Four things to consider before outsourcing part or all of your supply chain

As with all strategic decisions, outsourcing comes with both benefits and risks that must be carefully considered:

At its core, outsourcing is a strategic decision to capture value drivers and enjoy long-term benefits. It shouldn’t come as a surprise that outsourcing comes with a wide range of benefits for both large and small organizations, and many of them have been successful in strategically outsourcing all or part of their supply chains. Hallmark benefits of outsourcing supply chain activities include reduced complexity, competitive edge, reduced costs, access to more resources, and improved procurement processes. For a deeper dive into the benefits of SCM outsourcing, check out our blog post “Nine benefits of supply chain management outsourcing”.

Turning over some or all of your supply chain management to another company doesn’t come without risk. Factors like communication barriers, quality control, privacy concerns, and loss of control are  considerations for companies considering outsourcing. Completing a thorough risk assessment to ensure you’re choosing a reliable and experienced partner is essential. We’ll cover more about how to reduce the risk of outsourcing in supply chain management through appropriate evaluation and communication later in this post.

How does outsourcing supply chain management differ from keeping these activities in-house? Here are a few examples: 

• Insourcing provides direct control over processes and quality—and requires substantial investments in infrastructure, personnel, and technology. 

• Outsourcing delegates certain supply chain functions to external partners, offering access to specialized expertise and resources while potentially reducing operational costs and mitigating risks associated with managing multiple functions in-house. 

• Outsourcing requires you to relinquish some control over critical processes and may pose challenges in maintaining transparency and alignment with business objectives.  

• Where insourcing allows for greater customization and agility in responding to market changes and customer demands, outsourcing can lead to dependencies on external vendors and potential disruptions in the event of supply chain disruptions or conflicts.  

Ultimately, the decision between insourcing and outsourcing hinges on the specific needs, resources, and strategic goals of the business, weighing the trade-offs between control, cost, flexibility, and risk management.

So, you’ve evaluated the benefits and risks of SCM outsourcing, and compared outsourcing against insourcing in your organization, and you’re still not sure if outsourcing is right for you. Before you decide to outsource your supply chain activities, here are a few important things to consider:

Knowing what you want from outsourcing is a critical first step in establishing what part(s), if any, of your supply chain you want to outsource. Start by answering these key questions: 

• What ownership stake in the supply chain do you want? You need the decision to be unanimous among your company stakeholders. Do you want to shift part or all of your supply chain activities? Core or non-essential supply chain activities?
  
• What supply chain activities can you outsource to extract value you can’t access on your own? Besides cost, value is a factor of time, quality, resources, and skillsets. Outsourcing can help  make your product faster, improve quality, better mitigate risks, give you agility, and alleviate your staff’s burden. SCM can provide a strategic, tactical, and transformational advantage to your organization.
  
• What supply chain activities can you outsource to gain substantive financial benefits? Many organizations want to access the commodities, products, and services they need at a lower cost than they can achieve on their own. However, another significant value of outsourcing supply chain activities is to improve your overall working capital. Make sure you incorporate this dimension in your decision-making. 

Remember, without clear goals in place, you won’t be able to properly align with your partner. The last thing you want is to compromise on the partner's support, approach, process, or flexibility. 

It’s important to treat your outsourcing partner in a strategic sense. From the onset, you should share and be specific about all your internal requirements. You should openly share as much data as possible—your designs, AVL, BOM, and samples. Utilize your partnership agreement to ensure your intellectual property is protected. Your partner can’t realistically propose a sound strategy with partial information or hidden facts. Also make sure that you are clear on your organizational compliance and sourcing policies so you can avoid potential reluctance from management later. 

Your partner needs to focus on transparency and quality control, as well. Focus on long-term commitment and alignment, which means reviewing pricing, test standards, required additional specifications, lead time, communication standards, and support levels. More importantly, your strategic outsourcing partner should be proactive, provide reports, and highlight the visibility of facilities, documentation, and inventory. The best strategy is to bring everyone on the same page so you can work together effectively for years to come. It's advantageous for you to start early discussions with a solid NDA in place, and once a factory is identified you will need a non-circumvent agreement. 

Your decision to outsource your supply chain activities should revolve around your evaluation of current tech trends, strategic alignment, core competencies, and cost-benefit analysis. You are counting on your partner to give you a tactical, strategic, and competitive edge to your organization, so be sure to define clear goals, evaluate carefully, be transparent, and have a balanced approach.