1. Offshore Contract Manufacturing:
Reducing Risks Inherent
in Outsourcing Your
Supply Chain
This is the second article in a two-part series
that examines the sourcing risks associated
with offshore contract manufacturing. Part II
discusses how to reduce distribution risks
when outsourcing your supply chain.
Companies outsourcing their distribution of finished goods
face risks that can jeopardize the right products being deliv-
ered 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 in-
crease costs, boost transit times, and diminish service lev-
els. While this risk exists even if you build your own distribu-
tion 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? Con-
duct a network optimization analysis that looks at your trans-
portation 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 require-
ments 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, compa-
nies 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 func-
tional and technical requirements, and establish an effective
performance management framework. In addition to clarify-
ing roles and responsibilities, this framework offers perfor-
mance reviews of “SMART” key performance indicators
(KPIs) at regularly scheduled meetings with your outsourc-
ing partner.
Under this scenario, you can manage and monitor your pro-
vider’s performance regularly using quantitative data. To
select the right distribution partner, look at the potential pro-
vider’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 sup-
ply 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.
by Jeffrey A. Shaffer and Praful Karanth
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