How to configure success through outsourcing

June 8, 2004
How to configure success through outsourcing For many logistics professionals, the word configure can sound a bit intimidating. In reality, though it

How to configure success through outsourcing

For many logistics professionals, the word configure can sound a bit intimidating. In reality, though it may sound like a technical term, configuring is really just part of a relatively painless process called outsourcing.

Obviously, tackling outsourcing from start to finish can be a cumbersome task. There are many decisions to be made, from selecting an outsourcing provider to determining which business components to outsource to configuring the system. This article will walk you through some of the key decision-making steps you'll confront.

Know what you do best

Start with an assessment of your company's strengths and weaknesses. If your company has optimal resources in the area of R&D or sales and marketing, for example, that is where you should focus.

Every company has its own budget and finite dollars to spend in creating and distributing products. Financial resources and personnel should be directed toward the area where a company shines, not to areas that can be successfully handled by an outsourcing partner. When done right, outsourcing can free up resources — both cash and management — that can be better spent on innovation and growth.

Keep pace with your competitors
Don't follow a path to self-extinction by operating in a vacuum. To survive in today's competitive marketplace, companies of all sizes need affordable and reliable product assembly and delivery, and most can't do it all themselves.

While many companies are resistant to the latest offshoring trends, they need to wake up to the reality that offshore companies are becoming their direct competitors, if they aren't already. You can outmaneuver your competitors with a strategic outsourcing initiative if it's a proper fit for your business.

Don't just go with your gut

Evaluation of an outsourcing provider goes beyond liking your rep. It's always important to trust your instincts. However, are you willing to risk unhappy customers by selecting a company based on a relationship alone? Check references — not just one, but a current customer in both the small and large categories, and two former customers.

Look for a strong financial foundation and high sense of security. A long-standing business with customer testimonials to back it up and the security systems to keep proprietary information safe are key.

Develop a relationship with the outsourcing provider by visiting them to see their capabilities and infrastructure, as well as the quality of their people, which translates to their ability to serve your needs through their resources.

Having an outsourcing partner with professionals trained in specific areas managing the process can help enhance accuracy and quality. Well-run outsourcing companies have resources that allow them to do specific tasks more efficiently, and these cost savings are passed on to customers.

What to outsource?

For starters, consider the high-volume, stable products that don't change much in type or quantity over time. If a product is volatile, it might still make sense to set up some type of logistical chain to get it made or assembled elsewhere. Using a third-party distributor to remove the internal hassle of dealing with product volatility may help manage fluctuations.

What about warehousing and transportation? Ideally, the same provider handling the parts and assembly can do this. The various tasks come together more easily when fewer sourcing companies are part of the plan from dock to distribution. This way companies don't have to chase down their own raw materials suppliers, provide shipping, or worry about meeting production deadlines when a shipment from a supplier is delayed.

Comparing quotes

When comparing quotes, be sure to compare apples to apples to get the total landed cost. This should include component sourcing, inventory, service lead times, change controls, warehousing, distribution and transportation to your plant or to your customer's facility. Knowing the grand total and what it includes helps end users of outsourcing services save money and pass along savings to their own customers.

A solid outsourcing partner will offer options and solutions, not complications and hassle. If a quote on an assembly was requested, what about the sub-assembly, customs clearance and cross-border transportation with final distribution to the end user? A legitimate outsourcing provider will also tell a logistics officer when it simply doesn't make sense to outsource that component or service. Sometimes the answer is “no,” or the answer is not a single solution but multiple options. A modular recipe is desirable with various components segmented as a menu on the proposal.

What about geopolitical factors and duties/tariffs?

Working with foreign entities is a learning process. There's nothing like on-site evaluation, especially when it's not obvious through news tracking. Go to the country and look around. If it seems like chaos and instability, it probably is. Sure, it might be the cheapest deal in terms of labor costs, but if the news yields stories of political unrest over time, it's best to look elsewhere.

Too little or too much police/military personnel, lack of traffic control and illegal behaviors occurring in broad daylight without consequences are all bad indicators. None of these things can be determined without a trip to the country to view it first-hand.

The unavoidable duty/tariff is never a factor to ignore. In fact, this fee can completely change the bottom line cost. It basically comes down to the country of origination of the raw materials, where they enter the country (via U.S. or Mexico, etc.) and in what form. Because of a free trade agreement, the materials could be duty-free if handled within legal guidelines for a specific country.

To cite an example, hardwood plywood is cheapest in Brazil. When brought into Mexico there is an 18% duty rate, but it's still cheaper because if the plywood is cut up in Brazil, it has no duty coming into Mexico.

Duties are different in various countries, and there are legal loopholes based on the customs classification of materials. Raw materials versus cut or partially assembled materials play a factor in many cases. A good outsourcing provider will know this and should be able to provide counsel.

With the evolving market, global trade allows the lowest possible resulting cost. The trend toward offshore outsourcing is here to stay, so learning how to work the logistics chain from the supplier's supplier to the customer's customer is critical to staying in business. Those who lead in accomplishing this will dominate the marketplace in 2004 and beyond. LT

Laird Carmichael is executive vice president of International Outsourcing Services LLC (IOS) (

June, 2004

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