September 2007 | Commentary | 3PL Line

Take a Deep Breath Before Diving Into Global Outsourcing

Tags: 3PL

Over the past two decades, production pioneers at automotive and high-tech companies turned outsourcing into a baseline capability, significantly enhancing profitability and productivity.

Today, manufacturers of all sizes in every industry are properly exploring outsourcing options as they grapple with the urgent need to reduce costs, enhance profitability, and increase competitiveness.

This is especially true in North America, where anxiety over low-cost/high-quality foreign competition and rising labor costs is forcing manufacturers to take a deep breath and dive headlong into outsourcing, ready or not.

Open-Heart Surgery

The lure of lower costs in a range of countries with impressive emerging production capabilities may be too great to ignore.

Serious complications can arise, however, when a company rushes into the corporate open-heart surgery that we know as global production and supply chain management.

This process typically requires far greater planning, technology, new competencies, and simultaneous integration capabilities than the domestic-oriented production and distribution processes that they often replace.

At worst, entering into a changeover without proper expertise and planning can result in a severe production disruption. At best, it can leave substantial savings on the table and fail to optimize the benefits.

Outsourcing production to other countries is a complicated process that lengthens the supply chain, involves more partners, requires complex management, and increases the possibility of potential disruptions. Logistics and inventory costs will rise, but opportunities for efficiency gains, especially as the supply chain matures, exist.

Successful outsourcing requires that you engage internal stakeholders—sales, marketing, human resources, and customer service—in the plan, as well as suppliers and logistics providers. Having a strong team in place early in the process directly impacts the success or failure of your outsourcing operation.

Manufacturers should take a comprehensive look at their operations and objectives, and plan carefully before taking the outsourcing plunge.

Technology and communications are critical components of integrating, coordinating, and managing the physical supply chain and IT is a critical foundation of planning. IT implementation is complex because it involves many systems.

A qualified logistics provider, however, should be able to integrate the systems and create a seamless, consistent, and robust communications infrastructure among all partners, allowing for the dynamic operation of the entire supply chain from the point of customer order to the delivery of product.

Finding the Balance

Other cost and process challenges to evaluate are finding flexible and strategically located warehousing with the right capacity, and understanding how to balance supply and demand, product lead times, and inventory levels because global outsourcing lengthens the time between ordering and product delivery.

High-quality, technologically advanced warehousing can reduce inventory costs and increase added-value opportunities for manufacturers.

Inventory levels usually rise for outsourced manufacturers, but they can offset much of this additional cost with skillful demand, production, and supply chain management. Collaborate with all partners in the supply chain.

If logistics providers are notified of orders as soon as they are placed, for example, then they can optimize capacity, which helps drive cost savings.

Logistics providers, utilizing their comprehensive networks, can transition imports seamlessly from international line hauls to warehouses to domestic distribution. This helps maintain a consistent supply of product to the customer as the supply chain transitions from domestic to international.

Managing cross-border regulatory issues and procedures is a core competency for experienced logistics companies, and can help ensure the safety and security of the supply chain and its partners.

Logistics providers have large networks to manage infrastructure inadequacies and the knowledge and applications to assist companies in managing the increased complexity of outsourced manufacturing.

Culture also has emerged as a critical factor in learning the attitudes and working methods of the manufacturing country. Logistics providers possess local market expertise and in-country cultural experience. With this knowledge, they can advise and support businesses through the transition and help them gain their own expertise.

Expecting the Unexpected

Like any well-thought-out plan, something can go wrong inadvertently, especially when charting unknown waters. A domestic supply chain requires far less specialized knowledge to operate than an international supply chain.

That's why manufacturers, in collaboration with their logistics providers, should develop a comprehensive contingency plan. Contingency planning is critical to outsourcing's long-term cost and efficient operation.

Take it from the automotive manufacturers - outsourcing can yield great benefits if it is comprehensively planned and managed.

You can achieve a supply chain that runs efficiently if you engage the help of qualified logistics providers early in the planning process. They are key sources of knowledge, experience, and support in the outsourcing planning and implementation process.

Global logistics providers have the specialized skill set to negotiate goods across borders every day, flawlessly, with partners of different cultures. They will be qualified outsourcing partners when you are ready to take that deep breath and dive headlong into global outsourcing.