Adopt best practice to avoid outsourcing problems

26 August 2011

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26 August 2011 | Angeline Albert

Understanding what your organisation does best, and what suppliers can do better is the key to avoiding the “pitfalls” of outsourcing parts of the supply chain.

Michael Dominy, research director at analyst Gartner, told SM “organisations must focus on what they can do best and appropriately outsource activities that value chain partners can do better”.

Dominy’s analysis into the outsourcing of activities such as manufacturing, logistics and supply chain management has identified a number of best practices that buyers should adopt. He believes purchasers can prevent future problems by basing outsourcing decisions on “strategic and tangible factors”, such as the overall business objectives, and not just cost.

“Many companies that have outsourced a supply chain function such as manufacturing purely on the basis of direct cost have experienced problems later,” he said. “Some companies have found that total costs didn't improve as much as anticipated because customer service suffered and quality problems increased after outsourcing.”

In addition to a robust analysis of costs, which addresses the question of retaining or outsourcing the service, companies must also incorporate quality, responsiveness, past performance of the vendor and risk as part of the decision-making criteria.

Dominy said any outsourcing strategy should be aligned with both the organisation’s corporate goals and supply chain strategy. It is also crucial to understand how corruption and intellectual property risks differ by country so these can be factored into decisions.

“The major players in the supply chain outsourcing market are expanding their services into each other's turf. Knowing which services are core and which are not for each service provider is important when deciding the activities to award to an outsourcing provider,” he added.

“A regular flow of data, information and ideas including inventory levels and customer orders should be shared at least weekly. Any information such as supplier changes or other decisions that will impact the outsourcing partner should also be updated and communicated weekly.”

He also said the importance of defining and monitoring service levels and set out key performance indicators should not be underestimated.

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