Four things to consider before outsourcing part or all of your supply chain

In layman’s terms, outsourcing is a strategic process that establishes a third-party supplier partner to take over management responsibilities of an internal function. Supply chain outsourcing is more than just a trend—it’s a strategic decision adopted by a multitude of organizations because it can create significant economic value.  

The importance of outsourcing in supply chain management can’t be understated. OEMs are increasingly turning to outsourcing to streamline operations and enhance competitiveness. By leveraging external expertise, companies can concentrate on their core strengths while accessing specialized skills and technologies to drive innovation. Embracing outsourcing not only boosts efficiency but also empowers manufacturers to navigate the complexities of the global marketplace with agility and resilience.

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It’s critical to find a trusted partner, not just a supplier, when outsourcing in supply chain management.

As with all strategic decisions, outsourcing comes with both benefits and risks that must be carefully considered:

Benefits of outsourcing supply chain management

At its core, outsourcing is a strategic decision to capture value drivers and enjoy long-term benefits. It shouldn’t come as a surprise that outsourcing comes with a wide range of benefits for both large and small organizations, and many of them have been successful in strategically outsourcing all or part of their supply chains. Hallmark benefits of outsourcing supply chain activities include reduced complexity, competitive edge, reduced costs, access to more resources, and improved procurement processes. For a deeper dive into the benefits of SCM outsourcing, check out our blog post Nine benefits of supply chain management outsourcing”.

Risks and challenges of outsourcing in supply chain management

Turning over some or all of your supply chain management to another company doesn’t come without risk. Factors like communication barriers, quality control, privacy concerns, and loss of control are  considerations for companies considering outsourcing. Completing a thorough risk assessment to ensure you’re choosing a reliable and experienced partner is essential. We’ll cover more about how to reduce the risk of outsourcing in supply chain management through appropriate evaluation and communication later in this post.

Insourcing vs. outsourcing supply chain management

How does outsourcing supply chain management differ from keeping these activities in-house? Here are a few examples: 

  • Insourcing provides direct control over processes and quality—and requires substantial investments in infrastructure, personnel, and technology. 
  • Outsourcing delegates certain supply chain functions to external partners, offering access to specialized expertise and resources while potentially reducing operational costs and mitigating risks associated with managing multiple functions in-house. 
  • Outsourcing requires you to relinquish some control over critical processes and may pose challenges in maintaining transparency and alignment with business objectives.  
  • Where insourcing allows for greater customization and agility in responding to market changes and customer demands, outsourcing can lead to dependencies on external vendors and potential disruptions in the event of supply chain disruptions or conflicts.  

Ultimately, the decision between insourcing and outsourcing hinges on the specific needs, resources, and strategic goals of the business, weighing the trade-offs between control, cost, flexibility, and risk management.

Four things to consider

So, you’ve evaluated the benefits and risks of SCM outsourcing, and compared outsourcing against insourcing in your organization, and you’re still not sure if outsourcing is right for you. Before you decide to outsource your supply chain activities, here are a few important things to consider:

1. Focus on clear goals.

Knowing what you want from outsourcing is a critical first step in establishing what part(s), if any, of your supply chain you want to outsource. Start by answering these key questions: 

  • What ownership stake in the supply chain do you want? You need the decision to be unanimous among your company stakeholders. Do you want to shift part or all of your supply chain activities? Core or non-essential supply chain activities?
  • What supply chain activities can you outsource to extract value you can’t access on your own? Besides cost, value is a factor of time, quality, resources, and skillsets. Outsourcing can help  make your product faster, improve quality, better mitigate risks, give you agility, and alleviate your staff’s burden. SCM can provide a strategic, tactical, and transformational advantage to your organization.
  • What supply chain activities can you outsource to gain substantive financial benefits? Many organizations want to access the commodities, products, and services they need at a lower cost than they can achieve on their own. However, another significant value of outsourcing supply chain activities is to improve your overall working capital. Make sure you incorporate this dimension in your decision-making. 

Remember, without clear goals in place, you won’t be able to properly align with your partner. The last thing you want is to compromise on the partner's support, approach, process, or flexibility. 

2. Measure the overall capabilities of your partner.

Complete proper due diligence with outsourcing in supply chain management.

The secret to choosing the right partner lies in evaluating the market thoroughly. Theres no reason to make this decision in haste. Instead, take your time and take a closer look at the provider’s expertise, scalability, current customer relationships, and collective experience. Its vital you understand the differences among various companies, because your needs are unique and different companiescapacity to meet your needs will differ. For instance, make sure the geographic outreach of the partner aligns with your company’s needs. When evaluating potential partner, ask yourself:

  • Can your partner perform a variety of supply chain tasks effectively? Essentially, analyze their abilities and support mechanisms. 
  • Can your partner deliver consistent and high-quality service? You should find out about the approach of your partner, and that means understanding their process, adaptability, and available equipment. 
  • Can your partner adequately support you during transition? You will have to prepare, transition, and deploy different outsourcing stages. Your partner should be able to support and execute plans with a talented internal team. Additionally, you should be able to count on your partner to resolve emerging issues, receive guidance, and make a complete transition. 

3. It’s a two-way street. Ensure transparency and collaboration. 

It’s important to treat your outsourcing partner in a strategic sense. From the onset, you should share and be specific about all your internal requirements. You should openly share as much data as possible—your designs, AVL, BOM, and samples. Utilize your partnership agreement to ensure your intellectual property is protected. Your partner can’t realistically propose a sound strategy with partial information or hidden facts. Also make sure that you are clear on your organizational compliance and sourcing policies so you can avoid potential reluctance from management later. 

Your partner needs to focus on transparency and quality control, as well. Focus on long-term commitment and alignment, which means reviewing pricing, test standards, required additional specifications, lead time, communication standards, and support levels. More importantly, your strategic outsourcing partner should be proactive, provide reports, and highlight the visibility of facilities, documentation, and inventory. The best strategy is to bring everyone on the same page so you can work together effectively for years to come. It's advantageous for you to start early discussions with a solid NDA in place, and once a factory is identified you will need a non-circumvent agreement. 

4. Opt for a balanced approach.

Minimize the risk of outsourcing in supply chain management by aligning goals with your partner.

Outsourcing supply chain activities to an expert partner is the most effective way to scale up opportunities, improve in-house capabilities, focus on other important areas of your business, and cut costs. Since you expect your outsourcing strategy to deliver these benefits, you also want your goals to align with those of your partner. You’re looking for the provision of an ongoing service rather than a one-off service—make sure the right incentives and measures are in place for long-term success. 

Final thoughts on outsourcing in supply chain management 

Your decision to outsource your supply chain activities should revolve around your evaluation of current tech trends, strategic alignment, core competencies, and cost-benefit analysis. You are counting on your partner to give you a tactical, strategic, and competitive edge to your organization, so be sure to define clear goals, evaluate carefully, be transparent, and have a balanced approach.

a graphic reading supply chain terms

About NMG

NMG has more than 85 years of experience partnering with organizations to bring their industrial, IoT, lighting, medical, telecommunications, consumer, and aerospace products to life. We solve your most complex challenges in engineering design, manufacturing, and supply chain management.

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