  • Unlike traditional practice of contracting,
    outsourcing is a strategic management tool that
    involves organization restructuring unlike in
    contracting. It allows the organization to
    concentrate on its core competencies

Strategic Outsourcing, A Structured Approach to
Outsourcing Decision and Initiative, (1999)
Maurice F. Greaver II.
Theory Practice of Outsourcing by Dave
Griffiths http//
  • Outsourcing non-core business processes to
    outside service providers like
  • Logistics
  • Warehousing
  • IT Software/Hardware
  • Human Resources
  • Payroll processing
  • Manufacturing
  • Enterprise Resource Planning
  • A multi-billion industry.
  • Visit http//

History, Trend, and Growth
  • The oldest form of outsourcing is specialized
  • The original cotton and woolen mills that define
    the start of the industrial revolution were
    self-contained entities.
  • Mechanics made everything on site except the
    bricks and mortar for the buildings.
  • Over time, people discovered that they could sell
    equipment to mills by designing and making
    cheaper and better equipment.
  • They succeeded and gave birth to the outsourcing

  • Many people would argue that this is not
  • However, it meets the criteria
  • A third party is providing a product or service
    designed to meet the buyers specification and
    the buyer is motivated because the seller is
    offering with specialized expertise and/or a
    lower price.

Trend in larger organizations is to outsource
entire processes.
  • Nike focuses on what it does best marketing, and
    leaves the manufacturing offshore, in places such
    as Thailand.
  • Nike designs what they are selling. The Thai
    manufacturer makes and delivers the products.
    Nike receives the products, check them against
    specifications and quality assurance standards.

Expected to grow at double-digit rates over the
coming decade.
Why Outsource?
  • Focus on core competencies
  • Frees management from repetitive/mundane tasks,
    reduces investment, generates cash
  • Organization can concentrate on core
  • Organizations can adopt best-in class
  • Vendors have considerable strength and focus on
    outsourced processes. To remain competitive, they
    are continuously looking to improvise their
    services and adopt best practices to make them
    more efficient.
  • This helps organizations achieve faster,
    efficient, effective and more economical business

  • More competitive
  • Can respond more effectively to changing demands.
  • Allows companies to gain more scalability.
  • Outsourced activities allow companies to
  • have greater leverage in responding to changes
  • to gain market access, expand.
  • Reduced cost and advanced technologies
  • Latest technologies
  • Vendors often implement latest technologies to
    make their processes and services.
  • Companies can take advantage of these
    technologies, which they might not be always able
    to do if they were conducting activity in-house.
  • Economies of scale
  • Vendors economies of scale helps drive down
    overall cost in the system, thus enabling
    companies to realize more productivity and

Why Not?
  • Loss of Expertise Can lead to decrease or total
    loss of in-house expertise
  • Loss of Control Increases organizations
    vulnerability as it becomes partially or totally
    dependent on a service provider
  • Conflict
  • Need to modify policies/procedures or develop new
    policies/procedures to coordinate with vendor
  • e.g., QC policies, problem resolution procedures
    need to be in place to address any situation
    arising regards to quality of services.

  • Staff Morale
  • Layoffs, reallocation or re-training.
  • Training and education to help employees adjust
    to new methodologies and new environment.
  • Uncertainty
  • Cost

Outsourcing Logistics
  • Logistics process of strategically managing the
    procurement, movement and storage of materials
    and finished goods through the organization and
    its marketing channels in most cost efficient,
    effective and profitable manner for the
    organization and the customer
  • Outsourcing logistics function to free resources
    (time and finance) to focus on mission-critical
    and core activities
  • A multi-billion dollar industry
  • George Logemann, director of outsourcing
    consulting outsourcing is 30 bullion to 40
    billion global industry.

Prof. M. Christopher, http//
Third Party Logistics Providers (3PL)
  • is the function by which the owner of goods
    outsources various elements of the supply chain
    to one 3PL company that can perform the
    management function of the clients inbound
    freight, customs, warehousing, order fulfillment,
    distribution, and outbound freight to the clients

  • Focus on Core Competencies
  • Saves companys limited resources to concentrate
    on what it does best.
  • Ryder Dedicated logistics and GMs Saturn Ryder
    fully takes care of Saturns logistics needs
    Saturn concentrates on manufacturing.
  • Best Practices
  • Organizations may not always follow best
    practices. Outsourcing logistics to third party
    logistics allows companies to implement best
    practices. This allows organization to achieve
    best performance.

Designing and Managing the Supply Chain -
Concepts, Strategies, and case Studies D.
Simchi-Levi, P. Kaminsky and E. Simchi-Levi
Irwin McGraw-Hill,ISBN 0-256-26168-7
  • Enhanced technological capabilities and
  • Use of information technology has enhanced the
    efficiency of logistics operations. TPL often
    invest in these technologies to provide
    competitive services.
  • Investment
  • Organizations can save considerable amount of
    investment that may be required in building
    logistics assets, networks and facilities like
    warehouses. Companies can outsource these
    requirements by outsourcing logistics and invest
    in developing their core processes.
  • Economies of scale
  • 3PL who own assets would have considerable size,
    large customer base, and considerable resources,
    which in turn mean economies of scale.

  • Cost
  • Outsourced logistics may cost more than running
    in-house operations.
  • Customer orientation of 3PL
  • How customer oriented or flexible is the 3PL is
    important. These intangible benefits need to be
    carefully evaluated.
  • Asset owning versus non-asset owning 3PL
  • Whether 3PL owns assets or does not own assets
    should be considered in decision-making.
  • 3PL who own assets would have considerable size,
    large customer base, and considerable resources,
    which in term mean economies of scale. On the
    other hand they may tend to favor their own
    divisions and may not be flexible enough.
  • Non-asset owning 3PLs may not own assets but
    they would tend be more flexible, allowing them
    to tailor services to suit the client needs.

3PL Services
  • Transportation Management
  • 3PLs fleet (or alliance partners) offer
    optimized network to serve their customers.
  • Shipment Management System (SMS) allows 3PLs to
    plan load management, routing, and equipment and
    driver management, network freight analysis.
  • SMS can be effectively integrated with Warehouse
    Management Software (WMS), to provide integrated
    logistics solutions concepts like multi-stop
    workload or less than truckload are often used to
    serve their customers better.
  • Multi-vendor consolidation reduces overall costs.
    Full truckload economies can be used to combine
    freight from different vendor to common

  • Warehouse management
  • 3PLs run and manage warehouses using Warehouse
    Management Systems, radio frequency scanning, and
    bar code labeling
  • 3PLs manage and track the movement of goods from
    initial receipt to outbound shipment. Real time,
    periodic and accurate information can be provided
    to manage inventory and demand better.
  • Additional services like advanced shipment
    notifications can be generated to inform the
    retail partners in the supply chain.

  • Packaging
  • 3PLs often have ability to do final product
    packaging in their warehouse, thus eliminating
    the need to ship product to off site packaging
    companies. This in turn means reduced product
    handling, reduced cycle time and reduced costs.
  • 3PLs can offer variety of packaging services
    like custom pallets, display shippers, inserts
    and coupons, labeling and printing, repackaging /
    conversion and also wrapping and bundling.

Extended Capabilities
  • Kopczak, L. Trends in Third Party Logistics,
    Ascet, Vol. 1, Stanford University, (4/1/99)
  • http//

  • Information technology to enhance traditional
    logistics capabilities
  • Reduce intermediate stocking, cross docking or
    merge in transit
  • Enhance tracking and tracing capabilities
    enabling their clients to achieve better
    coordination and management of inventories and
    goods in transit.

  • Customized solutions to match customers
  • Some 3PLs have co-located their activities to the
    shippers site, thus taking over activities
    traditionally performed by the shipper.
  • Reassignment of activities enables companies to
    reduce overall processing cost and reduce supply
    chain inventories.
  • Some 3PLs act as local agents with complete
    material management, order processing, order
    fulfillment capabilities.
  • Some 3PLs are involved with the financial
    process invoicing, credit checks and collection.

  • Integrate and coordinate activities performed by
    many entities in support of local and global
  • Integrate order management, payment processing,
    warehousing into the supply chain
  • Provide resources to e-business enterprise to
    manage the supply chain.
  • Many are equipped with EAI (middleware) to
    interface legacy systems with e-marketplace
  • Provides customer a single point of integration
    into e-marketplace.
  • Examples
  • CTI Logistx
  • Roadway Express

  • CTI Logistx
  • Network builders are building corporate alliances
    with CTI Logistx to integrate services and
    applications into end-to-end B2B solutions.
  • Roadway Expresss website
  • Hosts applications to provide information
    solutions for managing pre-pick up through
    post-delivery shipping transactions
  • Provides shipment status, allows them to create
    bills of lading, provide complete view of invoice
    and remittance in real time
  • Calculate transit times, provides specific rate
  • Generates customized reports
  • Supports EDI transactions sets for exchange of
    business documents between supply chain partners.

  • Dynamic reconfiguration of activities to address
    changing requirements.
  • Shippers are demanding logistics providers to
    develop dynamic business structure, so that
    logistics providers can respond to changing
    environment as a result of new product increases
    and changing channel partners configurations.

  • Canadian-based Unigistix Inc
  • Provides highly integrated and flexible services
    for rapidly expanding B2C operations.
  • Company has unparallel ability to organize
    space, equipment and storage systems into
    flexible e-commerce-based logistics management
    solutions that can be reconfigured to perform a
    wide range of tasks".
  • EDI enables integration of in house systems and
    with those of clients. EDI enables detailed
    capturing and processing of client organization
    that can be used to execute efficiently and

Fourth Party Logistics (4PLs)
  • 4PLs provide comprehensive SCM solutions
  • Can assess, design, build, and run integrated
    comprehensive supply chain solutions.
  • Implement best of breed approach to provide
    services and technology to a client.
  • Leverage the capabilities for 3PLs, technology
    services providers and business process managers
    to deliver a comprehensive supply chain solution
    through a centralized point of contact.
  • Integrate clients supply chain activities with
    their own capabilities, providing one-stop

(No Transcript)
Three phases of outsourcing
  • Internal analysis and evaluation
  • Needs assessment and vendor selection
  • Implementation and management
  • http//

Phase 1 Internal Analysis and Evaluation
  • Pre-requisite Top management involvement
  • Internal Analysis
  • Identify organizational goals understand
    services to outsource
  • Identify and understand its core competencies.
    This exercise will allow organizations to
    identify non-core activities and functions.
  • Evaluation
  • Compare cost of conducting activities in-house
    with outsourcing
  • Non-financial questions
  • How critical are these functions/activities?
  • What are the dependencies on these activities?
  • Does this activity tends to become a mission
    critical activity?
  • Long term cost and investment implications
  • Work morale and support.

Phase 2 Needs Assessment and Vendor Selection
  • Analyzing needs and requirements
  • Information within the organization
  • Companies who have outsourced similar services.
  • Vendors who can fulfill these services.
  • Request for proposal (RFP)
  • Helps company evaluate its needs
  • Helps vendor understand if they can perform.
  • Helps assessment and comparison of vendors.
  • RFP should
  • Define complete requirements in measurable terms
  • Describe the problem that needs to be resolved
  • Describe the type of relation the company is
    looking for
  • Specify service level

  • Vendor Assessment and selection
  • Assessment by cross-functional team with
    expertise in legal, finance, human resources and
    the specific function being outsourced.
  • Evaluate vendor's financial stability, cultural
    fit and proven track record. If possible contact
    vendor's existing clients.
  • Contract
  • Negotiate and sign contract.
  • Performance criteria and how they will be
  • Define service levels and consequences of not
    meeting them.
  • Both the parties should communicate regularly and
    openly and express mutual desire to succeed.

Phase 3 Implementation
  • Define/identify tasks, establish time frame
  • Establish mechanism to monitor/evaluate
  • Training/education to help manage new
    relationships and change
  • Identify, communicate and resolve issues promptly
    and fairly.

7 Steps to Successful Outsourcing
  • Based on
  • Maurice F. Greaver II, Strategic Outsourcing- A
    Structured Approach to Outsourcing Decisions

  • Planning initiatives
  • Exploring strategic implications
  • Analyzing costs/performance
  • Selecting providers
  • Negotiating terms
  • Transitioning resources
  • Managing relationships

1. Planning Initiatives
  • Assess risks
  • Announce initiatives
  • Form project team
  • Engage advisers
  • Train the team
  • Acquire other resources
  • Address issues resource management, information
    management, project management
  • Set objectives.

2. Exploring Strategic Implications
  • Understand organizations vision, core
    competencies, structure, transformation tools,
    value chain, strategies
  • Determine decision rights, contract length,
    termination date
  • Align initiatives.

3. Analyzing Costs and Performance
  • Measure activity costs
  • Project future costs
  • Measure performance existing and future, cost of
    poor performance
  • Benchmark costs/performance
  • Determine specific risks, asset values, make
    total costs, pricing models, final targets.

4. Selecting Providers
  • Set qualifications
  • Set evaluation criteria
  • Identify providers
  • Screen providers
  • Draft RFP
  • Evaluate proposals qualifications, costs
  • Performa due diligence
  • Determine buy total costs, short-list
    providers, finalist providers, review with senior

5. Negotiating Terms
  • Plan negotiations
  • Address high-level issues, deal breakers
  • Prepare term sheets
  • Negotiate contract scope, performance standards,
    pricing schedules, terms and conditions
  • Announce relationship.

6. Transitioning Resources
  • Adjust team roles
  • Compare/merge transition plans
  • Address transition issues communication, human
    resources, other production factors
  • Meet with employees organization, provider
  • Make offers/termination
  • Provide counseling
  • Physically move.

7. Managing Relationships
  • Adjust management styles
  • Set up oversight council
  • Communicate
  • Define and design meeting agendas, meeting
    schedule, performance reports
  • Perform oversight roles
  • Confront poor performance
  • Solve problems
  • Build the relationships.
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