Outsourcing in Logistics Sector

Introduction :

Nowadays, many organisation are outsourcing their non- core activities to an external agents. Distribution is one of these activities as distribution consider as a non-core activity for many firms. Although, there are many advantage for outsourcing, there are also risks and disadvantage in this process. In this essay I would explain the term outsourcing and explain why organisations are preferring to outsource some of its functions in today's environment. Also, in this essay it has been tried to analysis the advantage and disadvantage of the outsourcing process and its risks towards the organisation.

The word outsourcing could be described as the contractual relationship with a specialised outside service provider for work traditionally done in-house. Outsourcing could also be defined as the use of external agents to perform one or more organisational activities. In the last decade or so there has been a trend, particular among large scale companies, to hand over the whole or part of the distribution function to the external agents.

One should emphasis that outsourcing is an issue that is not specific to distribution. Many other organisational functions, such as information system, building maintenance, etc..., have been outsource for many years in organisations.

There are different reasons for organisations outsourcing their distribution function. More and more organisations today face a dynamic and changing environment. This, in turn, is requiring these organisations to adapt. Competition is also changing. The global economy means that competitors are likely to come from across the ocean as from across town. Successful organisations will be the ones that can change in response to the competition and changing environment. In other words, they will be flexible.

Therefore, today's organisation stand in sharp contrast to the typical bureaucratic organisations that have many vertical levels of management and where control is sought through ownership. In such organisations, Research and Development are done in-house, production occurs in company-owned plants, and sales and distribution are performed by the company's own employees. To support all this, management has to employ extra personal including accountants, human resources specialist and supply chain management specialists. However, nowadays successful organisations outsource many of these functions and concentrate on what it do best.

Outsourcing can help organisations to reduce the impact of change in the environment by outsourcing some functions to specialist companies on that function who have more expertise and focus to concentrate on managing change. So, outsourcing could consider as a strategy to manage change in the external environment.

Globalisation is another aspect which has impact upon increasing outsourcing. Nowadays, many companies are turning their attention to foreign markets, the number of global companies are accelerating. But these companies do not have in-house expertise to negotiate or operate the supply chain process in international markets. So, they need to outsource their supply chain to logistic companies which have international expertise in the distribution function. The another reason for increasing outsourcing is the increasing complexity of distribution networks. Storing and moving goods have become more complex as the technology is advancing too fast. A manufacturing organisation normally do not want to waste its management resources to this functions. Therefore, they prefer to outsource this function to logistics companies which possess all the necessary skills and technology in this service.

For example, Marks and Spencer, one of the world's leading retailers has outsource its distribution function to Exel , one of the leading companies in supplying logistic service. M&S has approached Exel to take control of its complex distribution service. Now, Exel provides a distribution service for 23 M&S stores in South England, and also deals with M&S in France, Spain and Hong Kong. Exel has bought a revolutionary technology to M&S export operation by enabling 10 suits to be shipped in the space normally occupied by four garments. In addition, M&S customers start to get a high level of service because stores could be replenished quickly. All these and other benefits M&S has gained through outsourcing its complex distribution service.

There are many advantages which a company could get from outsourcing its distribution functions. It could reduce the operating cost of the firms. A study which has been conducted in 1993 reported that a company could reduce 9% of its operating costs by outsourcing. When a company is outsourced its distribution function to world-class provider, it would reduce the cost of this function as the provider would be more efficient and specialist in this function. Also, by outsourcing non-core activities like distribution, a company could focus on its core activities and increase revenues. . Managers realise that by outsourcing their routine, nonessential operations, they can better focus on the core competencies that truly differentiate them from competitor. For example, Ericsson one, of the leading companies in the telecommunication industry, wanted to reduce its costs in the supply chain by finding a solution to its warehouses in Philippines. Ericsson is always trying to reduce costs in different areas of business, this is including, the supply chain so as to save money and focus on Research and development. Therefore, Ericsson turned to Exel. Ericsson has leased the warehousing operation to Exel on a two years contract. Exel has provided a flexible service to Ericsson which has resulted in cost saving and made Ericsson concentrate on its core businesses. Before Ericsson has to handle the warehouse operation in-house but it was not the core competencies of the business.

Another advantage of outsourcing is the reduction of the need to invest in non-core business assets such as warehousing and carriers. This will allow the firm to make the capital funds more available for core functions such as research and development in the telecommunication industry. For example, Northern Telecom manufacture enterprise which is operating in 130 countries have outsourced its distribution service to Ryder Dedicated Logistic. The main reason for Northern Telecom to outsource its distribution function, it did not want to invest in non-core activities. ' The core competency of Northern is not fleet management. If the president of our company has a million dollars to invest, will he put it into fixing tracks or a new telecommunication system?' says David Grant, General Manager, Global Logistic.

The development and increasing implementation of outsourcing