If you are reading this article, you are probably at the stage where your supply chain is starting to creak. Either, you are spending too much time on it yourself, or you are feeling out of your comfort zone, realising that supply chain management is perhaps a more technical profession than you first thought.
The difference between a well oiled supply chain and a messy one is the difference between delivering on customer promises (and therefore keeping your customers), and not.
Getting to a point where your supply chain is not just working like clockwork but is also a USP for the business takes time and investment. But the smartest founders see it as just that – an investment (rather than a cost). As the part of the business with the biggest P&L, good supply chain management should pay for itself 5x over. And bad supply chain management burns a hole in the pocket and risks listings.
If you have been in the game for a while, you will know there are two common ways that brands will resource their supply chain management:
You pay a third-party to manage it for you 4PL (Outsourcing)
You build a team in-house (Insourcing)
Having helped hundreds of consumer brands in the UK navigate this decision in establishing their supply chain strategies, we have discovered that there are a number of nuances worth keeping in mind.
Prior to making a decision as to how you are going to structure your supply chain function, it is important to consider the pros and cons of outsourcing supply chain management versus insourcing it and the long term impacts of each.
To be clear, we are not talking about the outsourcing vs in-housing of manufacturing or 3PLs – we will cover that in a separate article. This is about the activities of managing the supply chain – demand planning, forecasting, order to cash and more.
Outsourcing SCM vs. insourcing SCM
This article will be an extremely honest, transparent, and in-depth comparison based on over 10 years of helping brands outsource and in-house their supply chain management processes.
The spoiler: we work with many brands successfully outsourcing and also many brands successfully in-housing. One route is not universally better than the other. The role of this article is to lay everything out there and empower you to make the best decision for your business.
The pros and cons of outsourcing supply chain management
Brands that outsource their supply chain management pay for and rely on a third party to deal with everything on their behalf (just like they do with digital marketing agencies, design agencies and PR companies). In supply chain, the third parties will almost always take the day-to-day management (order to cash, demand planning, managing third party suppliers); some will take on project work as well (finding a new factory, moving 3PL, implementing new systems).
Who are the third parties? Obviously we at Young Foodies offer this as a service, however beyond us you have the likes of Windfall Logistics, AFP and a few others. Some, like AFP, are accountancy firms offering the service as an extension to the finance work, and others like Windfall Logistics are sales agencies offering it as an extension to their work.
The pros and cons below take into consideration specific elements of all three outsourcing tactics listed above.
Pros of outsourcing SCM
Supply chain management needs someone always ready to deal with a short delivery, production delays or unexpected new listings. Working with a third party, you can feel confident that holidays, illnesses or even delays in hiring are not an issue you need to deal with – instead they are responsible for shadow resourcing so you never have to lose weeks covering someone else’s job. And if you work closely in partnership, you do not need to worry about someone suddenly handing in their notice.
Less management time
Often founders struggle to manage supply chain folks because they are not always specialists in the trade themselves. Working with a third party with various levels of seniority, you are reported to as a client, rather than like a manager – and you should not need to get into the weeds with the junior members of staff.
Levels of capability
Some work in the supply chain function is very strategic and commercial (e.g moving factories, negotiating contracts, handling stakeholders), and some is very tactical (e.g processing orders, raising invoices and dealing with delivery issues). If you hire someone too senior, you will be overpaying them half the time; and someone too junior will struggle to add the necessary value. Outsourcing allows you to benefit from a team of people at different levels and with different specialisms to ramp up and ramp down based on business needs.
Experience across brands
The supply chain world changes every day – retailer delivery requirements could change; EDI providers can go bust; key 3PLs could start offboarding their SMEs. By working with a 4PL you get the benefit of their live experiences with other brands. They will know the best softwares, warehouses, and ways of working because they are experiencing the good, the bad and the ugly right now elsewhere.
Quick to get going
It takes minimum 3-5 months to hire a supply chain manager, have them serve their notice and get started with you. Then it takes a further 3 months for them to be really owning their patch (or not passing their probation). Working with a third party, you can get setup and working in half that time and there is usually more certainty of success.
Scalability and Flexibility
Sometimes things are really busy in supply chain and sometimes they are not. For example, you may have a handful of business critical projects this year – when they are done, things will be a lot simpler. Working with an agency allows you to scale up and scale down resource requirement to the needs of your business – multiple projects can be worked on simultaneously if need be.
Lower initial investment
Agencies will likely have onboarding fees however these are usually less than half the cost of a recruiter’s fee for a full time hire.
Cons of outsourcing supply chain services
Not many viable options
Unlike PR or digital marketing agencies, there are not hundreds of outsourced supply chain services in the market at the moment and certainly even fewer that offer both ‘business as usual’ and project management. Finding the right partner for your business can be hard and there can be waiting lists for the best providers.
Can cost more
A significant management and risk burden is moved out of your business and into that of the agency. As a result, just like with marketing agencies, outsourcing supply chain management can cost more than in-housing. It can also be more unpredictable as costs scale up or down with support required.
Can be less flexible
In order to keep costs sensible and a consistent quality of service, third parties require structure and control of processes. The flipside of this can be less flexibility to react last minute to your requests. For brands unwilling to change their mindset to be more proactive and planned, this can cause frustration. Similarly, the scope of services needs to be clearly defined as with any service provider – this means your outsourced supply chain service is not going to suddenly down-tools and help you build your Lunch! trade show stand like a full time employee might.
Dependency on the third party / ownership
This is perhaps the greatest drawback from leveraging third-party services. Instead of building the expertise and proficiencies of your internal team, you are investing in the growth and development of people outside your business. Even if you find someone you like, if the agency does not have capacity or is no longer available, you can be left high-and-dry.
The pros and cons of insourcing SCM
Now that we have dug into outsourcing, let us see how insourcing stacks up. Companies that insource their supply chain have full time members of staff managing the end to end. Usually this is a Head of Supply Chain and a full time junior member of staff to start with. They then scale to a Head of Supply Chain (or SCD / OD) and a team split into demand / supply planning and customer supply.
Companies that are most successful with insourcing have:
Executive leadership buy-in that supply chain is a critical enabler across the business and therefore should not operate in a silo
A supply chain strategy that acknowledges it to be the biggest P&L in the business and therefore not just an admin job
A ROI mindset to supply chain – rather than seeing it purely as a cost
With this in mind, here are the pros and cons of insourcing supply chain management.
Pros of insourcing SCM
Eliminate third party dependencies
By recruiting in-house you are eliminating the risk of dependency on a third party. You no longer have the worry about losing the agency that you love or a fear that they will increase their fees.
Better managed costs
Yes. The initial investment in insourcing is greater considering that a successful implementation requires hiring and on-boarding a full-time Operations Manager to own and manage it all.
However having this person at the helm of your supply chain means that the only substantial variable in costs you will experience over time are:
When you have big projects that they are too busy to undertake
When you need specialist experience such as lawyers or technical managers
While the total cost to the business is usually a similar level, it is at least predictable.
Can dabble in other things
In an SME, people often wear many hats. One day your team are doing their expected roles and responsibilities and the next they may be having to be a product developer or even be in a tube station handing out samples. This flexibility of role is possible when you hire in-house.
Investment in your team
One of the beautiful byproducts that emerges when building a team is the feeling of culture and team. You are supporting the development of individuals both directly and indirectly through the culture of your workplace. If you enjoy that element and you love management, it is near as impossible to replicate this through third parties.
Cons of insourcing SCM
Like for like capability costs more
Having the same capabilities and levels of experience in-house versus outsourcing is much more expensive. You cannot have 3 hours of a systems expert, 6 hours of a contracts expert and 3 days of an administrator in the same way – instead you need 1 ‘jack-of-all-trades’ to play multiple roles.
People cost money
Recruitment fees aside, there are a number of hidden costs of people that we rarely acknowledge. The cost of covering their holidays and when they are off sick. The cost of their laptop, desk and taking them out for team drinks. The cost of developing them and supporting them in highs and lows. This is a real financial and time burden not to be forgotten.
Finding the right person
Recruitment is not easy – then adding someone’s technical capability that matches your brand values makes it even harder. It is not impossible (our Recruitment Team do it everyday) but it can take time and cost money so you should be prepared for this.
Key person reliance
The FMCG recruitment market is fast paced and good people are offered new jobs all the time. Hiring in-house in such a technical and high-dependency role can lead to huge key-person overreliance and risk as a result.
Every task can take longer
Without having the benefit of 10s of doing the same thing across multiple brands, every new task or initiative is started from scratch. This leads to more time and therefore more cost to get things done. It can also lead to more mistakes unless you have great relationships with other brands to learn from theirs.
So, insourcing or outsourcing SCM?
Overall, you can see there are good things about inhousing and good things about outsourcing. Everything is a trade-off based on your brand, your personal values and what your supply chain priorities are.
What is not usually a trade-off, though, is cost. While on the face of it, outsourcing can look more expensive because the management time, risk, people costs and overheads are built into the monthly fee, at the end of the day you will find if you are comparing apples with apples, it is a similar cost.
The good news is there are a few questions you can ask yourself to help narrow down your thoughts on what is best for your brand:
Do you personally enjoy working on the supply chain function and would you enjoy developing an individual in this space?
Do you see this function as a cost or an investment, really?
To what extent do you need this function to wear non-supply chain hats?
Is the level of work quite lumpy within the year (with key improvement projects) or is it quite consistent week in week out?
Do you understand where your opportunities for cost, quality or risk improvement are and do you know how to get there?
What agencies do you work with in other parts of your business and why? How does this compare?
Wrapping it up and how we can help
At YF, we can help you either outsource your supply chain management or build a team in-house – whatever you feel is right for your business.
Our outsourced Supply Chain function covers ‘business-as-usual’ management as well as project management and delivery. If you are interested in going down this route rather than in-housing it for either everything or just specific projects, just reach out and we will give you a quote for the services.