We recently recorded Karen Bird, our Head of Global Supply Chain Practice and Chief Marketing Officer, on supply chain technology integration best practices. One of our favorite moments during the interview was when we threw her a curve ball, prompting her to answer an unrehearsed question. It paid off – big time.
Her answer touched on one of the main questions many supply chain leaders are being asked by executives today: “Should we insource or outsource supply chain management?”
To answer this question, let’s examine the fundamental aspects of supply chain management, break down the different types of activity in supply chain management, and discuss the impacts of outsourcing in supply chain management for these different types of activities.
What is Outsourcing in Supply Chain Management?
Supply chain management is defined by the Council of Supply Chain Management Professionals – the most respected authority on the subject – as:
Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.
Outsourcing is defined by Iqbal & Dad, in their article Outsourcing: A Review of Trends, Winners & Losers and Future Directions (2013) as:
Outsourcing is handing over one or many of the business processes to an outside vendor or the utilization of outside available services provided by third party to carry out business activities…
Therefore, outsourcing in supply chain management is the handing over of processes within supply chain management to outside service providers.
Co-Sourcing is the sharing of a function or department within your company between internal and third-party providers.
To handle the complexities and continually changing supply chain environment, a growing number of companies work with networks of partners to get things done – an approach which has evolved and adapted to the industry. When it comes to planning, execution, and even the physical work of supply chain management, companies used to look at two clear options: Either tackle a project yourself – insourcing – or hire someone else to tackle it completely: outsourcing. Today, though, we’re seeing the rapid emergence of co-sourcing. A more collaborative and communicative style of management, co-sourcing enables each contributing partner to focus on their strengths and unique differentiators, which collectively provides a path for them to develop more sophisticated and specialized capabilities.
Outsourcing in Supply Chain Management: Verticals vs. Horizontals
To properly evaluate your strategy for outsourcing in supply chain management, break down your supply chain activities into verticals and horizontals. Think of verticals as processes such as sourcing, manufacturing, or logistics management. Conversely, think of horizontals as activities, tactics and tools that enable the verticals such as coordination, day-to-day execution, design, or technology strategy.
- Supply Chain Management Vertical – A process in the supply chain that directly adds value to the final product. Examples of verticals are sourcing, manufacturing, and logistics management.
- Supply Chain Management Horizontal – An activity, tool, or tactic that enable or improves a supply chain vertical. Horizontals can be strategic, such as network design, or IT integration. Horizontals are also tactical, such as coordination or exception management.
Keep in mind that your company’s verticals may look different than others. For example, you may not have a manufacturing operation. Instead, you may have a packaging or bottling vertical.
Your horizontals may also be organized differently than other companies. However, every company will have strategic and tactical horizontals. Tactical horizontals are activities your insourced or outsourced team perform to keep your supply chain running. Strategic horizontals are typically for planning, reorganizing, or optimizing your supply chain, and may run across several verticals at the same time.
Outsourcing in Supply Chain Management: Drivers and Benefits
Supply chain outsourcing is a common practice, and it is very difficult to find any enterprises that does not outsource some of their tactical and strategic supply chain activities. According to Gartner’s Logistics Outsourcing Trends in 2020 research, over 80% of supply chain professionals who responded to their survey indicated they plan to significantly increase logistics outsourcing budgets. Why has supply chain management outsourcing become so common place?
While many readers might instantly think that cost reduction is the main driver of supply chain management outsourcing, research suggests that this kind of thinking is shifting. Gartner further noted in the same above study that supply chain executives are organizing their outsourcing strategy to achieve “faster speed to market, end-to-end visibility and better data quality”. It is safe to say that all verticals in the supply chain contribute to these drivers. While Iqbal and Dad (2013) found that the need to focus on a company’s core competency is amongst the top driving forces to outsource. Numerous sources have also indicated that being able to take advantage of new technological advances being offered by outsourcing providers is another key reason supply chain leaders are looking outside of their own four walls.
The benefits of outsourcing in supply chain management can also vary by company. Summarizing Karen Bird’s points in the above video, outsourcing in supply chain management has the following benefits:
- Allows your company to focus on the core business of manufacturing, supplying or delivering products.
- Provides your company a chance to tap into different experts who work on supply chain technology, optimization, or design projects on a regular basis and possess a wide range of views.
- Gives your company the choice to engage with and leverage external expertise in a flexible way: project, long-term or consultative.
We argue the above benefits apply especially to infrequent and strategic supply chain horizontals such as supply chain technology integration, supply chain network design and manufacturing asset optimization. Furthermore, these strategic initiatives can be executed collaboratively with both experts inside and outside of the organization on an as-needed basis.
To be clear, we are not suggesting that Fortune 500 companies should give up on building supply chain expertise and competencies within their enterprise. On the contrary! We are advocating that the enterprise must expand their supply chain knowledge in order to become more successful. To do so, it is wise to enlist the help of partners to ramp-up at speed and at scale.
Defining your Approach to Outsourcing in Supply Chain Management
So, how do you use all this information to determine your supply chain management outsourcing strategy? Before you begin, create a matrix like the below:
Your verticals and horizontals may not look the same. Make sure you work with your internal teams to align on what they are. Also, mark each of your internal core competencies to clarify your company’s competency strategy.
Once you’ve determined your matrix and your core competencies, work with each of your teams to determine the best strategy based on the current insourcing and outsourcing strategy, the ability of available suppliers to meet your needs, and the performance of your current supplier.
Your insourcing and outsourcing strategy may not be binary. A hybrid strategy where your internal team works closely with an outsourcing supplier may be the right strategy for you. Hybrid sourcing allows you to stay up to date and build competencies, while leverage external expertise to help you excel in a business process.
A typical organization may have Supply Chain Outsourcing Strategy matrix like this:
Hopefully this article has better armed you with tools to determine the best strategy for you.
You can learn more about our supply chain technology integration offerings here, or read the related contributed article by Dr. Gene Ramsay, Insourcing or Outsourcing Your Supply Chain Optimization?
Another related article that you may want to check out is “Outsourcing for Supply Chain Expertise”
Feel free to schedule a 30-minute consultation with us. We would love to discuss your outsourcing in supply chain management strategy with you.