Risk Management – Mitigate Risk When Deciding to Outsource
Mitigate Risk When Deciding to Outsource
A guest post by James Riggins:
Jim Riggins is a former QSO for the US Navy, and a highly experienced Senior Operations, Shared Services and Global Supply Chain Professional. Jim has more than 23 years experience in Quality, Logistics and Supply Chain Management, most recently as SVP North American Business Operations at Getinge USA, Inc.
The number of businesses that Outsource everything from their entire Supply Chains, Call Centers, Customer Service Centers and other functions has continued to increase exponentially in the past 10 years, and the backlash is also growing.
There have been many successful Outsourcing projects, especially when companies perform the proper due diligence in advance and approach the project with a Predict.Plan.Perform.® framework. There are sadly, too many instances when an outsourcing project is less than successful.
Because potential damage to a company resulting from a failed outsourcing project can linger for years with customers, employees and partners, the Predict.Plan.Perform.® approach establishes a baseline, and sets up process improvement metrics to ensure the best possible return on the resources invested.
To begin however, some challenges may be anticipated by utilizing basic, familiar tools that can also be incorporated in the development of the broader formal strategy and project plan.
Most managers are familiar with a basic SWOT Analysis:
SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats), is used to identify key internal and external factors that are important to achieving the objective. SWOT Analysis groups key pieces of information into two main categories.
- Internal Factors – Strengths and Weaknesses internal to the organization.
- External Factors – Opportunities and Threats presented by the external environment to the organization.
The usefulness of a SWOT Analysis type tool is that it may be used in any decision making situation when a desired end state (objective) has already been defined. There are many variations to this type of Matrix Tool that can also be used.
The SWOT Analysis tool can also be used in Pre-Crisis Planning and Preventative Crisis Management and may be used in creating a recommendation during this type of viability study.
If properly performed, SWOT’s can generate many strategies, but don’t get fixated on compiling lists. Think about what is actually important.
Firestorm’s approach helps take this a step deeper: the Predict.Plan.Perform model requires that an organization Predict the vulnerability, Plan the response, and Perform when the event occurs.
The Predict phase will classify the critical vulnerabilities, identify key project personnel, ascertain critical decisions, analyze gaps, identify infrastructure and supply chain needs, and define communications requirements.
The Plan phase will develop the strategy, construct the plan, and involve the appropriate personnel to assure their buy-in and commitment.
The Perform phase will establish protocols for implementation, community involvement, communications, test exercises, audits, reviews, updates, and compliance. Often, plans are not updated to reflect ongoing changes within organizations, thus creating unforeseen vulnerabilities; a well designed and executed plan can transform a complex implementation.
There are various reasons for Outsourcing and in the following example uses a company’s fictional Supply Chain and in particular, the Physical Storage and Movements of Products activities. They currently perform these activities in-house, but it is not their core competency, and the company has decided to investigate the viability of Outsourcing these functions.
It is important to review and understand the current operation in order to correctly benchmark the activities, and to ensure all variables are included.
Some examples of variables to be used when deciding to Outsource the Supply Chain:
The size and reputation of the 3PL bidding on the project
Do they have a well-defined niche and does that fit your companies industry. For example, if you manufacture or distribute Medical Devices, do they have experience in the Medical Device Industry?
What is your reason for Outsourcing this function (Investigation, Corporate Directive, Not Core Competency, Less Cost, More Flexibility)? This is extremely important and you may find by using this tool that your objective may have to change.
Location of potential site vs. the current location. Could the location potentially cause a disruption of business; for example hurricanes, earthquakes, etc?
Size, adequate square footage for growth and cost of facility or space.
Number and cost of employees required to meet all demands (human capital).
Ease or complexity of products being distributed. Is there a long learning curve and are there secondary operations that need to be performed? Are there a high number of returns to manage?
Is current facility leased or owned, racking, material handling equipment, office equipment, ect? Can used equipment be sold or do leases require early settlement? Review the asset lists as well as the open leases and/or maintenance contracts.
Does the 3PL have adequate online inventory management and IT systems? How do you communicate or transmit customer orders, purchase orders, invoices, ect?
How do you address regulatory requirements such as FDA, ISO or U.L. requirements if for Medical Devices? There are also potential Customs, USDA, EPA and other government agency requirements depending on the product being stored and distributed. Don’t forget about the quality systems, reporting requirements, monitoring requirements, customer complaints and how to harmonize the two systems?
Don’t forget that Outsourcing an activity to a 3rd party does not relieve the company of any regulatory responsibility, which makes it even more important because easy access and visibility to that activity becomes limited.
Can the 3PL properly handle any storage and shipment requirements for hazardous materials?
Who is responsible for any licenses, insurance requirements, taxes, leases, packaging and forms printing and facility maintenance costs and fees?
What is the process for handling inventory losses, shrinkage or damaged goods? Who is responsible?
Can the 3PL properly handle and maintain the technological requirements of bar coding the inventory and any EDI requirements?
What is the process for routing goods, payment and negotiations of freight costs? Are you able to utilize the 3PL’s potential size and combined volumes for larger discounts?
Are Metrics and KPI’s clear, understood and agreed to? Who is responsible for providing the results, reporting and corrective actions?
Is there a clear chain of command and escalation process?
Will the 3PL provide someone to handle night weekend or emergency shipments?
Remember all costs incurred by the 3PL will be passed onto the company with a markup. This must be agreed to in advance.
Are there incentives or value add the 3PL can offer? Can they reduce costs while increasing efficiencies over the life of the contract? It is not unusual to make that part of the negotiations.
Last, factor in the investments the organization will make such as the cost to plan, organize, pack and move the inventory and to unpack and set up the warehouse and processes. There will also be a significant change management process that needs to occur for all involved. Ask:
What does the company do with the existing personnel? Layoffs or potential training and transfer to other functions (Social responsibility)?
The above list is in no way all-inclusive and will vary from industry to industry and company to company.
It’s important to gather all current costs and validate them for a solid baseline to be used during negotiations and then to use to monitor if the contract is awarded.
It has been my experience that the number one source of conflict between the company and the 3PL after the transfer of the activity is when transactional costs and any unplanned costs to meet deadlines or to perform unplanned activities or volumes are not clearly called out in the contract.
In addition, don’t forget to have all parties sign a (NDA) Non-Disclosure Agreement and any appropriate intellectual Property Agreements.
After all this has been taken into account and if the decision has been made to move forward and Outsource this function then the organization should use a systematic process such as Firestorm’s to ensure a successful transition and a long and successful Outsourcing partnership.
Do you have an Outsourcing related question or immediate need? Contact us (800) 321-2219