Outsourcing is a global business and supply chain practice that goes back decades. Although it became popular during the initial outbreak of globalizaion, the process dates back to the 18th century.
Today, it is a norm for businesses across the globe. 90% of the Fortune 500 companies outsource their logistics arm to 3PL businesses.
It’s safe to say that the practice has enjoyed quite a bit of fame. But why?
We will answer that and explore why it became so popular in this article.
What is Outsourcing?
Outsourcing is a process that occurs when a business hires out one or more of its activities to a third party who specializes in the process.
Where your supply chain is concerned, it is the practice of entrusting various arms of the supply chain operations to other parties, allowing the supply chain to focus on its core.
A typical example of a supply chain industry that outsources is the food industry. You would be hard-pressed to find a food supply chain that handles its own supply chain.
This is because activities like transporting raw materials and finished products to and fro the supply chain fall well beyond their expertise in most cases. Here, outsourcing allows them to focus on what they are good at while ensuring the logistics is well taken care of.
Why is the Outsourcing of Supply Chain Activities So Popular?
Think about it: when last did you see a supply chain that doesn’t outsource one or more of its activities? In fact, there are supply chains and organizations known to outsource the entire operation to 4PL and 5PL businesses.
E-commerce businesses, especially those you would classify as small businesses, are quite fond of the practice.
Here are a few reasons why the process is not going anywhere anytime soon.
Labour Shortages
As much as we like to think technology is the be-all and do-all of the modern business climate. However, people are still necessary to its success.
In fact, you would struggle to achieve any milestone without them…at least for now.
Supply chains are complex enough. But as effective as people are in the supply chain, how much would it be fair when there is a labour shortage?
This shortage is why organizations are eager to outsource their supply chain activities to industry experts, allowing them to streamline and manage their business more effectively.
Lack of Expertise
As much as businesses and modern companies like to think they are faster, better, and more efficient, the truth is they cannot do everything. Neither can their supply chains.
As lack of expertise skyrockets in the manufacturing and business world, businesses will suffer the consequences because they cannot churn out products efficiently.
To combat these, many of them are turning to industry experts who can help them make the different arms of their supply chain more effective.
Competitive Edge
Businesses are indeed doing better than ever. However, the competition is more poignant than ever, especially concerning supply chains.
By outsourcing its processes, your supply chain can improve its efficiency and productivity because it gets to focus on what it is good at while leaving the rest to other experts, and together, they can get the supply chain to excellence.
Risk Sharing
When you outsource your supply chain activities or operations, you share the risk behind those activities with your suppliers or vendors. An example of this is in the distribution and logistics service.
Rather than just you, the supplier joins you in sharing the risk, which forces them to take care of necessities like compliance, security, and quality assurance.
The entire process reduces the risk level while letting your supply chain share the burdens of the operations.
Time and Cost
For all its success, the modern supply chain is truly defined by three main factors. Time, cost, and accuracy. Ensuring speed and low cost is where outsourcing shines brightest.
No matter how good your supply chain is, if it cannot be reduced by these two factors, the success of that supply chain will be severely limited.
To ensure this is optimal, organizations outsource parts of their supply chain they are sure will enable them to achieve these KPIs.
But What are the Challenges Associated with Outsourcing Supply Chain Activities?
Although there are many reasons to use the outsourcing strategy, there are still a few associated challenges.
- Controlling the quality of products or services that have been outsourced can be difficult. There may be problems with quality if your supply chain and its supplier have different work cultures, norms, and expectations
- Geographical distances and linguistic barriers can make communication difficult. Misunderstandings and misinterpretations could happen, affecting a project’s progress and results would affect the progress and results of a project.
- Outsourcing supply chain activities gives up some of your influence over how they are carried out. This lack of control can raise questions about the calibre of the job and timeliness.
- There are security hazards when giving confidential information to outside suppliers. Data protection laws must be followed, and confidential information must be protected.
Bottomline
There is an increasing desire and need for outsourcing various arms of the supply chain. Especially where the success of the supply chain is concerned.
Unlike great supply chains like Ford and Carnegie Steel, which could do everything internally, modern supply chains hardly meet this criteria.
This is why outsourcing is making so many waves, and if you think about it, it is actually a no-brainer for many supply chains. Home and away.
Obinabo Tochukwu Tabansi is an ex-supply chain professional turned ghostwriter with a decade of experience working in different facets of the supply chain. Today, he lives his passion for writing on all things supply chain and helping clients from across the globe communicate their thoughts and solutions seamlessly. His blog, Supply Chain Nuggets, is Africa’s fastest-rising supply chain blog, helping professionals, business owners, and curious minds navigate the continent’s complexities.
