Strategically Speaking: Should You Be Outsourcing Your Distribution?
Is Your Organization a Candidate for Distribution Outsourcing?
The decision to outsource your distribution operation is not one to be taken lightly or left to amateurs. To be sure, the request for proposal (RFP) and vendor-evaluation processes, and the creation of the business case for review with senior management, require a comprehensive understanding of your organization’s business policies, workflows, unique functional requirements, current and prospective transaction volume, and strategic goals.
There are several fundamental questions that every organization should consider as part of the annual business-planning process. Forthright answers to these questions will help your leadership team decide if outsourced distribution is something your organization should seriously consider:
1. If we define “distribution” as being composed of the sales, marketing, revenue/order in-take, fulfillment, returns processing, credit and collections, customer service and inventory management (including remaindering and inventory disposal), which of these functions, if any, are your organization’s “core competencies.” In the context of an outsourcing evaluation, we define “core competencies” as those functions that your organization does supremely well and that provide a significant cost and/or competitive advantage. If you cannot credibly link your revenues or demonstrable cost advantages to the quality of the individual services you provide, the process may be a candidate for outsourcing.
2. How do your operating metrics (e.g., functional expense to net sales ratios, lines per order, fill rates, order time in process, average collection cycle, etc.) compare with similarly sized competitors? Visibility to operating information is essential to managing costs and successful profit-improvement initiatives. If your business systems cannot provide this information without a brute-force effort, you are likely leaving money on the table—profits that outsourcing may allow you to leverage.
3. Can your distribution operations be easily scaled to match the requirements of a potentially volatile marketplace? What are the fixed and variable components (i.e., costs that vary with sales volume) of your current distribution operations? What are your break-even revenues for the best, worse and most likely scenarios of your organization’s three- to five-year planning horizon?