Gaining competitive advantage through outsourcing Essay

This essay has a total of 7791 words and 39 pages.

Gaining competitive advantage through outsourcing

Gaining competitive advantage
through outsourcing
Authors:
Sarah Tagliapietra
Peter Platan
Ng Seow Li
Ralph Schneider
Executive Summary
Today's escalating, competitive and demanding environment has forced players in the
marketplace to be more efficient, to emphasize on a leaner organization and continuously
innovate new procedures to keep ahead of competitors. Adding final consumer value to the
product or service in the form of lower prices, quality and better service has become an
essential requirement in the global marketplace.
Logistics outsourcing has become an attractive option in order to take advantage of global
opportunities, to acquire state of the art logistics capabilities, significantly improve customer
service and to enable focusing on core competencies.
The purpose of this study is to present a theoretical framework for outsourcing actions as a
guideline for companies on why and how to outsource. It gives a deeper insight on logistical
outsourcing as a new and promising trend in the global environment while presenting the
main logistical areas of outsourcing as well as the advantages and disadvantages.
In order to effectively implement outsourcing, commitment from top to down management
and a wide understanding of all the stages and implications of outsourcing are required. In
order to achieve these prerequisites and a successful implementation process, a model
integrating the third- party logistics buying process and relationship improvement process is
presented. It emphasizes the importance of carefully identifying alternatives, the overall
analysis of partner selection with the help of specific criteria, mutual relationship building
between logistics service buyer and provider through joint team building and continuous
improvement and performance measurement. The relationship positioning tool model can be
used for the continuous enhancement and improving of the supplier-customer relationship.
The results and overall reasons of outsourcing should focus on adding value to the final
consumer of the product or service. By achieving lower logistical costs and a higher level of
quality and expertise these results can be used to add value to the consumer.
The study points out that there is an increasing need for logistical outsourcing as a way to gain
competitive advantage and as an instrument to meet the requirements of the company's
complex environment.
TABLE OF CONTENTS
1.0
INTRODUCTION..............................................................................................................
1

1.1 OUTSOURCING
TODAY.......................................................................................................
1

1.2 LOGISTICS OUTSOURCING
.................................................................................................
1

2.0 APPROACH
.......................................................................................................................
2

2.1
PURPOSE...........................................................................................................................
2

2.2
METHOD...........................................................................................................................
3

3.0 THEORETICAL FRAMEWORK ................................................................................... 3
3.1 LOGISTICS OUTSOURCING DRIVERS................................................................................... 3
3.1.1. Advantages and disadvantages ................................................................................ 4
3.2 THE IMPLEMENTATION OF OUTSOURCING .......................................................................... 6
3.2.1 Model for
outsourcing...............................................................................................
6

3.2.2 Relationship positioning tool
.................................................................................... 9

3.3 AREAS OF
OUTSOURCING.................................................................................................
10

3.3.1
Transportation.........................................................................................................
10

3.3.2
Warehousing............................................................................................................
11

3.3.3 Inventory management
............................................................................................
13

3.3.4 Information
systems.................................................................................................
14

4.0 CASE EXAMPLE
............................................................................................................
15

4.1 BACKGROUND
.................................................................................................................
15

4.2 OUTSOURCING SOLUTION
................................................................................................
16

5.0
CONCLUSION.................................................................................................................
18

6.0
REFERENCES.................................................................................................................
19

Gaining competitive advantage through outsourcing
1
1.0 INTRODUCTION
1.1 Outsourcing today
Today's escalating, competitive and demanding environment has forced players in the
marketplace to be more efficient and to emphasize on a leaner organization. Enterprises must
adapt with increasing speed to market pressure and competitors' innovations. To survive in the
21st century, enterprises are hurrying to:
1) search globally for opportunities and resources
2) focus on core competencies and mutually beneficial longer term relationships
3) outsource those activities that can be performed more quickly and at a lower cost by
subcontractors
Outsourcing seems to be an attractive option to take advantage of global opportunities, to
acquire state of the art logistics capabilities (often at lower costs), significantly improve
customer service and most important to focus on core competencies.
The idea of outsourcing is not new. It has been utilized traditionally, but on menial chores.
Now it is currently a very popular strategy, commonly used by many companies. The
International Trade Commission reported that the trend is global. It expects the global 12%
growth in outsourcing to continue, with revenues reaching US$ 99 billion.
1.2 Logistics Outsourcing
Logistics outsourcing1 is a significant process. The total costs of logistics in highly
industrialized countries reach about 18% to 30% of GNP. More than 50% of the final price of
the product consists of logistical cost.2
But this function, for many companies, is not a core competence. This meaning that logistics
is not the means by which the company differentiates itself. Yet it is a significant operation,
because it can show a dramatic return on investment. When there exists an industry segment
such as logistics, which is a non-core activity to a large number of companies, there is an
opportunity for a marketplace for outsourcing to develop.
Logistics outsourcing is an attractive alternative, because it matches the three characteristics
companies are striving for mentioned above (enhance globalization, gain benefits from
economies of scale and specialized process expertise). It has clear and objective metrics that
can be easily measured by the buyer (inventory costs, inventory levels, the cost of
warehousing space and transportation etc). The buyer can understand the benefits received
from the outsourcing supplier and so the outsourcing relationships becomes an easy sell in
today's competitive market place.
1 This practice is also known as Third Party Logistics (TPL).
2 Storhagen, 1995.
Gaining competitive advantage through outsourcing
2
Another driving factor for the decision to outsource is that specialized skills required for
success in supply-chain management are rapidly becoming more advanced and complex, so it
becomes essential to have good expertise at hand. These specialised skills include having the
ability to effectively use handling and storage technologies; planning software and supporting
infrastructure; data-communications technologies; decision-support; demand-planning and
advanced transportation planning and control tools.
Example: Compaq, the world's number one producer of personal computers, estimates it has
lost around $1 billion in sales in 1994 because its laptops and desktops were not available
when and where customers were willing to buy them. Compaq's chief financial officer argues
that his company made the most of what needed to be done in order to be more competitive.
Compaq changed the developing, manufacturing, marketing and advertising of products. The
only area that was not addressed was logistics.
For most companies products, promotion and price are the competitive ingredients, while time
and place have taken a back seat. This relative neglect is now changing. The increase in the
geographical distances between production and consumption, and the concentration of
production to fewer and bigger units in order to be able to enjoy the economies-of-scale in
production has increased the need to store and to transport. Distribution costs, as a percentage
of revenue, are greater for international companies than their domestic counterparts.
Complexity, long order lead times, unusual product-service requirements and differing legal
and cultural factors in foreign countries have combined to create a more challenging operating
environment. Many companies are now seeking to exploit their logistical competence.
Strategic vision calls for a willingness to offer extra value-adding services. Logistically
speaking, it means meeting commitments and shipments arriving when and where promised.
Companies committed to the strategic use of logistics usually outperform the competition in
speed and consistency of the order cycle. The objective is to be the preferred supplier for key
customers. Consequently companies are willing to use qualified external support to outsource.
2.0 Approach
We will approach outsourcing from a theoretical framework by describing the processes and
possibilities of outsourcing and finally apply the methods to a practical case.
2.1 Purpose
Our purpose is to present a theoretical framework for outsourcing actions as a guideline for
companies on why and how to outsource. With this work we want to give a deep insight on
logistical outsourcing, as a new and promising trend in the global environment. We will
explain what outsourcing is and which are the opportunities offered in this field and
demonstrate how it can create value for the customer. To better show that it is not a risky
investment, but a new opportunity, we will propose a framework for the implementation of
the outsourcing decisions, describing a possible relationship between a firm that wants to test
outsourcing opportunities and a logistical consultant company. We will also apply this theory
to a small case to give an example of how the consultant company could work in that
Gaining competitive advantage through outsourcing
3
situation. Our purpose is to present the theoretical framework for outsourcing actions as a
guideline for companies on why and how to outsource.
2.2 Method
The report has been based on a descriptive approach in strive to describe the reality; how
outsourcing can create value.
No primary data was used in this report, as we used a case example for background on our
example implementation. As such all information is secondary, achieved through studies of
relevant literature, books and journals that proved useful to the study.
3.0 Theoretical Framework
This capital will deal with the theoretical framework of outsourcing. Presenting some of the
basic reasons why companies outsource and the advantages and disadvantages of the
procedure. A model for implementing the practical phases of the outsourcing process is also
presented. Finally four possible areas of outsourcing are explored.
3.1 Logistics Outsourcing Drivers
Although logistics outsourcing can vary from one business enterprise to another the basic
reasons and driving factors for outsourcing are:
1) Facilitate and accelerate business reengineering: outsourcing allows enterprises to
realize quickly the anticipated benefits of reengineering. Not only does outsourcing allow
enterprises to accomplish rapidly the anticipated benefits of a structural change, but take
advantage of already reengineered world-class provider.
2) Flexibility and reduced risk: an additional logistics outsourcing driver is risk reduction.
Investments of a sizeable amount in a non-core business can have tremendous risks. When
enterprises outsource they reduce workload fluctuations, improve flexibility and enhance
capabilities to adapt to changing opportunities.
3) Investment priority: logistics outsourcing is appealing to business enterprises because
they can switch a large proportion of fixed costs into variable costs. This will not only
improve the enterprise's balance sheet but also free capital funds for core business areas.
4) Reduce or control operating costs: cost reductions and operating cost controls are the
most often cited reasons to use third party logistics (TPL). TPL seems to have leaner
overhead structures, more expertise, less excess capacity and better control.
5) Concentration on core business: to achieve a competitive advantage throughout the
logistical activities the company should continuously develop outsourcing, upgrading its
resources; but by doing this the company may loose the focus on its core activities. By
applying third party logistics it can fill in the lack of expertise and technology knowledge
without loosing the focus on its business:
• High quality logistics service: TPL enterprises are medium to large businesses.
They tend to have extensive logistics expertise, state of the art equipment and
Gaining competitive advantage through outsourcing
4
excellent training for their personnel. The acquisition of these capabilities through an
outsourcing arrangement can result in an increase in the quality of logistics service that
the contracting enterprise receives.
• Better and newer technology: logistics technology requires more often special
expertise. A competent logistics provider can relieve the outsourcer of a timeconsuming
logistics function and a non-core business area that requires the latest
technology to be successful.
Figure 1: Driving factors of outsourcing
3.1.1. Advantages and disadvantages
By outsourcing the logistical activities the company can achieve great benefits, but it will have
to cope with some common issues. The following is a list of the most important ones, to give
a useful insight on the convenience of undertaking this decision.
The advantage that a company could gain through outsourcing can be seen both from the
operational and the strategic point of view. Too often companies look at outsourcing as a
mean to lower only short-term direct costs (operational impact). However, through strategic
outsourcing, companies can lower also their long-term capital investments and leverage their
key competencies significantly (strategic impact). The following is a summarization of the
operational and strategic advantages of outsourcing.
OPERATIONAL IMPACTS:
• Cost reduction: the outsourcer can experience lower logistics costs due to the
increased efficiency of the TPL;
• Improved logistics service: the outsourcer can benefit from the third party
logistics provider's increased levels of service consistency. This enhances
efficiency and can lead to higher customer satisfaction;
Gaining competitive advantage through outsourcing
5
• Reduced inventory costs: access to state of the art physical distribution systems
through outsourcing can reduce the amount of inventory required in the system.
This results in lower inventory costs for the outsourcer;
• Capital investment reduction: the outsourcer doesn't have to face the asset
investment because it is using the TPL provider's facilities and equipment;
• Upgrade logistics system: the outsourcer can gain access to state of the art
logistics capabilities, at a fraction of the cost of upgrading its own system, by
outsourcing its logistics functions;
• Accommodated seasonal peaks: the problem of seasonal changes shifts from the
outsourcer to the TPL provider, so the former doesn't have to cope with it and
can achieve great flexibility.
STRATEGIC IMPACTS:
• Access to logistic expertise: a strategic goal of the outsourcer could be to acquire
and maintain a state of the art logistics expertise. The TPL provider is likely to
be aware of current developments in the logistics field such as new regulations,
innovations and logistics technology. It will therefore pass on the benefits of its
knowledge to the outsourcer as a result of the outsourcing agreement;
• Easier access to foreign markets: an enterprise can gain access to foreign
markets much more rapidly with the help of a TPL provider than if it tried to set
up its own logistics network. By engaging in outsourcing, the outsourcer gains
access to the previously established local contacts of the third party logistics
provider. It also acquires the ability to resolve local regulatory problems and
overcome cultural differences using local expertise with professional
accreditation. Possibly most important, however, is the opportunity to enter a
new market without the necessary infrastructure costs. This reduced cost
diminishes the risk of entering new markets;
• Concentrate on core competencies : some enterprises have found out that in
order to remain competitive in their field they must reduce the range of functions
they perform and concentrate on their core competencies. To do this they must
reduce the resources and efforts expended outside their core skills. Many
enterprises have made the strategic decision to minimize their involvement in
logistics functions. Outsourcing offers enterprises the opportunity to reduce their
logistics efforts while maintaining high standards of logistics service;
• Economies of scale: for many enterprises logistics economies of scale are not
achievable due to the relatively small size of the enterprise. In some cases, a
strategic decision can be made to access these economies of scale, not by
expanding, but by outsourcing the logistics functions to a TPL, which is already
large and efficient enough to achieve the desired economies of scale.
Outsourcing complete or partial activities creates great opportunities, but also new types of
risks. The main disadvantages that the management can face are:
• Loss of critical skills: if the company doesn't realize that the logistic function in
question is a core activity for itself, and it decides to outsource it, it will loose
the specific skills that constitute part of its competence;
Gaining competitive advantage through outsourcing
6
• Loss of cross-functional skills: communication among the different functional
departments is usually difficult enough in a normal company, especially
regarding logistics. It is easy to understand that it will be more difficult if the
function is taken over by an external company (the outsourcing provider), so one
of the main issues in the implementation of the TPL relationship concerns the
information system and its interfaces;
• Loss of control over the supply chain: since the logistics functions are being
outsourced to another firm, which the parent company has no control over, it
may mean a loss of control over the logistics process and the service levels. This
may in fact lead to the risk of trusting your partner too much; in fact there are no
legal restrictions on the penalties that can be sentenced on vendors for service
levels not reached;
• Human resource issues: the outsourcing usually means a reorganization of the
work and may sometimes not be accepted by management and employees, which
can see the outsourcing provider as an interference. Management should solve
this issue by focusing on commitment and employee education;
• Lack of global logistics providers: even though the trend is to have a unique
partner in outsourcing in order to achieve better communication and coordination,
and even though we are going towards the globalization of the
markets, the company cannot trust a world-wide logistics network that would
completely cover all of the relevant markets.
3.2 The implementation of outsourcing
As with other management strategies the most challenging phase in outsourcing is often the
implementing and realization of the change. Converting the theory and ideas into effective
practice demands decisive co-operation and synchronizing of efforts. Multiple factors may
prevent the successful implementation of the outsourcing plan. The key factors in
implementation are commitment and understanding. Commitment for the outsourcing
decisions is required throughout the organization from top to floor management. Commitment
is also reflected in the level of trust between the participating parties and mutual
understanding of the importance of commitment. Company-wide understanding of the
partnership-outsourcing concept and the goals set by management are also critical factors.
3.2.1 Model for outsourcing
In order to successfully implement this process, by which outsourcing and partnership is
finally achieved, a solid set of procedures and models are required. Therefore we have chosen
to present a basic model and framework for the practical actions needed to achieve company
goals. This model is an integrated framework of the buying process model3 and relationship
improvement process4 model, which we found suitable for implementing outsourcing.
This is a presentation of the buying process and relationship improvement model used by
customers (the party wishing to outsource some or all of its activities) in relation to the thirdparty
decision and consists of 6 different stages.
3 Coyle, Bardi, Langley, (1996) The management of business logistics
4 Macbeth and Ferguson, (1997) Partnership outsourcing
Gaining competitive advantage through outsourcing
7
Phase 1: Diagnose and conceptualize needs
This first stage consists of the company realizing and defining its needs for outsourcing
logistical functions. Some of the decisive factors (outsourcing drivers also mentioned in 3.1),
which may compel a company to choose outsourcing activities as an alternative to
independent logistic operations are:
• Capacity/space constraints
• Lack of needed expertise
• Organizational change
• Mergers and acquisitions
• Changing markets and customer requirements
• New products and cost pressure
The benefits of outsourcing are also considered at this point. From an overall view the
emphasis should be on taking cost out of the entire supply chain - not just on an individual
component. Other benefits deriving from outsourcing, in addition to cost reduction and the
facts mentioned in section 3.1.1., are improvement of customer service, ability to focus more
on core competencies, reduction of employee base and capital cost reductions.
Phase 2: Internal commitment and team building
As previously mentioned commitment and understanding of the issues involved in
outsourcing are crucial factors to the development of the relationship process. Thus
management expertise and commitment are essential prerequisites for success. The process
itself requires coordinated effort, which is effectively achieved through the building of a
cross-functional implementation team. This team has the responsibility of carrying out the
outsourcing process, development of collaborative supplier relationships and managing the
relationship change program. It should have the following characteristics:
• Stakeholder representation, including key operational people e.g. sales
production, engineering and purchasing
• Technical expertise
• Organizational expertise
• High level managers
• Strong leadership
• Right size. Preferably eight to ten members.
From this point on the implementation team plays an important part in coordinating efforts
and selecting suppliers.
Phase 3: Identify Alternatives
This stage should be devoted to the determining of selection criteria for a third-party supplier.
The needs defined in phase one should act as a basis for defining the characteristics and
factors required for the coming relationship between company and third party. The process of
identifying possible alternatives should also include a request for proposals from interested
Gaining competitive advantage through outsourcing
8
suppliers. A pre-screening based on this list of proposals received should identify the relevant
suppliers according to the company's specific needs.
Phase 4: Selecting partner
The selecting of a third-party logistics partner is the most critical phase in the outsourcing
process. Suppliers that offer the lowest prices are not necessarily the most suitable ones for
developing long-term mutual relationships. The emphasis should be on the total acquisitions
cost including selection process, implementation and estimated future expenses instead of
supplier quoted unit prices. Crucial selection factors include the following:
• Technical capability. Does the supplier have access to technology, which
provides basis for customer service and development.
• Existing level of business. Experience of supplier and key figures indicating
profit, turnover and healthy levels of investment.
• Design capability. Is the supplier experienced in working with customers in
design.
• Capability for development. Does the supplier have processes, which are fully
capable now and plans to ensure their effectiveness in the future.
• Organization management. Does the supplier have an organizational structure
capably of managing desired processes and a TQM environment.
• Personnel capability. How experienced is the staff and how well does the
supplier organize, train and use its people resources.
• Company strategy. Does the supplier have a strategy compatible with forming
collaborative, long-term relationships with customers.
The following up and assessing of these criteria's involve visits to each supplier's premises,
interviews with key personnel and the building of professional contacts on a personal basis. It
is important to achieve consensus on the final selection and ensure that everyone has a
consistent understanding of the decision and its implications. A win-win relationship objective
is essential.
Phase 5: Supplier commitment and joint team building
After choosing the most suitable supplier, the aim of this phase is to encourage the chosen
supplier to buy into the relationship improvement process and the building of a joint team
with the supplier in order to carry forward the rest of the relationship building process. It is
important that both parties go through a process to develop full understanding amongst
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