Outsourcing

An Emerging Trend
Value Chain Decisions
The operational structure of a value chain is the
configuration of resources such as suppliers,
factories, warehouses, distributors, technical
support centers, engineering design and sales
offices, and communication links.

Value chains may be centralized or

decentralized.
Evolution of Supply Chain
❖ 1st Revolution-Ford Supply Chain (1910-20)

❖ Black Colored - T model, Inflexible Model

❖ 2nd Revolution-Toyota Supply Chain (1950-60)

❖ 3rd Revolution-Dell Supply Chain(1995-2006)

❖ Flexible Model
Outsourcing and Vertical Integration
• Vertical integration refers to the process of
acquiring and consolidating elements of a value
chain to achieve more control.
• Backward integration refers to acquiring
capabilities toward suppliers
• Forward integration refers to acquiring
capabilities toward distribution or even
customers.
• Outsourcing is the process of having suppliers
provide goods and services that were
previously provided internally.
 Offshoring, Near-shoring & Farm-
shoring
◼ The term “Off-shoring” is referred to the
outsourcing of business processes to a
location distant from the service
consumers.

◼ The term “Near-shoring” has been coined

by the Latin-American countries to refer to
their close proximity to the US and other
major service consumers.

◼ “Farm-shoring” means the placement of

jobs in low-cost regions of the service
recipient’s home country.
Drivers to Outsourcing
•Globalization of markets

•Competitive pressure

•Changing customer demands

•Emerging technologies
Three Waves of Outsourcing
1. Outsourcing goods-producing jobs, such as
computer components and electronics from the U.S. in
many industries several decades ago.

2. Outsourcing simple service work, such as standard

credit card processing, billing and other forms of
transaction processing, and software development.

3. Outsourcing skilled knowledge work, such as

engineering design, architectural plans, call centers,
and computer chip design.
Ways of Business Process Execution

E.g. Jio Customer care

E.g. Levi Strauss & Co

E.g. Bank of America
Customer care

E.g. Logistics Service

 Why Outsourcing?

- To focus on core competencies (Toyota)

- Resource constraints(Logistics services)
- Cost-saving resulting from better management (Low cost
labour and manufacturing)
- Reduction in risk and liability
- Extend superior customer service (Call centres)
- Source of process improvement (Call centres for consumer
goods)
-Tap Business Opportunities in offshore vendor’s country
through their network (Hero-Honda)
-Agility to respond to the ever-changing customers
need(Distributors)
The Outsourcing Process
The Outsourcing Process
Business Processes Outsourced
Example
Marine International manufacturers an aquarium pump and is trying to
decide whether to produce the filter system in-house or sign an
outsourcing contract with Bayfront Manufacturing to make the filter
system. Marine’s expertise is producing the pumps themselves but
they are considering producing the filter systems also. To establish a
filter system production area at Marine International, the fixed costs is
$370,000 and they estimate their variable cost of production in-house
at $11.27 per filter system. If Marine outsources the production of the
filter system to Bayfront, Bayfront will charge Marine $25 per filter
system. Should Marine International outsource the production of the
filter system to Bayfront if marine sells 25,000 filters a year?
• Total Cost In-house = Fixed cost + (Variable cost) (Units)

• Total Cost In-house = $370,000 + ($11.27)(25,000) = $651,750

• Total Cost Outsource to Bayfront = ($25)(25,000) = $625,000

 See the calculations below for confirmation.

Q* = ______FC_______ = $370,000 = 26,948 filter systems

Buying cost - VC1 $25 - $11.27

• If demand is greater than 26,948, then produce in-house (make)

• If demand is less than or equal to 26,948, then outsource
• For a quantity of 25,000 pumps, Marine should outsource to
Bayfront the production of the filter systems.
Logistics Evolution
Alliance with
4 Party 3 PL Service provider
Logistics IT Organization
IT/logistics Consultant

Outsourcing
3 Party Warehousing
Logistics Transportation
Inventory
Order processing

In-house Self -relient

logistics Organization
performing
all logistics
operation
 3 PL Service Provider
Wholesalers
The stand-alone operators, who extend only one
type of service in which they have an expertise
such as:
- Warehousing
- Transportation
- Customs clearance
- Packing
- Equipment suppliers
- IT support
Integrators
One who provides entire logistics services and offers
Logistics solutions to customer’s logistics problem
 Advantages of 3 PL
•Reduction in risk and liabilities

•Value added service to the customer

•Source of process improvement

•Wider market coverage

•Speed to market
Value Added Services by 3 PL
Service Providers
•Cross docking
•Customs clearance
•Reverse logistics
•Assembly or mixing
•Freight consolidation
•Special packaging & labelling
•Logistics audits
•Stock financing
Prominent 3PL providers
◼ AFL Limited
◼ Dynamic Logistics
◼ Fed Ex
◼ Gati
◼ Logistix limited
◼ Patel Roadways
◼ SembCorp
◼ TCI
◼ TNT
4 PL Service Provider
- Covers the entire supply chain of the customer

- Collaboration between two or more 3PL service

Providers on the resources sharing basis to
extend logistic solution to a common customer

- Alliances to be led by integrator with IT based

and not asset based service provider

- Flexible arrangement
Advantages of 4 PL
• Reduced logistics cost
• Concentration on core competencies
• Release of management capacities
• Reduced assets
• Economies of scale
• Increase of process quality
• Access to latest technologies
Logistics Outsourcing Issues

Switching cost (assets , customer service)

Degree of control (over employees)
Human & electronic interface ( decision issues, EDI)
Tuning logistics to need of channel partners (ITC)
Degree of outsourcing
Legal aspects
 Service Provider Selection - 1
•Define logistics problems

•Identify problem areas

•Establish objectives

•Search for service provider

•Proposal evaluation

•Selection of service provider

Service Provider Selection- 2
Define logistics problems
- High logistics cost
- Longer performance cycle
- Increased customer complaints
- Reverse logistics
Service Provider Selection-3
Identify problem areas
- Warehousing
- Material handling
- Storage arrangement
- Transportation
- Packaging
Service Provider Selection-4
Establish objectives
- Cost reduction
- Performance cycle compression
- Customer complaints resolution
- JIT delivery
- Freight optimization
- Route planning
- Inventory carrying cost
Service Provider Selection-5
Search for service provider
- Integrator
- Wholesaler
- Consultants
Service Provider Selection-6
Proposal evaluation & Selection
- Credentials
- Logistics infrastructure
- Experience and customer base
- Technology
- Cost of service
- Reliability
- Government liaison
Logistics Service Contract Agreement
•Date & place of the contract
•Names and addresses of contracting parties
•Scope of service
•Delivery requirements
•Payment terms
•Extra services from service providers
•Charges for services offered
•Value proposition by service provider
•Damage liability
•Responsibilities
•Performance measures criteria
•Risk sharing
•Termination of contract
•Notice period
•Notice for claims and filing suits
•Authority & jurisdiction of dispute settlement
•Governing laws
Reverse Logistics -A New Wave
Reverse Logistics
What it is…
❖ The process of moving goods from their place of use ,
back to their place of manufacture for reprocessing,
refilling, repairs or waste disposal
❖ It’s a planned process of goods movement in reverse
direction done in efficient and cost-effective manner
through the organized network. It can be standalone or
integrated system in company’s supply chain
 Why Reverse Logistics ?
•Growing public concern for
environmental pollution
•Government regulations on
product recycling and waste disposal
•Growing consumerism
•Stiff competition
Reverse Logistics Scope
Refilling
LPG Cylinders, Soft Drink Bottles, Liquor Bottles,
Pallets, Containers
Product Recall
Defective product, Shelf life over (Johnson)
Refurbishing
Used and returned within warranty period
Remanufacturing
Used product for quality up-gradation
Waste DisposalRecycling the waste
 Three Stage Reverse Logistics
System for Used Car Recycling

Stage III Stage II Stage I

Steel
melters Customer
Car
Dealer
Battery Customer
suppliers
Customer
Packaging Car Car
manufacturers Producer Dealer Customer

Tyre
producers Customer
Car
Dealer
Customer
Components
producers
Reverse Logistics:
System Design Considerations
• Product location identification
• Product collection system
• Product recycling / disposal centres
• Documentation system
• Cost implications
• Legal issues
 Reverse Logistics in India
Refilling of LPG Cylinders, & Soft Drink Bottles
Bharat Petroleum, Hindustan Petroleum
Pepsi, Coca-Cola
United Breweries (Beer)

Return of ‘Life Expired’ Products

Nestle (Yoghurt)
Mongini’s (Cakes)
Rest in the next ……