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Highlights
- Given the complexities of modern retail, several retailers are looking to outsource parts of their supply chain to be more resilient and efficient.
- What retailers need is a framework for seamless transition to an outsourced model without adversely impacting their business.
- A framework that takes a holistic approach to managing four core supply chain dimensions end to end will make the transition smooth.
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Outsourcing to outsmart competition
Outsourcing supply chain management (SCM) helps build resilient supply chains while enabling all stakeholders to focus on core competencies.
Retailers across the world have been through a roller-coaster ride induced by supply and demand shock due to geopolitical tensions and health scare. They are still facing the bullwhip effects. This has forced them to take a closer look at their supply chains to make them more resilient. Many retailers are evaluating different strategies driven by context. For example, based on various factors such as the state of their enterprise, market, competition, customer propositions, and ecosystem, they are opting for full-owned supply chain, outsourced supply chain, or hybrid supply chains.
Often, the decision to outsource supply chains is driven by the desire to better position themselves for long-term success by lowering capital expenditure, building better products and service, and ideating and implementing future growth strategies, rather than spending time and resources on logistics management. But ensuring a smooth transition to third-party logistics (3PL) partners while ensuring zero downtime to their business is a daunting task.
A framework for each of the major stakeholders involved—retailer, 3PL warehouse operator, 3PL transport operator, and supplier—will ensure a smooth supply chain outsourcing transition and improve the odds of success for retailers.
Retailers should drive synergy
As business owners, retailers need to take ownership and drive all stakeholders in a harmonious and synergistic way to achieve the transition objectives.
Outsourcing allows retailers to revisit all aspects of the value chain—from sourcing to fulfilment—to identify opportunities to lower operating costs. Retailers must choose the right 3PL partner who offers consistent and reliable service across the distribution network, best-in-class technology, simple onboarding model, clear pricing model without hidden costs, and responsive customer support. They must ensure that the future network design is holistically realigned against expected network demand.
In addition, significant operations, business process, and technology realignments will be required between all the supply chain stakeholders. Retailers will also have to decide whether to mandate 3PLs to use their IT systems and applications or embrace their systems with right integrations. Last but most important, they need an effective change management, governance, and monitoring system in place.
Some challenges that retailers may face during the transition include node ranging, redesigning of replenishment parameters, likely black-out days during transition, and 3PL’s performance. 3PL players should be able to overcome workforce hurdles (on-boarding, training, attrition, attendance) during the transition and also efficiently handle any spikes in volume inflow or outflow.
To keep business up and running, retailers should focus on mitigating challenges by taking a proactive approach, such as planning for inter-store stock transfers, shifting to adaptive forecasting, enhancing the ordering level to buffer-up inventory, monitoring leading indicators to anticipate and proactively manage likely performance challenges.
3PL warehouse operators must formalize change management
3PL partners should have detailed project charter along with contingency plan to meet any unexpected event.
A retailer enters into a partnership agreement with 3PL warehouse operator to leverage best practices and execution efficiencies. 3PL warehouse operators need to formalize the handover-takeover and change management process with the retailer. Any takeover of the retailer’s workforce and assets needs to be detailed in the project plan.
The challenges 3PL warehouse operators may face in such transition pertain to remapping of the skillsets of the retailer’s workforce, stabilization of the new environment, and management of contingencies and compliance. By building product-handling capability, performing end-to-end testing of process and machineries, adopting a control tower approach, and integrating with the retailer’s business approach, 3PL warehouse operators can address these challenges proactively.
3PL TRANSPORT OPERATORs must PROVIDE VALUE CHAIN VISIBILITY
3PL transport operators must offer visibility so that everyone in the value chain has a single source of truth.
3PL transport partners need to be aligned towards serving the needs of a revised network. There must be synchronization between the retailer, 3PL warehouse operator, and suppliers. Everyone in the value chain should follow a single source of truth for visibility from the 3PL transport operator. All data models between shipment pick-up, real-time update, and delivery status need to be telecasted or made available to the respective stakeholders.
3PL transport operators may face challenges such as route re-alignment, fleet utilization, and adherence to service-level agreement (SLA). They should be able to forecast such events and have a plan B. For example, by leveraging cognitive technologies they can detect early warning signs of disruptions and respond with appropriate actions such as resizing the fleet.
Suppliers should adopt an ‘always-ready’ approach
Suppliers should watch out for unexpected events and bring in efficiencies with an ‘always-ready’ approach.
With change in warehousing operations model, supplier(s) should focus on the revised expectations and ensure product availability or visibility to the retailer on demand. Suppliers may have to rework their own network model and synchronize it with the procurement process of the retailer, including product mapping to warehouse(s) and network routing from the supplier’s facility to the retailer’s warehouses.
Suppliers may face challenges in production capacity, electronic data interchange (EDI) synchronization, and invoice revision. For example, production planning for expected order (spike/trough due to re-alignment), end-to-end testing of revised environment, and revising network entries in the CMS.
Four dimensions for a seamless transition
Network, operations and business processes, and technology realignment between all stakeholders is vital for seamless outsourcing and delivering on the customer promise.
To successfully execute supply chain outsourcing transition, all stakeholders must focus on four key dimensions:
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Network re-design: The primary aspects of the change to the retailers’ physical network in the short to medium term pertain to transitioning and rationalization of the warehouses and transport network for 3PLs. The transition will involve (to varying degrees) opening, closing, rationalizing, and repurposing of existing and new depots and realignment of flow paths, product and store range, supply points, and functions such as forecasting and demand planning.
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Operational re-configuration: Retailers, 3PLs, and suppliers need to be aligned towards the existing and to-be warehouse operating model. The future state operating model should have capabilities such as adaptive forecasting, dynamic capacity planning, dynamic ramp-up and ramp-down resources (people, fleet).
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Technology re-alignment: Upstream and downstream systems and technologies have to be synchronized with the needs of the new network. Typically, this dimension involves decommissioning legacy systems, consolidating and integrating multiple systems such as order management system (OMS) and warehouse management system (WMS) to create a unified technology system with seamless data interchange, and adopting hybrid and multi-cloud environments for scalability.
- Deliver on the promise: This involves reliable and transparent execution of the new network with requisite performance and visibility against key indicators such as service levels, availability, and operating cost.
Table 1: Four-dimensional framework for seamless outsourcing
Note: The key challenges and mitigations summarized in this table are indicative. In the real world, the challenges and ways to mitigate them will vary based on the ecosystem, business processes, and priorities.
Outsourcing without compromise
An optimal outsourced model never compromises on product availability.
Processes, partners, governance, and technology must be tightly inter-linked to allow retailers to operate with continuity and efficiency and transition to an outsourced model without compromising on one of the most important aspects of retail world: product availability for customers.
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