Insourced vs. Outsourced Supply Chain Management
Outsourcing, or the contracting out of a non-core business function to a third party, is a common American business practice. After gaining traction in the 80s and 90s for functions like manufacturing and logistics, its popularity continued to soar. As of early 2016, more than 40 percent of companies outsource some manufacturing and 80 percent outsource transportation.
Many businesses choose to outsource their supply chains to leverage the resources and expertise that a third party can provide and to free up time to focus on core business objectives. While outsourcing can provide flexibility and cost savings, it also has its drawbacks. Depending on which growth stage your business is in, it may be beneficial to move your supply chain back in-house.
Are you ready to bring your supply chain in-house?
When your business was in its infancy, outsourcing all or part of your supply chain was likely necessary in order to accommodate growth while still remaining profitable. If your business is in a more mature and stable growth stage, then it’s time to assess the advantages and disadvantages of continuing to outsource your supply chain. One way to determine if you’re ready to bring your supply chain management back in-house is to evaluate the key performance indicators (KPIs) outlined in the service level agreement with your 3pl. Establishing service level agreements (SLAs) with your 3pl holds them accountable for their contracted responsibilities. If SLAs are continuously unmet, it may be time to move on.
Take online retailer Zappos for example. In its younger years, Zappos chose to outsource its fulfillment and shipment. Known for their exceptional customer service, the company realized it made a mistake when their 3pl wasn’t upholding the same quality standards that Zappos’ customers had come to expect. Ultimately, they decided to insource these functions in order better manage their customers’ experience.
Another way to determine if insourcing is a good option is to evaluate the cost effectiveness. Once your business has grown, outsourcing your supply chain management may be more costly than bringing it back in-house. With outsourcing, you have less control over things like productivity, lead time and inventory management. Outside forces, like wage or tax increases, can also drive up costs. If your business has the capital to invest in its own infrastructure upfront, the increased control you gain could result in greater long-term cost savings.
Benefits of insourcing
Insourcing your supply chain management comes with many benefits, including:
- Increased quality control
By taking part or all of your supply chain back in-house, you’re able to have greater control over how products are being made or the time it takes to fulfill and ship orders. There’s also more freedom to brand your company with packaging and control the customer experience from beginning to end.
- Talent aligned with company values
You’ll also be able to hire employees who align with your culture and can share in your company’s vision. In fact, having employees who are highly engaged and invested in a company’s success results in a 21 percent increase in productivity, according to a Gallup study.
- Cost savings
Managing your supply chain in-house gives you better control and visibility into operational costs. If you’re looking to drive down costs, you have the ability to identify and correct inefficiencies that are hurting your bottom line.
- Tax incentives
Some states offer companies tax incentives to locate operations and provide jobs there. Ashley Furniture is scheduled to open a facility in northern Texas where it will receive sales and property tax breaks as long as it hires 350 full-time employees.
Dollar Shave Club is known for quickly taking a chunk of the men’s razor market with its affordable business-to-consumer model since its 2011 launch. The subscription-based company is an excellent example of an online retailer that improved their business model by taking their supply chain back in-house.
The company grabbed attention when their 2012 YouTube video went viral. It only took twenty-four hours after the video was posted for the company to receive 12,000 more orders causing their revenue to jump more than $240 million.
In its early stages, the company partnered with a 3pl to manage its fulfillment operations. It was initially successful but once the company grew and more orders were flying in, the relationship between Dollar Shave Club and their 3pl struggled.
Dollar Shave Club’s objective was to ship every order within 24 hours of receipt but didn’t feel like their 3pl would be able to meet the objective. Additionally, the e-retailer wanted to gain more flexibility, inventory control and speed. Knowing that bringing their supply chain back in-house was the only way to meet these high expectations and align their business objectives, they decided to end the relationship with their 3pl.
The company now operates two distribution centers in-house: one located near Columbus, Ohio because of its proximity to major carrier hubs, and the other near Torrance, California. These distribution centers are able to fulfill orders within 24 hours and can provide the same quick and efficient service to all customers.
Taking control of your supply chain
Bringing your supply chain management back in-house is a big decision. When your business has reached a point where you can consider this option, it’s important to think about your future business objectives and evaluate which option will best align with those objectives.
Outsourcing your supply chain management can be beneficial for early-stage businesses that don’t have the resources or infrastructure to do so in-house. Once your business has gained traction, bringing your supply chain back in-house can help to control costs and ensure quality standards are being met.