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A practical example of an outsourcing project – 4 steps to succeeding at outsourcing

IMIG Industry Consult GmbH has been commissioned to handle project management for outsourcing internal logistics. The client produces precision tools at several locations in Germany and counts among global market leaders, with more than 10,000 customers worldwide. But what does outsourcing actually mean?

As a company, you do not have to do everything yourself, because sometimes it is both smarter and more cost-efficient to outsource sectors or individual tasks. Outsourcing can be a success factor for groups, small businesses, and self-employed people alike. Parts of production, tasks in IT, accounting, tax advice, personnel management, recruiting, marketing, customs clearance, and logistics – there is a lot that can be outsourced to experts. External service providers are commissioned to outsource certain tasks or structures which require an expertise that is either not (yet) available internally or too expensive. Instead of continuing to provide a service yourself, this will be provided for your company by an external service provider.

Outsourcing seems to be a comparatively large expense. Finding service providers, negotiating conditions, concluding contracts, controlling quality... So why outsource, and when does outsourcing make sense? To give this critical question a conclusive answer and come to a decision, the advantages and disadvantages must be weighed up against each other and reliable cost comparisons created.

 

Advantages & Disadvantages of Outsourcing

Advantages 

Disadvantages

  • Reducing costs
  • Dependency
  • Minimising risk
  • Being bound to a contract
  • Saving time
  • Data protection
  • Improving quality
  • Work atmosphere
  • Core competencies
  • Losing knowledge
  • Flexibility with volume fluctuations
  • Expending effort on communication
  • Billing with transaction costs per month

 


Outsourcing-Mistakes

An outsourcing project does not always go according to plan, and there are always mistakes lying in wait which can ultimately cause a project to fail. The most common outsourcing mistakes are:

  • Outsourcing certain areas arbitrarily
    "We'll just outsource it..." Outsourcing is not a method to simply save yourself work. It requires thorough analysis and a consideration of the advantages, disadvantages, costs, and effects. 
  • False perceptions about outsourcing
    Naivety makes outsourcing go wrong. Those who ignore disadvantages, risks and potential costs are approaching the project with a false perception. Areas that are critical to the company where information on customers, suppliers, products, or processes is passed on to an external provider can also be risky.
  • Choosing an outsourcing partner incorrectly
    Large outsourcing sectors have a great many providers who differ in terms of capabilities, competencies, and willingness to fulfil the goals of their client in full. Cooperation is only successful with the careful selection of the right partner.
  • Unclear agreements both internally and externally
    What exactly is being outsourced? What is the scope of the service? Which criteria have been set? How are checks made? Imprecise agreements lead to misunderstandings, problems, and additional costs.
  • Poor contracts between the outsourcing partners
    The outsourcing contract must regulate the obligations of both sides. No open questions should remain unanswered. In addition to technical questions regarding precisely what is expected and how, the most important parts of a contract include provisions that are essential for managing risks, management of the service provider, flexibility in the event of changing volumes, and the procedure for terminating the contract.



A practical example of an outsourcing project – 4 steps to succeeding at outsourcing

The task was to outsource all logistics processes to an external service provider approximately 25km from the production site. The client has already made an internal decision to outsource and award the contract.

Step 1: recording the current situation

  • Recording actual processes in a structured manner
    • Workshops with everyone involved in the processes
    • Mapping the process on brown paper
  • Analysis of stakeholders and expectations of logistics processes
    • Identifying all stakeholders
    • Determining success factors
    • Expectations from stakeholders
  • Data analysis of actual processes
    • Evaluating SAP movement data over for a year
    • Determining the quantity structures for each process
  • Risk analysis
    • Clustering influencing factors into the likelihood of occurrence and impact/damage
    • low – medium – high

Actual processes hitherto unknown in this level of detail requiring relocation and a risk analysis indicating all expected risks constituted the outcome of step 1.

Step 2: creating the target image

Surmising from step 1, target processes were developed, with particular emphasis on transparency in the flow of materials and minimisation of risks.

  • Developing target processes
    • Surmising from actual processes
    • Making decisions on each process step internally/externally
    • Considering framework conditions
  • Drawing up specifications for the external service provider
    • A detailed description of WHAT is needed
    • Specifying the technical framework conditions
  • Designing the contract
    • Specifying the legal framework conditions
    • Prices
  • Creating the IT concept
    • Mapping target processes in SAP
    • Creating transparency in these processes

Step 3: Process Roll-Out

  • Planning the relocation in 4 partial relocations
    • Maverick buying of goods which are brought to the ordering party without being booked
    • Cost centre for materials and shipping standard goods
    • Inventories, supplying production and shipping special goods
    • Receiving goods
  • Training key users from the external service provider
    • Core processes
    • Support processes
    • Training in all SAP processes for each process
  • Implementing the IT concept
    • Developing a prototype per process
    • Realising / implementing the concept
    • Adapting and further developing the concept

Step 4: Hyper Care Phase

The fourth and final step of the project involved the external service provider providing intensive support for all logistics and SAP processes. In weekly CIP meetings, optimisations and errors in the process flow were dealt with and eliminated, as well as standards created using the PDCA cycle. A complaint management system was used by both parties to record errors and interruptions in the process flow.

Lessons Learned

  • Because a detailed actual analysis was only carried out in the implementation phase, there was no sound knowledge on which to decide either for or against outsourcing --> weighing up all influencing factors before deciding for or against outsourcing allows unpleasant surprises during implementation to be avoided.
  • The call to tender and awarding of the contract to the external service provider took place without precise knowledge of the processes and desired service. This led to supplementary offers and amended costs when compared to initial assumptions and profitability calculations --> the individual phases of an outsourcing project, as mentioned at the beginning, ensure that the project remains within the budget.
  • Just as key users from the external service provider were supposed to be trained on-site, the Coronavirus arrived. Postponing due to the Coronavirus was not possible as the client's existing logistics employees had already been dismissed and a deadline for the rollout was missed as a result --> only give notice of dismissal when you are certain that the timetable can realistically be implemented as well.
  • From the point at which the existing employees were dismissed, motivation had diminished. The employees were not willing to apply to the external service provider --> an attractive arrangement for existing employees to switch to the external service provider would have been beneficial for both training and the transfer of knowledge in the long term.
  • Sufficient resources, as well as free time for the project on both sides, ensure that the project is both successful and implemented quickly.

Outcome

All logistical processes were relocated to the external service provider with more than 6000 material numbers moved to 10,000 storage locations. Shuttle service was set up for the daily movement of goods between the client and the external service provider, with transport orders in SAP ensuring transparency as to where the goods are located.
After 3 months of hyper care, averaged delivery reliability across all processes totalled 97.5%, which allowed savings in the total costs for logistics of approximately 25%. Based on the total project costs, an ROI of 2.5 years is achieved.

 


Thomas Klein
Senior Consultant I IMIG Germany

For further information please contact us either by mail: marketing@imig.com or by phone: +49 7152 928 460.

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