Outsourcing in Supply Chain Management

Anyone who works in or has owned an e-commerce business will attest to the fact that supply chain management can be very challenging. From inventory management to fulfilling orders to meet customer demands, handling supply chain management in-house can be one of the hardest parts of e-commerce business processes.

This is why many e-commerce entrepreneurs opt for outsourcing supply chain management to save time, effort, and even money in some cases. In this article, we will break down outsourcing supply chain management and explain how to make the most of it.

First, it is worth exploring what exactly outsourcing supply chain processes entail. As the name would suggest, this refers to a situation where a business (usually an e-commerce or consumer goods-based business) outsources its entire supply chain management to a third party service provider. If a business sells plates, for example, supply chain outsourcing would involve hiring supply chain companies to store the plates, manage inventory, and handle the delivery of the plates to meet customer demands.

A Brief History of Outsourcing in Supply Chain

While outsourcing business operations is not a new concept, the emphasis on supply chain outsourcing did not take hold until the 1980s. This is because that decade saw a greater push for businesses to focus on their core competencies. The idea was that if businesses did not have to worry about their supply chain management and could instead develop better products and market them, they would be more profitable.

By the 1990s, ‘strategic outsourcing’ became the focus within the business world. This concept believes that enterprises can gain a competitive advantage within the market if they leverage external expertise. By outsourcing supply chain management to experts, the supply chain can be significantly improved.

From the 2000s onward, the focus within the business world has been on transformational outsourcing. The idea of this is that by outsourcing, businesses can gain access to cutting-edge technological advances without having to invest large amounts of capital. If there is innovative new technology that makes supply chain management easier, a business can access this by outsourcing its supply chain as opposed to buying this often-expensive technology.

The Importance of Outsourcing in Supply Chain

The reason why it is important for a business to outsource its supply chain operations can mainly be put down to improved business operations and convenience. Managing a supply chain can be so complex that it becomes another business unto itself. This takes away precious time that could be spent on developing the businesses’ core competencies.

If your business makes clothes, for example, your time could be spent making better garments and ensuring customer satisfaction as opposed to worrying about delivery times.

Enterprises that outsource their supply chain management often find that they have more time and energy to focus on internal team development and business growth.

Types of Outsourcing in Supply Chain

Because supply chain as a concept is so complex, supply chain management outsourcing is not a one-size fits all. In fact, there are many different types of supply chain management outsourcing.

Order Management Outsourcing: A third party manages the day-to-day task of processing orders.
Inventory Management Outsourcing: Rather purchasing products from outside vendors than producing it internally.
Warehouse Receiving Outsourcing: Using specialist external storage facilities.
Returns Management Outsourcing: Outsourcing logistics of managing refunds and shipping of returned products.
Inventory Storage Outsourcing: Using third-party storage facilities to store your stock.

Advantages of Outsourcing in Supply Chain Management

Many businesses are choosing to outsource their supply chain management to third-party suppliers and for good reason. There are a plethora of benefits for a business to enjoy by doing this, some of which are as follows:

Cost savings

Any business owner will tell you that supply chain management is not a cheap process in the least. Managing these processes in-house will involve hiring professionals, purchasing often-expensive software, and so on. Usually, an outsourced supply chain is a much cheaper option and can save businesses a lot of money in logistics costs.

Access to expertise

Supply chain management is such a complex concept that many universities offer degree programs in the subject. By outsourcing supply chain management, businesses can gain access to supply chain management professionals who have years of experience in the field.

Increased flexibility

If a business handles its supply chain management in-house, there is a bit less flexibility due to reduced access to resources. If this process is outsourced, some more flexibility can be accessed. This is because supply chain companies typically have larger warehousing capabilities, more sophisticated systems, and so on.

Improved efficiency

Supply chain companies typically have years of experience in managing logistics operations and an army of staff with the needed industry expertise. This means that they can offer a level of efficient service to both the businesses that patronize them and their customer base.

Risk reduction

Having a supply chain partner as a business means that there is less risk to be borne. The risk of mismanagement, delivery issues, and so on are taken on by someone else when a business chooses to outsource supply chain management.

This risk mitigation can allow the business to focus on its core functions and increase customer satisfaction.

Disadvantages of Outsourcing in Supply Chain

Loss of control

As much as outsourcing supply chain activities saves businesses time and money, it also leads to a lack of control. If your third-party suppliers can only ship products in a 10-day period, for example, the business and its customers are beholden to this timeframe.

Quality issues

Choosing the wrong supply chain management company could be even more costly than handling supply chain management yourself. If the company has poor quality control, erratic delivery times, or overall poor management, this will trickle down to the customer experience. In turn, this will reduce customer satisfaction and could harm business success.

Communication challenges

While managing supply chain operations, some internal communication will be needed, whether confirming delivery or items or checking inventory. When these processes are being handled by third-party providers, communication challenges can set back the supply chain processes by days and even weeks.

Cultural differences

A supply chain network is beholden to the culture of the company that handles it. If your company handles its own supply chains, it will run according to your company’s ethos and values. When you outsource it, it operates according to the third-party company’s work culture and these are not always compatible.

Legal and regulatory compliance

One risk that unfortunately crops up when outsourcing supply chain management is that you cannot always be sure that the company you outsource to is practicing legal compliance. If supply chains are managed under your own roof, you have some oversight into these processes. But when they are not, compliance cannot be as easily guaranteed.

Factors to Consider Before Outsourcing in Supply Chains

While there are pros and cons to outsourcing supply chain management, there are several factors to consider before deciding if it is right for your business.

Strategic goals: First of all, decide what your overarching business goals are. It might be to increase market share, improve customer satisfaction, scale production, create faster production cycles, and so on. When you have defined these, consider if outsourcing supply chain management fits into your goals.
Cost-benefit analysis: There is obviously a cost associated with outsourcing supply chains but also a benefit to be had. As such, it is important to weigh the two. Is the cost reduction you get from outsourcing worth the differences in company culture? Is the increased customer satisfaction worth the loss of quality control?
Risk assessment: There are risks associated with this sort of outsourcing and it is worth considering whether your business processes can bear whatever issues might arise.
Supplier selection criteria: Before you select a logistics management company to handle your supply chains, decide on what selection criteria you will use. Are you prioritizing reducing operation costs? Is reliable delivery a non-negotiable for you? Is maintaining healthy inventory levels your biggest concern?
Contractual terms and conditions: How long does your logistics management company of choice require you to sign on for? What are the exit terms? What level of oversight and support will you be afforded? Keep these in mind before making your decision.

Outsourcing in Different Areas of Supply Chain

Manufacturing outsourcing: Hiring a third party to assemble or manufacture the products that are to be sold by your business.
Logistics outsourcing: Hiring a third-party business to handle the movement of the products from their point of origin to their final destination.
Procurement outsourcing: Hiring a third-party business to handle all procurement activities such as sourcing and category management.
IT outsourcing: Hiring a third-party company to handle the IT and technical aspects of the supply chain such as digital records, stock management, and so on.

Outsourcing in Different Industries

Retail: Retail businesses often have outside companies handle warehouse management and order fulfillment for their products.
Healthcare: The healthcare industry’s supply chain often involves the manufacturing and transportation of medicine and medical equipment. Such processes may be outsourced.
Automotive: Automotive businesses outsource the production, storage, and distribution of auto parts.
Technology: The manufacturing, storage, and distribution of tech products and their various parts may be outsourced by tech companies.
Consumer goods: Businesses that sell consumer goods may turn to third-party businesses to handle inventory and logistics operations.

Challenges and Risks of Outsourcing in Supply Chain

Cybersecurity threats: Supply chain leaders often leverage technology systems, such as cloud-based solutions, that are at risk for cybersecurity attacks which could leave your business vulnerable.
Intellectual property theft: As much as you enjoy an optimized supply chain, your supplier having access to your business product puts your intellectual property at risk for theft.
Political instability: Any instance of political instability in your supplier’s location could disrupt your business process.
Natural disasters and supply chain disruptions: Should your supplier experience a natural disaster or any issue, your supply chain strategy could be disrupted.
Ethical concerns: Your third-party supplier might not adhere to the same ethical standard as your business.

Conclusion

In conclusion, an outsourced supply chain can be a great way for businesses to save money, ensure a smooth operation, and meet consumer demands. Like all things, it has its pros and cons and business owners should consider their unique needs before making a decision.

FAQs

What is outsourcing in supply chain?

Having a third-party logistics company (3PL) handle and improve your supply chain operations. This includes managing inventory, all logistics and transport, and storage of products.

What are the benefits of outsourcing in supply chain?

There are many benefits to outsourcing your SCM. This includes increased flexibility, risk mitigation, improved efficiency and cost savings.

What are the risks of outsourcing in supply chain?

The risks of outsourcing supply chain include loss of quality control, risk of intellectual theft, differences in company culture and reduced compliance.

How do I decide whether to outsource in supply chain?

Consider your company’s unique needs and strategic goals and run a cost-benefit analysis and a risk assessment.

What are the best practices for outsourcing in supply chain?

Choosing a reputable company, communicating needs, and ensuring that practices align with company goals.

What industries commonly outsource in supply chain?

The following industries commonly outsource their supply chain management:

Consumer goods
Technology
Healthcare,
Automotive
Retail

What are the trends in outsourcing in supply chain?

Outsourcing supply chains has become mainstream, with sustainability and environmentally-friendly practices being a current trend in SCM.