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Grasping the Supply Chain

Strategies for outsourcing supply chains successfully

 

Organisations often outsource tactically to save money, rather than strategically to support business aims. The result can be soaring costs and a fragmented organisation – particularly when the supply chain is involved. Consultant Hugh Williams reports on the key issues and presents a check list of strategies that work.

LEADERSHIPOutsourcing polarises business leaders’ opinions. Some preach its virtues, including its potential to speed development, boost profits, and improve service quality, while others view it as a scourge of modern capitalism, responsible for job losses, exploitation, poor accountability and ‘brain drain’. But like any business strategy, it’s really about how it’s deployed – and why.

It’s easier to get outsourcing wrong than right, especially when it comes to an area that may be below the strategic radar: the supply chain. In most cases, companies get it wrong because they see outsourcing purely as a means to save money – or as they put it, ‘deliver efficiency savings’ or ‘accelerate time to value’.

Cost savings remain the major driver for stripping functions away from the internal organisation. But neither cutting costs nor corners is what successful outsourcing should be about, particularly when it comes to supply chain functions.

Boeing’s battery problem

It was never Boeing’s intention to become a poster child for how not to do outsourcing, but its story is a case in point.

Dreamliner

The Boeing 787 proved a difficult project as outsourcing led to internal management problems

The US aircraft manufacturer used outsourcing in an attempt to slash the 787′s development time from six to four years, and its costs from $10 billion to $6 billion. However, the strategy pushed Boeing billions of dollars over budget and it ended up three years behind schedule after losing control over production of some core components, the plane’s complex lithium batteries, which are essential to its operation. The batteries developed an overheating problem and the entire fleet of 787s had to be grounded.

That the batteries developed a fault wasn’t itself an outsourcing issue – technical problems can occur in any high-tech programme. Boeing’s mistake was not only that it had outsourced production, but that it had also outsourced oversight and procurement, so it became impossible to pinpoint what had gone wrong, or where.

The lesson is that in any complex outsourced supply chain, a single point of failure may never come to light, leading to protracted, expensive disputes.

The mistake that Boeing made is known as ‘throwing a problem over the wall’: handing over entire functions to a third party and just walking away. External organisations may have all the relevant expertise, so the error must lie at the buyer’s end: failing to consider how formerly integrated functions might talk to each other – and work together successfully – under the new arrangement.

Business leaders often give little thought to the challenges that outsourcing may present to the retained organisation and its management, particularly when middle managers – who are often the people who make day-to-day business relationships work – are swept out of the organisation in the same drive towards cost savings.

‘Bad banks’

Hugh Williams

Hugh Williams advises that outsourcing in the supply chain demands careful management and control.

Another common mistake is to offload parts of the business that tell you things you don’t want to hear. The recent banking crises fuelled the notion that companies can simply amputate dysfunctional business areas – in their case, toxic debt portfolios – and then just carry on as if nothing had happened.

Amputation does nothing to address the root causes of why processes spin out of control in the first place. Indeed, outsourcing functions that speak inconvenient truths deprives business leaders of precisely the information they need to turn their companies around and prevent the same thing from happening again.

The management consultant Margaret Heffernan coined the phrase ‘wilful blindness’ to describe how some leaders contrive to shield themselves from the truth. In the supply chain world, wilful blindness often occurs in relation to outsourced manufacturing, which can hide costly, unethical, or unsafe practices from the board.

In the social media age, a Twitterstorm can inflict lasting damage to corporate reputations and bring industry-wide practices to light; witness the Bangladeshi factory collapses in clothes manufacturing, for example, or the widespread use of sweatshop Taiwanese labour by the US technology sector. Similar stories abound across multiple sectors, from construction to consumer goods.

While local conditions may not be under client control, that is no excuse for a lack of due diligence. Western clients should never abdicate responsibility for local workers’ health, pay and working conditions, nor throw corporate social responsibility over the wall along with the contract.

Goodwill hunting

When companies lose control of their supply chains in poorly structured relationships, the damage might not be as immediate or catastrophic as the above examples, but it may still erode profits and goodwill.

A common cause is those companies that outsource processes they have no internal knowledge of, or which they have neglected to monitor, measure and benchmark. In such cases, the best that buyers can do is brief service providers to work to budget and then cross their fingers that the processes are designed correctly.

But trusting that the outcomes will be positive isn’t a viable strategy; indeed, it’s not a strategy at all. In the supply chain, getting the processes right is core to optimising everything from service delivery to supplier relationships and the bottom line. With no knowledge of internal processes, buyers have no hope of managing a relationship effectively, let alone saving money. Trust will rapidly break down, leading to arguments and even cover-ups.

Vendor management inventory (VMI) contracts are commonplace, in which manufacturers are given total responsibility for maintaining distributors’ inventory levels. Theoretically these relationships, which should benefit from shared risk, can be successful. However, when the distributor takes a ‘hands off’ approach without putting the right controls in place, inventory levels will be set incorrectly. The end result will be a haemorrhage of working capital and service quality.

The right path

Outsourcing: right or wrong?

Outsourcing ‘low involvement’ functions demands much greater leadership, not less.

The key to successful outsourcing in any sector, especially the supply chain, is for business leaders to understand the difference between delegation and abdication. The negative scenarios set out above are consequences of abdication – of failing to fulfil a duty by passing it off to a third party. Delegation is giving someone a job with the power to act, make decisions, or allocate resources on your behalf.

In order to delegate (or outsource) effectively, use the following principles:

Outsource the right functions. As a rule, the more ‘mechanical’ the function, the easier it is to outsource. The more the function becomes ‘high involvement’ (dependent on judgement and inside knowledge), the more difficult it is outsource.

That isn’t to say that judgement-rich processes are impossible to outsource – providers are moving en masse up the value chain – but a commitment to work closely with partners and keep them abreast of goals and strategic changes is essential.

Inevitably, this type of relationship requires a greater investment in time, money and trust, so weigh the pros and cons of high-involvement outsourcing projects against the benefits of bringing experts in house.

Consider sharing projects with outsourcing partners. For example, some client companies break down the complex task of forecasting into mechanical and high-involvement components so that the former can be outsourced and the latter retained and managed in house.

In these cases, the client company supplies the service provider with data feeds. The provider runs the data through its planning software and returns a baseline forecast, to which the client applies its own market intelligence and demand-sensing data. The client may also give the provider feedback so that it can fine-tune its algorithms over time.

Set strategic goals with the outsourcing partner. If the provider is only given narrow, tactical goals to meet – even for mechanical functions – the chances are it won’t meet top-line business goals. It may even undermine them.

For example, if a logistics partner is rewarded for filling shipping containers to capacity, it could pack them full of any items, resulting in excess inventory in the supply chain. Similarly, if a business is strongly committed to sustainability and carbon neutrality, its logistics provider should be equally committed to hitting those targets.

Establish rules and reporting. Even when a partner is engaged to manage a high-involvement process, it may be unaware of the client’s decision-making rules. To return to the logistics example, a client might specify that it wants its containers full, but only if fast-moving inventory items are being transported. If they’re not, then it might prefer its containers to be only partially filled, to help it reduce carbon emissions.

Clearly, feedback and reporting processes need to be agreed with outsourcing partners, otherwise none of these areas can be properly managed by either side.

Never choose partners on cost alone. Unless a genuine commodity is being outsourced, deciding a partner purely on a promise of cost-savings is a false economy. For example, even a service as seemingly generic as providing security personnel can undermine hard-won reputations if the supplier has no understanding of how guests visiting client sites expect to be treated.

In short, the key to successful outsourcing is counter-intuitive: the cheaper the service, the more work the client company has to do to brief its outsourcing partner, oversee work and handle complaints. When relationships collapse, it will come to light that these are precisely the things that the client has not considered. The end result is soaring costs, not savings.

Like all healthy business relationships, outsourcing depends on strong leadership, hard work and shared responsibility. The onus remains on the client, not the provider, to understand that. TS

The Strategist says

Outsourcing is never something that organisations should do off the cuff to save money, especially when the internal functions concerned have never been properly measured or evaluated. Low-involvement tasks can have counter-intuitive effects when outsourced, as they demand greater leadership, not less. Failure to grasp these issues can lead to escalating costs and a dispersed, fragmented organisation. Done well, in support of business aims – and ethics – outsourcing can underpin a healthy and responsible business.
Hugh Williams is a consultant who specialises in supply chain issues. Additional reporting by Chris Middleton.

 

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