Outsourcing Like Never Before

　　Overcoming the obstacles to make outsourcing work can prove to be a success for your organization.
　　Outsourcing
　　Commodity purchasing (purchasing items tied to materials that have volatile prices such as grains, energy, or metals) can be one of the most taxing responsibilities for a supply manager. Conflicting corporate mandates may rain upon the person or committee responsible for making the market decisions. Should I cover now and protect the business against potential upturns in the commodity prices or wait and hope for lower prices? Do I listen to my supplier, my broker, my consulting analyst, or my own instincts? Why don’t get credit for making good purchases while I get the blame if my market timing is not perfect? Where can I hire buyers with a good understanding of the commodity markets? When the market prices rally, like grains did in 1996 and energy did in 2000, supply managers may ask, “Is there anyone who can manage this for me?”
　　The decision criteria for outsourcing commodity purchasing begins with the same issues addressed in all outsourcing opportunities:
　　1.Can I clearly separate the activity from the day-to-day operations of the business so it can be handled from outside of the office?
　　2.Does the activity require niche expertise that does not exist in my department?
　　3.Is there an outsourcing partner that can meet the needs of my business?
　　4.Can I gain my organization’s sport to move the activity to an outside organization?
　　Separating Commodity Activities
　　Commodity purchasing has two distinct functions: supply chain management and price risk management. Activities that support getting the material to the operation are supply chain management functions. Placing orders, scheduling inbound freight, receiving, and acknowledging receipt are examples of these functions. These activities require the full knowledge of the operation and may be difficult to outsource. Quick response to issues and the large volume of daily contact may make it difficult to leverage an outsource relationship. A potential partner does not know the inner workings of the organization and therefore may undergo a huge learning curve before becoming productive.
　　The price risk management activities have the greatest financial impact on the business and are not as closely tied to the day-to-day operations of the business. Developing a market opinion, supplier selection, establishing master supply contacts, timing market purchases, using financial instruments, and reporting market positions can be managed by an outsourcing partner. There is significant leverage of the partner existing knowledge of these issues. Its knowledge and experience in the specific market can reduce costs and rapidly improve the supply management processes of your organization.
　　Is the Commodity Expertise a Key Competency for Supply Management?
　　A hamburger franchise should be a meat expert. An aluminum firm could not outsource aluminum expertise. An airline cannot claim that it does not need to be an expert in jet fuel. However, does a bakery need to have an employee who is an energy expert? Does a restaurant need a sugar expert for its sugar packets? Does a computer firm need a corrugated paper expert? If the volume or importance of the commodity does not justify hiring or training a world-class purchaser, outsourcing becomes a viable alternative.
　　The decision to outsource non-critical items is as simple as, "Do you want partial time of an industry expert or full time of an inexperienced supply manager?" The industry expert, experienced in the market, knows the available suppliers and may be able to leverage the volume of his or her other clients with your organization’s purchase.
　　Finding a Partner
　　The market is ripe with so-called experts that can assist in the outsourcing process. To evaluate these potential partners, check their standing in the supplier community. Suppliers will know and recommend them if they are experienced in the field. To avoid any potential conflict of interest, make sure more than one supplier has good things to say about the potential partner. If only one supplier likes the partner, it is possible that the supplier and the partner could be working together.
　　If you do choose to seek the advice of a third party, make sure the organization has your interests at heart. Beware of services in which the supplier pays a brokerage to the outsourcing partner. It is likely that your organization’s volume will eventually end up with the supplier that is paying the outsourcing partner the highest fee versus the one providing your organization with the best program. Ensure that the outsourced organization receives nothing from your suppliers.
　　Selling Outsourcing within Your Organization
　　Fear of losing control may drive supply managers to try to hang on to everything. However, outsourcing provides an opportunity for supply managers to manage the relationship with the outsourcing partner rather than managing the ups and downs of the individual commodity.
　　Outsourcing is not uncommon in most organizations. Many organizations use advertising agencies, sales brokerage networks, contract software developers, and/or outsourced human resources or accounting firms. These work because the organization’s managers handle the outsourced suppliers. Supply managers must manage the outsourcing partner as an asset.
　　Sell the outsourcing strategy as you would any business decision. Outline the opportunity that exists by better management of the commodity purchase. Quantify the cost of hiring an industry expert. Compare that with the outsourcing fees. Clearly define how you plan to manage the partner to give your organization confidence that you are still responsible for the outcome. Do not step back from the accountability for success. This will cement your value and calm the nerves of those who may be hesitant about the plan.
　　A Classic Example of Success
　　The following example demonstrates how an outsourcing situation might be successful in the purchase of energy, as a commodity. The energy markets are in transition. Natural gas and electricity are being deregulated, allowing organizations to creatively purchase them as a commodity. Energy is a significant expense for most businesses, yet most likely not a core competency. Organizations may recognize the need to decide whether to hire an expert in this new and complex area or to find an outsourcing partner.
　　One organization, after deciding to outsource its energy, found an organization that was formed by several industry experts. This outsourcing partner had a long history. It provided a total outsource alternative for energy procurement. This partner did not accept fees or rebates from suppliers but charged a fee from the buying organization for the service. This ensured that the partner represented its clients first. The partner’s only focus was the niche of energy procurement across the United States. To assist customers in managing the partner and measuring its results, extensive reporting systems were in place. These systems were Internet-based and allowed direct access to real-time purchasing history and contract balances. The organization realized that replicating the partner’s expertise would have been very costly to handle internally.
　　What to Do If It is Not Working
　　It’s difficult to reverse a souring outsourced relationship. Your organization no longer has the expertise, and the outsourcing partner may have all of the knowledge. Because of this hazard, remember the following:
　　1.Take your time in the selection process. Diligent review before the selection will prevent most surprises later in the relationship.
　　2.You are still responsible. Manage the partner like you would an employee. Stay up to speed on the issues and the decisions being made. If a key employee walked out on short notice, you might have to fill in. The outsourcing partner is no different.
　　3.Make sure the partner staggers supply contracts/expirations. Therefore, you will not have several major contracts due at any one time.
　　4.Ensure that there is a notification period before termination of the relationship. This will give you time to find another alternative.
　　Concluding Thoughts
　　When you find yourself trying to hire commodity expertise, consider outsourcing the activity. This may be the quickest and least expensive way to bring industry experts onto your supply management team. Outsourcing is a viable alternative to meet your commodity needs.