A STRATEGY – NOT A COMMODITY

In one of his brushes with re-engineering, Dilbert pleaded, “If you let me keep my job, I’ll do the work of ten people. Specifically, it would be the ten people in our strategic planning group. They don’t do much.”

When it comes to strategic planning for logistics outsourcing, Dilbert probably could do the work of twenty people. In spite of its impact on the logistics function and often the entire corporation, outsourcing and provider selection frequently are undertaken with little regard for overall logistics strategy. Do not enter into an outsourcing arrangement simply because it is written or talked about frequently, or because other firms in your industry are doing it. A sure recipe for disaster is to embark on a program that is not suitable, not understood clearly or one that is marred by unrealistic expectations. Major failures in outsourcing occur when a firm outsources an activity its own personnel do not totally comprehend, and the provider promises to meet requirements that have not been fully defined, communicated or understood.

Major failures also occur when the user firm treats outsourcing as a commodity purchase rather than the establishment of a strategic relationship. Many outsourcing relationships have been developed by traditional methods. The interested firm prepares a Request for Proposal which outlines the tasks to be performed and specifies the contents and format of the proposal. The RFP is presented to three or more providers who are asked to submit bids to perform precise tasks in precise ways. The contract then is awarded to the provider who demonstrates the best cost/benefit ratio, or in an increasingly number of instances simply the lowest cost.

The RFP makes providers’ proposals easier to compare and evaluate, but ignores the basic issue of determining the most cost and service-effective logistics process. Basing an outsourcing decision on cost alone ignores the real value that an LSP can provide. Surprisingly, some firms have turned outsourcing negotiations over to managers who have little if any knowledge of the supply chain or the LSP’s being considered. This complicates the negotiations even further and can sometimes lead to bad decisions.

In advising clients on outsourcing issues I suggest that cost is the last thing they should look at. Certainly, it is important, but a true partnership or relationship suggests input by all parties, and the most successful ones have been those that were established through joint analysis and resolution of the logistics objective – followed by a discussion of cost.

 

Written By: Clifford F. Lynch