FREE ESSAY ON OUTSOURCING IN LOGISTICS SECTOR

OUTSOURCING IN LOGISTICS SECTOR

Introduction : 
Nowadays, many organisation are outsourcing their non- core activities to an external
agents. Distribution is one of these activities as distribution consider as a non-core
activity for many firms. Although, there are many advantage for outsourcing, there are
also risks and disadvantage in this process. In this essay I would explain the term
outsourcing and explain why organisations are preferring to outsource some of its
functions in today's environment. Also, in this essay it has been tried to analysis the
advantage and disadvantage of the outsourcing process and its risks towards the
organisation. 
The word outsourcing could be described as the contractual relationship with a
specialised outside service provider for work traditionally done in-house. Outsourcing
could also be defined as the use of external agents to perform one or more organisational
activities. In the last decade or so there has been a trend, particular among large scale
companies, to hand over the whole or part of the distribution function to the external
agents. 
One should emphasis that outsourcing is an issue that is not specific to distribution.
Many other organisational functions, such as information system, building maintenance,
etc..., have been outsource for many years in organisations. 
There are different reasons for organisations outsourcing their distribution function.
More and more organisations today face a dynamic and changing environment. This, in turn,
is requiring these organisations to adapt. Competition is also changing. The global
economy means that competitors are likely to come from across the ocean as from across
town. Successful organisations will be the ones that can change in response to the
competition and changing environment. In other words, they will be flexible.
Therefore, today's organisation stand in sharp contrast to the typical bureaucratic
organisations that have many vertical levels of management and where control is sought
through ownership. In such organisations, Research and Development are done in-house,
production occurs in company-owned plants, and sales and distribution are performed by
the company's own employees. To support all this, management has to employ extra personal
including accountants, human resources specialist and supply chain management
specialists. However, nowadays successful organisations outsource many of these functions
and concentrate on what it do best. 
Outsourcing can help organisations to reduce the impact of change in the environment by
outsourcing some functions to specialist companies on that function who have more
expertise and focus to concentrate on managing change. So, outsourcing could consider as
a strategy to manage change in the external environment.
Globalisation is another aspect which has impact upon increasing outsourcing. Nowadays,
many companies are turning their attention to foreign markets, the number of global
companies are accelerating. But these companies do not have in-house expertise to
negotiate or operate the supply chain process in international markets. So, they need to
outsource their supply chain to logistic companies which have international expertise in
the distribution function. The another reason for increasing outsourcing is the
increasing complexity of distribution networks. Storing and moving goods have become more
complex as the technology is advancing too fast. A manufacturing organisation normally do
not want to waste its management resources to this functions. Therefore, they prefer to
outsource this function to logistics companies which possess all the necessary skills and
technology in this service. 
For example, Marks and Spencer, one of the world's leading retailers has outsource its
distribution function to Exel , one of the leading companies in supplying logistic
service. M&S has approached Exel to take control of its complex distribution service.
Now, Exel provides a distribution service for 23 M&S stores in South England, and also
deals with M&S in France, Spain and Hong Kong. Exel has bought a revolutionary technology
to M&S export operation by enabling 10 suits to be shipped in the space normally occupied
by four garments. In addition, M&S customers start to get a high level of service because
stores could be replenished quickly. All these and other benefits M&S has gained through
outsourcing its complex distribution service. 
There are many advantages which a company could get from outsourcing its distribution
functions. It could reduce the operating cost of the firms. A study which has been
conducted in 1993 reported that a company could reduce 9% of its operating costs by
outsourcing. When a company is outsourced its distribution function to world-class
provider, it would reduce the cost of this function as the provider would be more
efficient and specialist in this function. Also, by outsourcing non-core activities like
distribution, a company could focus on its core activities and increase revenues. .
Managers realise that by outsourcing their routine, nonessential operations, they can
better focus on the core competencies that truly differentiate them from competitor. For
example, Ericsson one, of the leading companies in the telecommunication industry, wanted
to reduce its costs in the supply chain by finding a solution to its warehouses in
Philippines. Ericsson is always trying to reduce costs in different areas of business,
this is including, the supply chain so as to save money and focus on Research and
development. Therefore, Ericsson turned to Exel. Ericsson has leased the warehousing
operation to Exel on a two years contract. Exel has provided a flexible service to
Ericsson which has resulted in cost saving and made Ericsson concentrate on its core
businesses. Before Ericsson has to handle the warehouse operation in-house but it was not
the core competencies of the business. 
Another advantage of outsourcing is the reduction of the need to invest in non-core
business assets such as warehousing and carriers. This will allow the firm to make the
capital funds more available for core functions such as research and development in the
telecommunication industry. For example, Northern Telecom manufacture enterprise which is
operating in 130 countries have outsourced its distribution service to Ryder Dedicated
Logistic. The main reason for Northern Telecom to outsource its distribution function, it
did not want to invest in non-core activities. ' The core competency of Northern is not
fleet management. If the president of our company has a million dollars to invest, will
he put it into fixing tracks or a new telecommunication system?' says David Grant,
General Manager, Global Logistic. 
The development and increasing implementation of outsourcing has not been without its
problem. The cost escalation and lack of quality of service are two of the more frequent
complaints from firms towards the third party, although contractors argue that these
problems often stem from firm's failure to be precise about what they want by outsourcing
their distribution service. Clear objectives need to be set by and to achieve this a high
level of communication and understanding between firm and service provider must be
established. 
There's no magic solution, experts agree. But organisations can reduce outsourcing
anxiety -- and boost their chances for success -- by carefully assessing their needs,
finding outsourcers that match those needs and, above all, engaging those outsourcers in
a functional, committed relationship. More and more, outsourcing deals are not being
patterned after the traditional vendor/client relationship but are being forged as
intensive, long-term and highly interdependent partnerships in which value and risk are
shared. 
Another risk outsourcing is the impact of outsourcing on those currently responsible for
management of the function is fundamental. If the service is outsourced, the management
of the provision of the service from within the organisation is radically changed from
management of a function to management of the business relationship with a contractor.
The lack of control posed by movement of this function outside of the organisation is
often seen as the greatest risk of outsourcing. Therefore, it needs to be carefully
planned and managed. 
In reality, the effect of outsourcing can simply be seen as a shift in focus from
managing a function to managing a contractual relationship. If properly implemented, it
need not represent a loss of control. Careful planning together with a contract written
to provide for control measures such as performance monitoring, and good contract
administration will minimise or negate any lack of control. 
Outsourcing now commonly includes asset transfers. Examples are transfers of staff, sale
of existing equipment, and/or a transfer of existing contracts used in the provision of
the service. It is common for specialist outsourcing companies to seek a transfer of
existing staff to do the work. An organisation can facilitate this process by allowing
communication between staff and bidders about options for staff. 
Many staff view the opportunity to work with an organisation that specialises in their
field as valuable; others will prefer redeployment or simply a redundancy. 
Sometimes the sale, lease or sublicense of a site is also involved. It is therefore
important that a complete asset valuation is undertaken as part of the process of
defining an organisation's current service and preferred requirements. An examination of
relevant documentation should also be undertaken. The organisation must know what
equipment and other physical property it has, including consumables, what contracts are
currently used in the provision of the service and relevant details of those contracts.
It is common for specialist outsourcing companies to seek a transfer of existing staff to
do the work. An organisation can facilitate this process by allowing communication
between staff and bidders about options for staff. All these need to be consider when the
company decide to outsource its distribution activities to the external agents. 
As noted, there are many advantages for companies who choose outsourcing as a means of
satisfying their logistics need, but just as there are advantages there are also
disadvantages. 
Outsourcing is based upon fundamental principles and, if those are applied at the outset
of a relationship, the parties will most likely have an effective, successful
relationship. But if the parties enter into an agreement that is not based on those
principles, the result will be an unsatisfactory relationship and, probably, an early
termination of the contract.
The first of these basic principles is for the buyer to determine the scope of services
and the metrics for the performance levels it wants from the supplier. This is the only
way a buyer can achieve a comfort level with turning over its process to the supplier and
ensuring that it gets what it pays for. This is the only way to ensure accountability
from the supplier. It must be done up-front, before the contract is signed. A certain
cause for failure in an outsourcing relationship is for the buyer to let the supplier
dictate what the services and performance levels will be. Another sure cause for failure
is for the buyer not to completely describe the scope and boundaries of every component
of the service. This can lead to a supplier providing something that was not agreed upon
and then charging a premium for it or the supplier not providing something the buyer
assumed it would be getting for the price it is paying. 
There's no magic solution for these problems. But organisations can reduce outsourcing
anxiety -- and boost their chances for success -- by carefully assessing their needs,
finding outsourcers that match those needs and, above all, engaging those outsourcers in
a functional, committed relationship. More and more, outsourcing deals are not being
patterned after the traditional vendor/client relationship but are being forged as
intensive, long-term and highly interdependent partnerships in which value and risk are
shared. 
Another disadvantage of outsourcing is the loss of control, especially when small
organisation outsource its distribution service. The way to get around that problem is to
be careful when selecting vendors and when crafting outsourcing contracts. For example,
contracts should include objective measures of performance and a timetable for meeting
those objectives. Should a vendor's performance fall below a performance standard or
otherwise come up short, the company should have a course of action to take.
In addition, the logistic company may be distributing the products, but ultimately the
manufactory are responsible for the customer relationship. The customer only cares about
receiving the product - not who sent it or how it got there. The company need to monitor
and evaluate the work of the third party and need to be firm in its needs as the poor
performance from the logistic will lead the firm to loose its customers and eventually
loose its market share. 
Conclusion :
A firm should outsource any activity which reduce or distract from its ability to focus
on core activities of the firm. If the organisation do everything, it would not have the
ability to develop its core competencies and gain competitive advantage. But there is
important point, which is, firms should be careful when they select the company which
will provide the necessary service. The relationship between the company and the
outsourcing vendor is of the utmost importance. Effective and thorough contractual
agreements are the key to a successful distribution outsourcing experience. The specific
needs of the organisation should be matched with the supplier's capabilities during
negotiations, to develop a contract around a shared vision. 
Also, the firm need to check if the provider are capable to do the job in proper way.
Most of the failure of outsourcing cause when the third party do not provide the desire
service to the firm. Also, the firm should be monitor the third party to check if they
are doing the right job
Bibliography
www.firmbuilder.com
www.exel.com
www.cnn.com
www.ft.com