Editor’s Note: No Doctor Who references in this post, I’m afraid, but this guest post from Holly Chavez goes above and beyond when it comes to thoroughly examining the question at hand. Enjoy! -Seth-
If you’ve been weighing whether outsourcing varying components of your business can contribute to its success, you’ll want to take a number of factors into consideration first. That’s a vital first step because when it is implemented correctly, you can watch your company expand and save money. There are also other reasons for the advantages that go well beyond financial means.
My First Experience with the Concept of Outsourcing
I was a lowly college student busting my tail working full-time and going to school part-time when I first heard the buzz about outsourcing back in the early 90’s. It was starting to catch traction in the news and my professors made the information about this business practice a part of their lesson plans, especially in my business courses. Outsourcing was particularly demonized at the time, and the media often portrayed it in a purely negative light. I was sitting in my business class one day when one of my fellow students asked the teacher why we were sending so many jobs overseas. The question was very pointed, and I could tell that my fellow student felt that it was definitely a negative trend by the way they spoke about it.
The professor listened to him politely, and then turned to the rest of the class. He asked us to look in our clothing and find one example of a hat, shoes, shirts, and pants…anything that indicated that our clothes had been made in the USA. We found several examples of Mexico, the Philippines, India and China on the labels within, but there wasn’t a single stitch of clothing that had been made in America (and it was a very big class!). The teacher then told us our term paper would be about outsourcing, and the many benefits it brings to business owners. “Have fun!” he said. “Thanks, I thought sarcastically.”
I figured that the term paper would be a boring topic on a business trend that I didn’t agree with. After all, my mother had lost her job in a textile mill due to outsourcing. So with much reservation and lack of appreciation toward my professor and the student that got his wheels turning, I began my work. However, the paper I produced that semester opened my eyes and subjected me to my first realization that there is a strong media bias that influences much of what we read and see on television, and there are actually many benefits and advantages to business outsourcing.
To illustrate, there were plenty of stories in the news about how we were losing jobs to outsourcing and NAFTA – who can forget Ross Perot’s famous statement during his 1992 presidential campaign proclaiming that NAFTA (North American Free Trade Agreement) would create a “giant sucking sound” of jobs going to Mexico where labor is much cheaper if the deal didn’t work both ways?
Lifting the Veil—Outsourcing Has Many Benefits
What we know from fast forwarding 20 years after NAFTA became a reality, was that Perot was wrong, and mainly in his assertion that it would drag our economy down. It has actually been a boon to the U.S. economy, along with other outsourcing and offshoring ventures. According to economist Gary Hufbauer, NAFTA alone has created two million jobs annually since 1994.
Nevertheless, the negativity of all the jobs lost to NAFTA and other outsourcing and offshoring deals were presented in the news at that time for the most part.
Unfortunately, none of the benefits they brought in return were mentioned much in the news, especially the long-term predictions for massive job creation. In all fairness to the media outlets, this concept, much like globalization, were in its infancy in the 90’s. The research for the paper I wrote that semester revealed to me that outsourcing had many benefits: it was often better for the environment, allowed more company profitability, and even long-term job growth in many instances. I saw many of these facets in one of my first paying jobs I had while I worked my way through college, also.
Operations That Should Give Outsourcing a Try
One of the first industries that went overseas were lower skilled industries, and many of them being the textile manufacturing business. My first internship in college was at a carpet mill in the Southeast, and it was a lesson in why many of these industries are sent overseas. The process is very simple, and it uses a lot of resources; additionally, they often pollute the water and air as byproducts of the process of making the carpet. The whole town smelled like a wet dog most of the time, and most of that industry probably would have been shipped overseas, like the rest of textile business, if the finished product wasn’t so big and bulky. Therefore, rendering it an expensive and nightmarish logistic option of bringing it back to the states, once manufactured outside of the country.
The carpet industry started seeing the cracks of remaining financially viable in the late 1990’s and early 2000’s. They were hit particularly hard by the housing market crash, and they began to close and consolidate many of their operations soon afterwards. Many of them were shuttled or downsized by the mid-2000’s. Those that stayed open often suffered increasing instances of injuries, and even some fatalities, as safety oversight was scaled back and workers were often rushed to fulfill quotas. Before I left, they were also suffering from and receiving high-level criticism about the amount of water they used during their operations.
DKC Show Highlights Fashion Outsourcing
A few weeks ago I was involved in the support of public relations and media giant, DKC. They recently had a red carpet event where they were promoting brand recognition for Aéropostale. It was an exciting event, but what was most interesting about the venue, though, was how even a glitzy event such as that can remind you of how valuable that outsourcing is and how it is all around us.
To explain, one of the many services that DKC provides includes facilitating all aspects to build popular brands for the fashion industry. They often hire actresses and models to put a youthful face on hot fashion brands such as Aéropostale. As actresses Vanessa Hudgens and Shay Mitchell came out on the red carpet to give good face to the flashing lights and lend their celebrity clout to boost the image of Aéropostale, I was reminded of my professor asking us to look within our clothing items for a ‘Made in America’ label. And sure enough, Aéropostale is a prime example of company that manufactures clothing outside of the U.S. Their clothing is actually made in a factory in Sri Lanka.
Your first thought may be that of the student that set the mood for the business class term paper we discussed earlier — something along the lines of, “Wow, the loss of jobs by doing it in another country.” However, not only is clothing outsourcing beneficial, the benefits in these cases are two-fold. There are direct benefits that have an immediate impact–such as reduced capital investment, better quality of the manufactured product and lower costs. Then there are indirect benefits on processes that are kept in house. Indirect benefits are more hidden and have a slow and subtle effect on a company’s profit margin. They can include better resource development, stimulating analysis and converting sluggish functional areas into more dynamic ones.
Should you feel Guilty about Outsourcing?
That question poses a moral argument to some folks that I often encounter while I have worked over the years. At times I was tasked as an industrial engineers to help businesses improve their performance and profitability. Sometimes re-engineering could fix a process that was barely hobbling along. For instance, the solution is often very simple in manufacturing facilities, such as ensuring operations to be in sequential order, thereby eliminating backward loops in the process. Other fixes involved eliminating wait times or moving workstations in sequential operations closer to each other.
However, there were often cases where it was necessary to implement outsourcing to allow the company to improve their bottom line. One instance was as simple as a little more organization, and the scenario involved a small warehousing and distribution company I worked for. After observing the storage process in the warehouse, it was clear that the disorganization and lack of visuals was hindering the worker’s capability to pick and ship merchandise. The issue was seen in all ten of their warehouses.
After the warehouses were organized and made visual, they found they only needed to have six warehouses vs. ten. The employees in the four warehouses that were closed were laid off, and it was one of the first instances in my career that I was in discussion with business owners to keep things ‘hush hush’ so as not to let it get out to the employees that the layoff was coming as we worked to put the plan in action. Did I feel bad? Not really. Does this make me or others involved with consolidation and outsourcing labor and other resources to another facility heartless? No. It’s a hard decision for anyone, but you really have to look at it from a systems perspective.
The Aftermath of the Warehouse Case
There have been times that I have been asked by business owners (and even some other industrial engineers) if the outsourcing bothers me. My answer is resoundingly, NO. You can’t localize outsourcing that way – you have to look at the big picture. Of course the employees lost their jobs in the four warehouses we discussed earlier, but if it had continued the way it was, those facilities would have closed anyway and damaged the profitability of the rest of the company.
Interestingly enough, it’s been seven years since the warehouse closures, and the company has been thriving in a sluggish economy. The company incorporated the best practices outlined to make their warehouse storage systems more organized and visual going forward, and the customers stay satisfied because they no longer are told that goods are missing or their shipment will be delayed.
The center also experienced growth from their original ten warehouse to twelve, with plans to open two more next year. Outsourcing such as this offers huge benefits, especially small businesses that find it a little harder to compete than a huge corporation would. Here are a few of the advantages that outsourcing brings to your business that can help you with your decision.
Focusing on Core Business Duties
Periods of rapid growth can stretch a company greatly beyond their limits, especially in the human resource and financial departments of a business. If a small businesses owner or entrepreneur needed any convincing that these activities should be outsourced, they should understand that 40 percent of these are non-revenue-generating activities. From payroll and human resource management to benefits and compensation, entrepreneurs can spend up to 40 percent of their precious day engaged in these necessary but time-sucking tasks.
This type of event can allow these important departments to become overwhelmed and swamped with all sorts of jobs. Instead of focusing on what they were hired to do, they are now in charge of a sea of endless tasks that can be difficult to accomplish in a timely manner.
However, outsourcing that additional work can allow your team members to focus on the core duties. This can include payroll, tax returns, profit and loss, employee review updates and staying within the parameters of the human resource laws.
Outsourcing Provides Cost-Efficient Advantages
Office functions that require additional training may be needed in a company. Whether you have to keep up with new rules and regulations pertaining to payroll laws or your medical billing would like to accept new insurance programs, the costs can add up and take a toll on your business.
On the other hand, outsourcing the duties to a facility that specializes in this activity can be cost-efficient to your company. It can also save your business time and money when all they have to do is focus on this specific task and make sure that it’s done extremely well.
Considering the Human Component Factors
While outsourcing can prove beneficial, you also have to take into account the human aspect of it. Business owners and corporate leaders may have to tackle tough decisions related to outsourcing. While it could help to keep your company from going under, consolidating the jobs and duties under one roof can eliminate jobs.
For instance, look at the military bases that have made ghost towns out of the cities and towns where military personnel and their families once supported a booming industry and local economy. Many Base Realignment and Closures slowed down areas that were thriving, but the consolidation made the military stronger as needless spending was cut out. Businesses operate much the same way and with the same methodology in order to stay viable.
Nevertheless, anyone with a heart and soul would find it difficult to put any number of people out of a job, even if it allowed the business to run more efficiently. Separating heart from the real world is difficult to do, but it can help when you hire the right outsourcing company and keep in mind the many benefits that outsourcing brings to the table.
The Seasonal Flexibility is an Added Benefit
If a company has significant growth at different times of the year, hiring a permanent employee may be a waste of time and money. While they can prove beneficial during the busy times, you may find them a hindrance when your business experiences a drought.
For example, an accounting company that is understaffed during the busy tax season may find it an advantage to outsource temporary employees during the hectic times of the year. Once the demand has lessened, you can release them from their duties.
Outsourcing Risk Management and Company Continuity
Going through high rates of employee turnover can be very disruptive to a business. Whether they are on company medical leave or your staff leaves for new jobs, training can be an added burden. This kind of incident can be especially crippling if your employee turnover is high. However, outsourcing allows your work to be completed in a consistent manner without disruptions.
Better Operations Management is Key
Operations that have lengthy processing times and rely heavily on experienced and skilled individuals when performing them can be particularly taxing on a business budget and schedule.
Also, when a company works with chemicals and toxins, it can cost a company a mint complying with regulations and adhering to strict guidelines.
Many strict laws and regulations are designed to protect the environment. Businesses that strive to meet these requirements incur great costs and time in the process. However, finding experts in the field through outsourcing can help with the adverse impact to the safety of the environment. It can also ensure that the proper measures are being followed in regards to working with chemicals and their proper disposal. Letting someone else manage this part of the process cuts out excessive lead times, saves money and is often a more eco-friendly choice.
I saw this in a company I worked at that refurbishes turbine blades for Siemens and GE. Their overhaul and repair process had very long lead-times and was very complex. One of the processing times for the assemblies was even made longer and more expensive because of the chemicals used to clean the blades. Safety regulations in New York where the blades were cleaned and refurbished were very expensive, and the whole approval process was very lengthy. The solution was to outsource the operations to a company in Mexico that had an acid bath that was suited for cleaning the blades. Even considering shipping time, the process lead-time was lessened by two weeks when the blades were sent to Mexico for processing.
The Right Outsourcing Company Helps the Transition
Whether you outsource your payroll or accounting duties, you’ll know that the right outsourcing company can ensure that the work outsourced will get done when you need it most. It can often be a task to outsource many business services, especially since many companies have provided these services for decades.
Once that it is done, though, many outsourcing operations are very successful and competent at what they do. This, in turn, leaves you the ability to be able to focus your resources on your core competencies and reap the many benefits of outsourcing.
Selecting the Right Outsourcing Company
Many business owners are hesitant to throw their hat into the outsourcing arena. It’s definitely a big step, and even though there are benefits as outlined here, it’s still difficult to know how to select the right outsourcing company. It’s such a massive step, so what do I do. The first thing that comes to mind about this that I tell my clients when I consult is kind of silly, but fitting: How do you eat an elephant?
Well, you eat an elephant one bite at a time. The same with choosing the right outsourcing company. You do it in small increments and you do it carefully. After all, it’s your business, and you don’t want to negatively impact it by choosing a poor outsourcing solution.
Outsourcing isn’t always sending work to the ‘wild blue yonder,’ either. Some outsourcing is sent to companies within the U.S. The most recent one I was involved in provided outsourcing the warehouse operations for a medical manufacturing company. The work involved outsourcing the storage of their completed displays and spare parts at a 4PL company warehouse and distribution center. Here’s what we did to implement a successful outsourcing venture for them.
Laying the Groundwork
Whenever you outsource to another company you are choosing something akin to a business partner, and you will want to protect your viability and good reputation by choosing a company that is reputable and shares your core values. You’ll want them to have the same (or very similar) business practices and devotion to success.
In the case of the 4PL that was ultimately chosen to be the supplier for the medical company, there was a process initiated for selection. It’s recommended that you pursue a similar path in rewarding your business to an outsource supplier.
The reputation and performance of the service of several 4PL businesses were considered for outsourcing – those two factors speak volumes for a business. For a non-biased source, we looked at publications that featured the top 4PL businesses in the United States.
A top ten list was compiled from the publication based on the criteria that they provided for the service we were looking for. The criteria included storage, inventory management, shipping, and 3PL management.
Request for information (RFI) and requests for quote (RFQ) were then submitted to the companies. Once received and reviewed for a harmonious match with the medical company, a top three were selected.
Another more competitive RFQ was then asked from the final three.
Once the final three RFQs were submitted, the final choice was announced to the suppliers. Then legal contracts and finance began to work on the final contract.
Risk analysis and cost/benefit of all the different suppliers throughout the decision-making process should also be key metrics to judge a supplier by, also, to make an informed decision.
The attributes that the supplier had that was awarded the warehousing business included the following:
1) lowest price for quality of services rendered,
2) great expertise,
3) great management of personnel, skilled employees and flex labor practices,
4) a high-quality and safe environment for both employees and their products and
5) constantly striving for continuous improvement and passing on proven cost savings throughout the contract to their customers.
Business owners who outsource discover that this smart business decision allows them to maximize their revenue and help build customer loyalty. Whether you would like to use it to cut costs, provide faster and better services, or boost profitability, you’ll find the benefits of outsourcing are undeniable. You should now be able outsource your business operations with a better conscience and the confidence that it can make your business operations run better, Now you can brush that pesky angel and demon off your shoulders!