Management of Outsourced Operations

Jitesh Agarwal PRN: 12020841019

Assignment: Warehousing Decision Insource or Outsource?

Warehouse Management: The Insourcing Perspective
In-sourcing is a strategic business and human resources alternative to outsourcing. In-sourcing means building up or adding new business activities in the company that have been or could be outsourced. Theres a common philosophy Do what you do best and outsource the rest. It is a common practice to outsource logistics and supply chain activities like warehousing. However, as the modern trade proliferates, we see more and more organizations insourcing logistics activities like warehousing. In todays competitive environment, the competitive advantage that companies gain derived is not only from product differentiation but also from the fact that how efficiently they manage logistics. Warehousing in such a situation becomes not just an activity that can take a back seat. It forms a core function for any company and hence a source of core-competency. Following are the advantages that can be gained from managing warehousing internally. Control: A primary advantage of in-sourcing is increased control. This is what motivates many companies to switch from outsourcing to in-sourcing. They want more control over the time, resources and results of the work. System Design: Companies can develop and execute their own plans in a specialized area with in-sourcing, as opposed to turning these elements of work over to an external provider. The company can integrate the new or growing specialization into the organizational structure. Logistics too important to consider outsourcing: Logistics is an important function. Seamless flow of material information keeps the business moving forward. Service Level commitments may not be realized: Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest. Cost reductions may not be experienced by outsourcing: If the volumes are too high, outsourcing does not lead to cost advantage. Initial investment would be far outweighed by the reduction in variable cost. Loss of Competency: Once a skill has been largely moved offshore, it is difficult to regain lost competencies. Warehousing, being an integral part of supply chain, competency achieved in logistics is an important asset for the advancement of any company . Issues related to security of goods and technologies in also a major argument behind insourcing of warehouse.

Further cost reduction by having offices for other functions such as housing of sales teams in the warehouse itself. Visibility over the process Economies of scale and scope Helps integration of supply chain management

Warehouse Management: The Outsourcing Perspective

Outsourcing is the process of turning over one or more critical business functions to third-party companies. Outsourcing warehouse logistics operations adds to the bottom line for a company through accurate, well-managed inventory and supply chain solutions. Top of the end warehouse management companies offer expertise that manufacturers, distributors and shippers can tap into, allowing companies to achieve supply chain solutions with their customers that minimize total delivered costs availing services par-excellence. The direct benefits of outsourcing are those related:

Focus on Core Competency: A company that outsources manufacturing, logistics, or both no longer needs all the resources it has been using to make a product, store it, and get it to customers. Therefore, the company can redirect these resources to its core functions. Warehousing being a hassle-some affair, a lot of companys efforts would be wasted for very little gain, if at all. Flexibility and Wider Range of Service: If a company outsources non-core functions, be they primary or secondary, your company has no limits. You can offer your customers more because, although the company may actually be doing less within its four physical walls, it is accomplishing much more. Your company can produce more, ship greater amounts, and break into product lines heretofore not considered because everything is not being done inhouse. Access to Global Networks and Superior Technology: Contract manufacturers and 3PLs have been doing what they do best for decades. As they have acquired more clients and become more established, contract manufacturers and 3PLs have built sophisticated relationships. Many also belong to multilevel networks that are so necessary for remaining competitive and winning in an established global marketplace. They are also using the superior technology associated with distribution operations, including warehouse management systems (WMSs). Reduced Capital Investment and Increased Cash Inflow: Outsourcing warehouse management will reduce capital investment. If you have outsourced distribution, then you no longer need distribution centres or warehouses. This makes capital funds more available for a companys core functions. Outsourcing can also eliminate the need to demonstrate return on equity from capital investments in non-core areas, and this can improve certain financial measurements. Value-add services (e.g. labelling, bundling, kitting, and other special packaging needs) to meet your specific and changing requirements Increased shipment visibility Gain competitive advantage over competitors through the use of supply chain professionals More saleable logistics operation and cost model Risk reduction Increased expertise in supply chain security Companies can take advantage of the warehousing companys network with other supply chain functions like transportation, etc.

According to the study, The State of Logistics Outsourcing 2007, 69 percent of companies surveyed were using 3PLs for warehouse/distribution centre management. Almost two thirds of companies surveyed felt the use of 3PLs had a positive impact on client service. Nearly 75 percent agreed with the statement Our use of 3PLs has had a positive impact on business process efficiencies. And almost half were able to measure a return on investment from using a third party logistics companies.

Final Decision: Insource or Outsource Warehouse Management?

Insourcing Cost Details

Annual capacity Annual charges Building and equipment (Depreciation of initial investment) Employee training Overhead expenses Management expenses Total Fixed Cost Cost per unit Annual charges ($155,000 / 180,000 units) Variable costs Direct labor costs 180,000 units

$25,000 $10,000 $50,000 $70,000 $155,000 $ .86

$1.00 $0.50

Total Cost of Warehousing per unit for Insourcing Total Cost of Warehousing per unit for outsourcing

$2.36 $2.90

As we can see from the above data, insourcing is cheaper for the company than outsourcing, and reduced costs is one of the major motive behind outsourcing. However, we cannot conclude insourcing to be better jus based on the above cost evaluation. Lets look in detail the implications of each. Todays warehouses are asked to execute more, smaller transactions, handle and store more items; provide more product and service customization, offer more value added services. At the same time they have lesser time to process an order, less margin for error and high turnover. Hence, warehousing has become an activity that requires you attention, time and money. Cost cannot be the sole criteria for deciding on whether to insource or outsource warehousing. From the above mentioned advantages of Insourcing and Outsourcing, it is clear that the advantages of outsourcing weighs above that of insourcing. However, in our case, the cost savings in case of internal warehousing is a huge 18.62% which cannot be undermined. Total cost of Insourcing warehouse per year = 180000 x 2.36 = $424800 Total cost of Outsourcing warehouse per year = 180000 x 2.90 = $522000 Net Cost Savings = $97200 Lets look at the long term perspective of 10 years and not just a single year. Forecasts are not always accurate, thus if the volume of 180000 decreases, the warehousing cost per unit will increase from $.86.

Also, as times change, businesses becomes more complex. Expert companies thrive in all areas and they do what they do best. Eventually, a company focussing on all activities, loses its sheen. With advancement in technology, the company will have to keep investing into the warehouse management activity to stay competitive. Another, very important consideration should be increase in demand in the subsequent years. While increase in demand is a continuous function, capacity increase is a step function. Suppose, the demand next year increases to 200,000 Units. The company cannot just increase capacity by 200,000. New warehouses will have to be acquired or built with capacities much more than the existing demand, which in turn would result in Low asset utilization in future years.

Now, let us see, how the company can make outsourcing maximize shareholders value and counter the costs savings that we witness in insourcing. In the same way that a company can create leverage and increase its ROI by trading on the equity of the firm, it can also increase its ROI by outsourcing an operation, even if its operating costs increase as a result. Outsourcing can take assets, inventories, and personnel off the books, resulting in high ROI and higher stock price in the market. Another minor setback in case of insourcing is employee relations will be hampered if the 30 full time hourly employees and three managers who were laid-off earlier will be recruited back which will cause them to be less motivated.

Hence, although purely from the bottom-line perspective it seems tempting to go with the insourcing option, the long term benefits of outsourcing far outweigh the initial gains in case of insourcing. Thus, the company should outsource its warehouse management.