Outside Warehousing: Reducing Risks Inherent in Outsourcing Your Supply Chain

This article appeared in the Council of Supply Chain Management Profressional's Newsletter (Supply Chain Comment, Sept/Oct 2007). It was written by Jeffrey A. Shaffer, an executive with Crowe Chizek and Company LLC in Oak Brook, Illinois and Praful Karanth, a senior manager also with Crowe and Chizek and Company.

Companies outsourcing their distribution of finished goods face risks that can jeopardize the right products being delivered at the right place at the right time. Manufacturers must manage a host of special distribution risks associated with location, warehousing, transportation, and technology.

Location Risks
Locating a distribution center in the wrong place can increase costs, boost transit times, and diminish service levels. While this risk exists even if you build your own distribution network, it is higher in an outsourced environment. One inherent difficulty is that third party providers prefer to use locations where they already have facilities.

So, where should you locate your distribution center? Conduct a network optimization analysis that looks at your transportation lanes to find the optimal distribution. To achieve the most efficient service level and cost, you need to consider how finished goods move from your plant to your customers.

The goal is to identify a location responsive to many needs. It should serve as the center for exceeding customer requirements in the most cost-effective manner. Selecting the final location for your distribution center includes consideration of available labor and facilities, tax incentives, and proximity to major highways, railroads, ports, or air terminals.

Warehousing Risks
Once the optimal distribution network is decided, companies may encounter the risk of selecting the wrong third party logistics provider. An inadequate provider for customer orders will lead to poor service, low customer satisfaction, higher operating cost, and, ultimately, lost sales.

To mitigate these risks, you should communicate your functional and technical requirements, and establish an effective performance management framework. In addition to clarifying roles and responsibilities, this framework offers performance reviews of “SMART” key performance indicators (KPIs) at regularly scheduled meetings with your outsourcing partner.

Under this scenario, you can manage and monitor your provider’s performance regularly using quantitative data. To select the right distribution partner, look at the potential provider’s flexibility in handling the fluctuations in your current and future demand for goods or services.

Ask questions such as:
• If inventory grows, where will the provider store those additional goods?
• Does the provider have technology to track inventory stored offsite?
• What are the financial implications of swings in inventory?

And look for similarities between the culture of your organization and the warehousing provider like:
• Quality management, which includes problem-solving and teamwork activities
• Employee training
• Well-organized, clean facilities
• Percentage of temporary versus full-time employees

Working with a partner who can offer flexibility along with adequate storage and tracking also helps to reduce supply chain risks.

Transportation Risks
Selecting your transportation partner is similar to the criteria for choosing your third party logistics partner. In addition to evaluating costs and capabilities, you should assess how compatible the culture of a potential carrier is with your company’s. For example, does the carrier value metrics as much as your business does? Do the trucks have regularly scheduled preventive maintenance programs, and are they cleaned periodically?

Like finding the right warehousing provider, approaching your carrier relationships as partnerships will help to ensure that the carrier’s standards of operation blend seamlessly with your company’s culture.

Technology Risks
An efficient distribution center and fleet optimization require the technological capability to handle inbound and outbound inventory. Maximizing effectiveness requires tightening levels of integration between enterprise resource planning, warehouse management systems, and transportation management systems.

Typical integration points include electronic advance ship notification and proof-of-delivery receipts, which facilitate inbound receipts, outbound shipments, and corresponding accounting transactions.

Sales and operations planning technology can facilitate the collaboration among sales, operations, finance, marketing, and distribution. All the key players, including outsourcing partners, should commit to the same plan.

Integrated technology allows your outsourcing partners to predict when they will need to ramp up for heavy activity, add staff, and allocate warehouse space needed to keep goods moving.

Risk Assessment and Management
Whether companies turn to offshore contract manufacturing or outsource their warehousing and transportation of finished goods, two critical steps require advance attention.

First, a comprehensive risk assessment will define and quantify risks along with their probabilities and costs. In addition, the assessment will allow you to identify events in advance that should trigger risk mitigation efforts.

Second, you need to design and implement comprehensive corporate performance management frameworks with your supply chain partners as part of your contractual agreements with them. These frameworks provide a structure for proper planning and execution, complete with KPIs necessary to monitor the relationship and encourage a collaborative approach.



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