Outsourcing can be an important and valuable way to enable business improvement. But outsourcing should not be contemplated or embraced just for the sake of outsourcing. Because the latest management buzz is filled with praise for the marvels and benefits of outsourcing doesn’t mean that just any and all outsourcing is a good decision. There are numerous challenges to successfully implementing an outsourcing partnership. Implementation failures or below expectation performance are far too common to be taken lightly. But putting the implementation issues aside, outsourcing may not be a good decision for a far more fundamental reason.

"...putting the implementation issues aside, outsourcing may not be a good decision for a far more fundamental reason."

We believe that it is critically important that any business base their decisions on evaluating the impact of local actions on the global performance of the company. Every business is composed of a series of interrelated and interacting activities. No part of a business operation should be viewed in isolation. Only by clearly understanding the cause and effect relationships that govern the total operation of the business can you understand the impact of any component part of the business. Moreover any commitment of time, money or other resources should always be evaluated in terms of its contribution to the generation of company’s throughput. Throughput is defined as the rate at which the system generates money through sales. Local optimization, which does not enhance the company’s throughput, at best is wasteful and may in fact, be harmful to the company as a whole.

"No part of a business operation should be viewed in isolation."

"Local optimization, which does not enhance the company’s throughput, at best is wasteful and may in fact, be harmful to the company as a whole. "

As an example in one of our case studies, "Reengineering of Product Distribution", the company had serious distribution problems as exemplified by the undesirable effects they were experiencing. An isolated perspective prompted them to engage in an outsourcing to a third party logistics partnership with the intention of gaining increased distribution capacity and cutting order fulfillment costs and lead times by the rapid deployment of multiple regional distribution centers. Significant time, money and resources were invested to make this happen. The result was that the pre-existing undesirable effects did not go away and in most cases were actually amplified.

The core problems had little to do with capacity or warehouse proximity to the customers. The core problems were "the operational processes are fragmented and error prone and lacking support systems" and "customer demand is very dynamic and difficult to predict". As you can see from the successful solutions that were implemented to eliminate or reduce the effects of these core problems, the outsourcing decision was actually counterproductive and cost millions of dollars of lost profits by delaying the appropriate solution. The outsourcing spread poor systems and processes into multiple new distribution centers, which exacerbated the associated control problems. Additionally, the adding of more distribution centers reduced the company’s forecasting accuracy, which made having the right product in the right place in the right quantities even more difficult to achieve. On top of that, the additional inventory holding sites increased buffer stocks by at least 60% which severely impacted the company’s cash flow as well as reducing the company’s ability to purchase critically needed products.

As we previously stated, outsourcing can be an important and valuable enabler to business improvement. But before outsourcing or any other improvement effort should be considered, a business organization must clearly understand the enhancement and contribution to throughput that will be achieved. If there is no significant gain in throughput to be achieved, why do it? After all isn’t the goal of any commercial business enterprise "to make more money now and in the future"?

"...before outsourcing or any other improvement effort should be considered, a business organization must clearly understand the enhancement and contribution to throughput that will be achieved."

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