Operations and Supply Chain Management The Core

436 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
firm to focus on activities that represent its core competencies. Thus, the company can create
a competitive advantage while reducing cost. An entire function may be outsourced, or
some elements of an activity may be outsourced, with the rest kept in-house. For example,
some of the elements of information technology may be strategic, some may be critical,
and some may be performed less expensively by a third party. Identifying a function as a
potential outsourcing target, and then breaking that function into its components, allows
decision makers to determine which activities are strategic or critical and should remain
in-house and which can be outsourced like commodities. As an example, outsourcing the
logistics function will be discussed.
Logistics
Management
functions that
support the
complete cycle of
material flow: from
the purchase and
internal control of
production materials;
to the planning and
control of workin-process;
to the
purchasing, shipping,
and distribution of
the finished product.
Logistics Outsourcing
There has been dramatic growth in outsourcing in the logistics area. Logistics is a term
that refers to the management functions that support the complete cycle of material
flow: from the purchase and internal control of production materials; to the planning and
control of work-in-process; to the purchasing, shipping, and distribution of the finished
product. The emphasis on lean inventory means there is less room for error in deliveries.
Trucking companies such as Ryder have started adding the logistics aspect to their
businesses—changing from merely moving goods from point A to point B, to managing
all or part of all shipments over a longer period, typically three years, and replacing the
shipper’s employees with their own. Logistics companies now have complex computer
tracking technology that reduces the risk in transportation and allows the logistics company
to add more value to the firm than it could if the function were performed in-house.
Third-party logistics providers track freight using electronic data interchange technology
and a satellite system to tell customers exactly where its drivers are and when deliveries
will be made. Such technology is critical in some environments where the delivery window
may be only 30 minutes long.
FedEx Corporation has one of the most advanced systems available for tracking items
being sent through its services. The system is available to all customers over the Internet.
It tells the exact status of each item currently being carried by the company. Information on
the exact time a package is picked up, when it is transferred between hubs in the company’s
network, and when it is delivered is available on the system. You can access this system at the
FedEx Web site (www.fedex.com). Select your country on the initial screen and then select
“Track Shipments” in the Track box in the lower part of the page. Of course, you will need
the actual tracking number for an item currently in the system to get information. FedEx has
integrated its tracking system with many of its customers’ in-house information systems.
One of the drawbacks to outsourcing is the layoffs that often result. Even in cases where
the outsourcing partner hires former employees, they are often hired back at lower wages
with fewer benefits. Outsourcing is perceived by many unions as an effort to circumvent
union contracts.
Framework for Supplier Relationships
In theory, outsourcing is a no-brainer. Companies can unload noncore activities, shed balance
sheet assets, and boost their return on capital by using third-party service providers.
But in reality, things are more complicated.
Exhibit 13.5 is a useful framework to help managers make appropriate choices for the
structure of supplier relationships. The decision goes beyond the notion that “core competencies”
should be maintained under the direct control of management of the firm and
that other activities should be outsourced. In this framework, a continuum that ranges from
vertical integration to arm’s-length relationships forms the basis for the decision.