The need for connecting Business Strategy, Supply Chain and Outsourcing
Focusing on business strategy can be tough when supply chain issues take precedence over operations and administration. Losing parts, production shortages, warranty management, customer service, unwanted inventory growth and delivery delays can quickly swamp internal resources, while eating away at otherwise attractive profit margins. Two examples to illustrate this point:
- a study conducted by Xerox Corporation showed that a 6 month delay in the introduction of a new product can reduce by 27% its profits over a period of five years.
- In USA, out-of-stock products such as pizza, juice, soup and cereales cost to their manufactures between 4% and 7% of total sales (GMA Logistics Study 2003).
Low performing Supply Chain can also affect the relation with clients. Think about this: of the top 10 internal customer service metrics usully used in USA by retailers, 7 are linked directly to supply chain performance (Fig 2).
So, the message is very clear: firm performance depends on supply chain performnce. But, if this is the case, how can we design and operate a top class supply chain? Here is where outsourcing plays a key role.
Every company has a limited number of resources, no matter its size. Therefore, a business can’t do all and be all things to all customers. Each company should focus on developing its core competencies to excel only on few activities. Which activities? Companies must understand which activities create the highest value in term of cost or differentiation to their costumers (fig 3), and then select those to be peformed internally according to their visions and stragegies. The rest of activities are candidated for outsourcing.
The decision to outsource an activity should be justified not only on the traditional cost and capital elements, but also on strategic elements such as:
- The acquisition of expertise, talent and resources that don’t exist internally (Given specialisation, external providers can select and recruit superior personnel and offer an attractive career path)
- The development of value added capabilities to better serve customers
- The improvement of operations or customer service
- Process improvement (6-sigma, cart Kanban, etc)
This approach of specialization/outsourcing could be a matter of survival for many Tunisian companies. Why? Firstly, the majority of local companies have a relative small size which limited considerably the internal resources available to develop world-class competencies. Secondly, there is a window of 2 years before the Tunisia economy opens to a free trade with the European Community, which puts 2008 as the deadline for companies to be prepared for international competition. So, when lack of resources and time are put together, the outsourcing to partners with the required capabilities becomes a very interesting option.
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