Insourcing vs Outsourcing of Supply Chain Activities

Many companies are reviewing which supply chain tasks they need to perform in house (insource) or outsource to a partner i.e. Logistics Service Provider (LSP) or Contract Manufacturer (CMO). Supply chain activities that can be insourced or outsourced can include for instance Transportation, Transportation Management, Logistics, Value Added Services, Order to Cash, Planning, Running a Control Tower, but also parts of the manufacturing/assembly process.

Make or buy decision

Seven factors determine the make or buy decision:

  • Whether the activity at hand is a core competence or not
  • Financial benefit of doing activities in house versus outsourcing to a 3PL/LSP or CMO
  • The financial position – companies under financial pressure are more likely to outsource as they lack the financial strength for investments in people, processes and systems to execute the supply chain tasks
  • Variability of costs – many companies have shifted to outsourcing due to making fixed costs more variable
  • Volume flexibility – seasonality and required future scalability.
  • Country and geographic knowledge
  • Timeline & risks

Hybrid outsourcing operating models

In the past, outsourcing has been regarded as a black or white decision. Over the last years, many brand owners have shifted from an insourced to an outsourced model and are reviewing a hybrid model in which the brand owner remains in control of an operation but leverages a 3rd party for specific value or expertise.

Alternative insourcing and outsourcing models include:

  • Execution of the activity by the brand owner whereby it has full control. This model is typically applied when the activity is regarded as a core competence
  • Supply of labour provided by the 3PL, while the brand owner retains control of the building, IT and material handling equipment. This requires solid contractual agreements and relationship management
  • Full outsourcing whereby the partner is directly responsible for personnel, the building and standard investments. The brand owner is not investing in this model
  • Full outsourcing with low specific investments from the brand owner
  • Full outsourcing with high specific investments. The brand owner is however dependent on the 3PL. This could be due to a long-term relationship

Insourcing vs Outsourcing of supply chain activities & BCI advice

BCI supports clients in the evaluation of the make or buy decision, which needs to be analysed from a strategic, qualitative and financial perspective. The critical importance of the supply chain activity to business performance (profit) and supply risks are key to taking the right make or buy decision and choosing the optimal operating model. In the strategic outsourcing evaluation, BCI includes elements such as core competences, the willingness to invest in supply chain execution, the clients position towards having own assets, volume and mix flexibility, scalability, intellectual property, management and control, quality and risk, etc.

Next to these strategic considerations, BCI assesses the pros and cons of the various make or buy models from a financial perspective.

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