Posts Tagged ‘Supply Chain Management’

* Enterprise Business Relationships, including ORM

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by Oliver Schmid

Over the last 15 years outsourcing has developed at a very fast pace. Unfortunately, what has not developed at the same speed is the development and implementation of Best Business Practices and the according standard processes and procedures. This in return results in uncoordinated efforts and lack of understanding of the whole process. Third party service providers will try to sell outsourcing as a win-win situation, but this is not always the case.  A majority’s outsourcing efforts are implemented through “trial and error” and there for a more costly than expected.

Sixty-nine percent of companies outsource IT services. Outsourcing of application development and maintenance ranges from 15% for CRM, ERP 25%, another 25% for business processes, and 27% for other applications.

Statistics about outsourcing provides us with a positive picture but more and more businesses are disappointed with their outsourcing efforts, according to new research.

Companies express frustration with the quality of work being provided, according to a survey, but most businesses still said they chose the cheapest outsourcing option instead of the best quality.

The question is why are companies frustrated with quality of work provided. What are the reasons behind that frustration? There can be many reasons. Reasons can be:

  • Language issues
  • Geographical problems
  • Cultural problems
  • Infrastructure and Operational problems
  • Lack of procedures and controls
  • No or poorly defined Service Level Agreements (SLA)
  • Lack of or poorly defined Key Performance Indicators (KPI)
  • Lack of guidance and follow-up
  • Failure to understand the business model, processes and expectations

Some of these listed issues may have a bigger issue on your business than others depending on the type of service that has been outsourced.

In my 12+ years of outsourcing experience the lack of guidance and follow-up by the Outsourcing Organization led to a failure of understanding the business model, the processes and expectations by the Outsourcing Partner. Yes, you read right – The Outsourcing Partner. It is important to see the organization/provider you outsourcing to as a partner rather than just a service provider.

Service Providers are organizations that provide services that do not directly have an impact on your business and its day-to-day operations. Service providers are banking services, payroll services, cleaning services, mail and package delivery services and other business services that have are not part of your core business model. Even certain outsourced IT services fall into these categories.  Again, some of the above services may be critical to the success of your business and at that time they must shift from Service Provider to Outsourcing Partnerships.

Outsourcing Partnerships must be established with any organization that provides services, which are part of your core business model and have a direct impact on the overall success and profitability of a business. These can be services like Customer Service, Supply Chain Management, Warehousing, Logistics (3PL Services), Software Development and more.

It is not that a “regular service provider” is less important to a business than a outsourcing partner that provides core business services. The difference is that a Service Provider will need less controls and less of an understanding of the core business processes. Some of these services have standard service levels they provide and not necessarily have exactly specified KPI’s and the according control mechanisms in place.

There for let us concentrate on a typical outsourcing partnership and the requirements to make it a success.

First we need to evaluate why so many business fail in outsourcing. Over the years, I have managed many outsourcing initiatives. At some I participated from the get-go and some either after they had failed or were about to fail. The number one reason has always been that the business, which was outsourcing services, did not communicate their expectations well enough or did not manage the third party provider. At the same time the organization, which became the provider of the outsourced services did not understand what was expected from them completely. The reasons have been multitude, but eventually always boiled down to lack of communication. The majority of organizations see outsourcing just as a personnel cost cutting measure and hand off all responsibilities to their third party service provider. Outsourcing initiatives, which are handled in such manner are for sure doomed to fail and will leave at the same time the impression that outsourcing does not work. This is why outsourcing has left such a negative impression with many people and organizations.

Often outsourcing projects will fail from the get-go, because an outsourcing relationship is established at the wrong level. Management is negotiating not only terms but also requirements with a sales department whose focus is to make the sale, without understanding 100% what is expected. Terms, SLA and KPI are negotiated and agreed upon before processes have been defined, communicated and put in place. It is imperative to have from day 1 all the people in the boat that are affected by the outsourcing measure. These folks really do understand their business.

I can attest that outsourcing can work and will work if done for the right reasons and if done the right way. I have successfully managed and participated in various outsourcing initiatives, like:

  • Outsourcing of customer-service-call-centers to offshore third party service providers, as well to onshore and nearshore providers.
  • Outsourcing of data center monitoring and support.
  • Outsourcing of data center replication and backup for data center redundancy and disaster recovery. At the same time improving the sustainability of not only the IT organization within the business but also the sustainability of the business itself in case of natural disasters or other unforeseen catastrophic  events.
  • Outsourcing of Warehousing, Logistics and Supply Chain Management to Third Party Logistics (3PL) providers.
  • Outsourcing of certain Accounts Payable and Receivable functions.

In many cases, outsourcing may not save you money but may improve your service levels without investing in more resources. This in return, over time, will improve company performance, reputation or brand awareness and hopefully <if done right> profitability.

It is highly recommended to engage not only reputable third party organizations that provide the to be outsourced services, but also to hire a person that has experience in managing and handling outsourcing projects. The person to be hired should not only know the does and don’ts of outsourcing but also be aware of the Structure of Outsourcing. It is also imperative to assure that your business model and the business processes that are to be outsourced make sense to be outsourced. A skilled person that has vast experience in outsourcing will be able to help to make this determination.


The Face of Supply Chain Outsourcing!

Supply Chain outsourcing has changed significantly over the last decade.


Supply Chain Outsourcing to a Third Party Logistics Provider or 3PL started out as having a product stored at an outside warehousing facility and then have the 3PL move the product from one facility to another based on instructions provided with each transaction order.

Today’s 3PL providers offer a range of additional services that range from

  • Physical logistics operations, like shipping and receiving.
  • Provide warehousing.
  • Manage complex operational handling, that may include repackaging, product maintenance, product consolidation
  • Administration.
  • Information Management Systems that integrate into and from a client’s backend ERP System, and automate the flow of transaction data, therefore minimizing human intervention and reducing data errors.
  • Providing customer broker services.
  • International freight forwarding, which may include the creation of all required customs forms and complying with all customs regulations (import & export) as well as providing so-called “Free-Trade-Zones”.

The type and number of services provided by the 3PL are defined during the engagement and contract phase, which also includes Service Level Agreements. These add-on services can quickly multiply and must be considered carefully.

Most important in any new 3PL relationship is not to go overboard and assigning to many services to the 3PL or not enough. Both scenarios can have not only a negative impact on your business but also on the business relationship between a 3PL and its client and, “Very Bad”, the client’s customer.

Why wouldn’t you give away as many business processes as possible right away to the new 3PL? Can it not just be in my interest to reduce my internal processes and labor in order to justify the outsourcing cost?

The danger here is, since it is a new partnership the 3PL is not to familiar with the clients operational processes, its customers and its products. Giving to much control and decision making to a new 3PL will cause friction in the day-to-day business operations between the 3PL and its client due to misunderstandings, lack of familiarity of business processes, and other requirements that were communicated either insufficiently or not at all.
At the same time will the 3PL client’s staff not be familiar with the 3PL’s operations and its issues and challenges. For this reason the client needs to monitor the 3PL’s operations and be able to assist and intervene right away until both sides are satisfied with the final outcome of the processes assigned and its expected results.

Keeping to much control inhouse at the client will have similar effects.
To much back-and-forth communication is required which can lead to misunderstandings and untimely business process fulfillment.
It can lead to friction between both parties due to misunderstood instructions and can be seen easily by the 3PL as being micro-managed.
It can lead to delays in any physical operations as it may pertain to shipping and receiving products into and from the 3PL location or processing and submitting the required paperwork or electronic equivalent transactions.
It is imperative to define responsibilities clearly. It is to nobodies favor to have contract and service level agreements that leaves the agreement up to interpretation by either party.

Any relationship with a new 3PL should be setup in stages with clearly defined time-lines in order for all parties to understand the expectations and responsibilities now and in the future.
Not doing so may lead to increased cost and delay in business processes implementation as well as it can put unnecessary strain on the business partnership.

Having a clearly defined Supply Chain Outsourcing Plan, will be a win-win situation for all parties involved, starting at the manufacturing operation, over warehousing and distribution to the final customers. It can lead for all parties to a reduction in cost and increase profits, since each party can concentrate on their core business processes.


Oliver Schmid has extensive experience in offshore outsourcing to the Philippines, onshore outsourcing to Canada and domestic Outsourcing of matrix oriented call centers.  He is also versified in outsourcing of data center operations and data center monitoring and support. In addition Oliver Schmid participated in various 3PL and Supply Chain outsourcing initiatives.