By Gary Forger
Senior Vice President, Professional Development
Material Handling Industry of America
Much has been written lately about the (impending, inevitable, in progress or mythical) recession. And those who say we are in a downturn have characterized its severity in a range of terms - short term, long term, double-dip, many years, and the worst in the last 30 years.
Regardless of where your business is in the economic cycle, the bottom line is in sharp focus these days. Some companies will emphasize cost cutting. Others will look for new ways to improve profitability. In some of these cases, practices that have long been employed to trim costs will receive new scrutiny and be re-evaluated for how they can improve profitability.
Take outsourcing in the supply chain. From the beginning, outsourcing inventory and order management to third-party logistics (3PLs) companies has been all about lowering costs. That's the case whether your 3PL is managing goods from China to Long Beach or within our borders. And that strategy has been hugely successful.
The global 3PL market has enjoyed double-digit annual growth for some time and now exceeds $390 billion, according to Armstrong & Associates. In fact, 75% of all Fortune 500 companies use 3PLs, says Armstrong. In other words, 3PLs are not only well accepted but delivering solid results.
However, the "low-hanging fruit is now gone," said Doug Smock and others in a recent story in Supply Chain Management Review. "Yet the expectations of senior management are that the spend management harvest has become almost an annual given. Where will the next level of savings come from," they ask.
Jeff Karrenbauer, CEO of Insight Inc. had this to say in his projections for 2008 posted at www.scdigest.com. "The looming recession will result in even more pressure from the senior executive suite to reduce supply chain costs. Unfortunately, far too much effort is expended on budget reductions within traditional silos."
At the same time, the supply chain has changed. Dramatically. What was once a push world is now much more of a pull world. Meanwhile, supply chains have become increasingly extended in terms of both distance and time, not to mention complexity. That means there are now more opportunities than ever for disruptions. Unfortunately, people are less tolerant of understocked or even empty retail shelves.
And all of the news from the supply chain is not positive. The Performance Measurement Group (PMG), the benchmarking consulting arm of consultant PRTM, recently conducted a study on supply chain operational practices and performance metrics. The results were discussed at the recent Supply Chain World North America event.
For instance, PMG found that on-time delivery performance for global supply chains was 20% worse than that for regional supply chains. In addition, perfect order fulfillment was 28% worse for the global supply chains.
Meanwhile, demand volatility is increasing, often without increased visibility into the status of inventory and orders in the supply chain. Sales and product cycles are accelerating as are marketing programs that support those efforts. And as PMG showed, not all supply chains are sufficiently nimble to compensate for all of these crosscurrents. Furthermore, the supply chain is having an ever stronger impact on the corporate bottom line.
"Supply chain globalization is about to enter a new phase," said Dwight Klappich, research vice president at Gartner at supplychaindigest.com. This new phase, he said, "is driven by the recognition by many organizations that their initial offshoring decisions were made with a myopic focus on product cost and not a thorough evaluation of total delivered cost."
Karrenbauer of Insight concurs. He recommends looking at the bottom line across all operations not by function. "Substitute a focus on maximum profitability instead of minimum cost and simultaneously evaluate the impact of the supply chain and marketing decisions in the analysis," he says at supplychaindigest.com.
Klappich and Karrenbauer are not alone. Deloitte Consulting recently released its 2008 Outsourcing Report. And while it goes far beyond supply chain outsourcing, it also concludes that how companies approach and manage 3PLs and their counterparts is at a crossroads.
More than 300 executives responded, with 83% saying outsourcing met their return on investment (ROI) goals of a little over 25%. Furthermore, 70% of those execs said they were "satisfied" or "very satisfied" with the results. That said, 39% said they had terminated at least one outsourcing contract.
"Clearly, outsourcing is working financially for most of the respondents," says the Deloitte report, "but their relationships with their vendors have not been without problems."
All too often, companies set their outsourcing goals too low. "They may have initially perceived outsourcing primarily as a tactic to reduce costs as opposed to a means to fundamentally transform their operations and drive dramatic improvements in efficiency, productivity, and reliability...Through outsourcing, the dynamics of the business are likely to change, so why not capitalize on all of the benefits," says Deloitte. In other words, costs not strategy rule the outsourcing decision. But it doesn't have to be that way.
Deloitte goes on to say that the alignment of outsourcing strategy with business goals will maximize ROI. "Having a clear strategic focus makes it easier to determine what capabilities to look for in a service provider, and to define realistic service levels that are tied to the company's business goals. Lack of a distinct strategic focus can completely skew the entire initiative and dramatically lessen results," says the report.
Adding a strong strategic element to outsourcing will extend the ROI timeline and require additional management effort. However, that tradeoff is clearly worthwhile. In fact, companies that make that shift are likely to find that they have been leaving money on the table for far too long.