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Strategically Speaking : 12 Costs to Consider in Outsourcing Distribution

April 2010 By David Hetherington
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In previous columns, I've explored the strategic reasons to consider outsourcing distribution operations and the request for proposal (RFP) process for outsourced distribution partners. Now, let's assume that you have evaluated all the third-party proposals and selected the finalist among the various bids.

With the exception of implementation, evaluating the costs of in-sourced versus third-party distribution is the most complex step in the process of determining whether outsourcing is, in fact, in your company's best interest. The outcome of the evaluation process may well be the shutdown of your company's captive distribution operations, so a carefully constructed analysis is mandatory.

The evaluation should consider quantitative and qualitative factors of both the in-house and outsourced options, including the one-time transition costs that are associated with moving distribution operations to a third-party provider, and a forthright assessment of the on-going capital and operating costs of maintaining a captive operation.

It goes without saying that the evaluation should have a multi-year view and should consider "environmental factors"—i.e., how the business might change in the years ahead.

There is little doubt that print-on-demand and short-run digital printing are here to stay, and the recent iPad announcement augers well for the e-book. Both developments suggest that the need for fixed warehouse space is likely to decline in the years ahead,. Unless your organization has plans for a significant expansion in the publishing program or acquiring another company, you may find yourself with more space than you need or can afford. Looking carefully at the long-term is essential.

Evaluating Status Quo
Evaluating the status quo refers to projecting the baseline costs for the current in-house distribution operations, including anticipated changes in costs because of an expiring warehouse lease, ongoing maintenance and leasehold improvements—will the warehouse need a new roof next year?—and any planned productivity improvement initiatives.

Moving warehouse operations is a complex undertaking under the best of circumstances, and prudence dictates that your analysis consider all the pluses and minuses of maintaining the status quo. The figures developed in this phase of the analysis should cover a multiyear horizon (5 years minimum) and should be realistic—this is not the time to put on your rose-colored glasses in an effort to maintain the status quo.

One-Time Costs of Outsourcing
The first step in the analysis is to consider the one-time costs that would be associated with outsourcing your captive distribution operation. Many of these costs can be developed while you are waiting for the vendor proposals to be submitted. At minimum, the one-time costs should take into account:



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