Outsourcing justification undergoes a change

Roger OakdenGlobal LogisticsLeave a Comment

What is happening?

The business media has recently noted changes to the outsourcing approach in two industries.

The mining industry in Australia is changing its business model so that operations in the mines are undertaken by mine companies employees, rather than mining services companies. In the global courier, express parcel (CEP) industry, the major companies have been enlarging their fleet of freighter aircraft rather than contracting for space in the bellies of airline passenger aircraft.

Assuming that companies in the mining and CEP industries undertook a considered analysis of the factors prior to taking the initial decision to outsource, why have they changed?

In the mining industry there is a cycle for a mine from exploration through development to production and finally decline. When demand for minerals expanded early in the 2000s, mining companies had to develop their assets quickly; operational activities were therefore outsourced, so the companies could concentrate on major development projects. As the cycle now moves to the production phase, the mining companies are able to better manage costs and so are in-sourcing operational activities.

At the time of rapid expansion in demand for the CEP sector, the companies may not have had access to sufficient capital to own or lease aircraft that could have experienced variable use (and earning) patterns; it was preferable to rely on the freight capacity of passenger aircraft. Now, with freight volumes being affected by changes in demand patterns, the CEP companies appear to consider it advantageous to manage their own assets and so minimise costs.

These examples illustrate that outsourcing is not forever. Decisions should be regularly reviewed to ascertain whether current economic and business conditions justify outsourcing functions within your business.

Review your outsourcing decisions

The timing of reviews depends on your industry and current economic conditions. The review must identify and justify the need for the proposed action, as in any buying situation. The following factors are examples of indicators when deciding whether to continue a contract or enter into new contracts to outsource a function.

  1. How core is the activity to your business? e.g. can it enable the business to exploit opportunities or neutralise potential threats
  2. How much reliance is placed on the function in achieving the logistics strategy? Examples of more critical activities are logistics system design and planning logistics activities
  3. How complex are the supply chains that interact with the function? Consider supply network complexity in a matrix using: demand features; supply features and product features against the: supply network; markets; products and processes.
  4. Are there particular features concerned with the assets used in the function that will make it more challenging for the business if part of an outsource contract? Examples are specially designed buildings, special purpose trucks, high skill people and specialised software
  5. What is the level of uncertainty associated with particular transactions undertaken in the function? The more uncertainty within transactions, the more difficult it is to measure outsource performance
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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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