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Insourcing-Outsourcing

Outsourcing, changing your outsourcing supplier, or taking things back-in-house (insourcing) is a major step. The decision on whether a process should be insourced or outsourced, and the proper management of these processes is critical in determining the performance of the supply chain.

Thorough analysis and deep commercial insight are required to select the right activities to insource-outsource and rigorous processes and measures are needed to manage the supply chain successfully.

A supply chain process may be inadequately configured from an insourced-outsourced perspective for a variety of reasons. These include:

• Incomplete or inadequate contract in place
• Misalignment of incentives between parties
• Inadequate penalty provisions
• Lack of disciplined management of the vendor or process
• Changes in the economic or strategic environment necessitating a new supply chain strategy or process
• Emergence of newly available alternatives

PIP follows a time-tested, rigorous process to determine the optimal configuration for your operations and then works with you to implement the changes in a manner that will ensure the benefits will be rapid and sustainable.

Approach and Methodology

Our work in this area covers four areas - the areas to cover depending on which have been covered already.

1. We work with your people to analyse the strategic and operational elements of each process along with the interconnection between processes. The operational and economic elements are modeled under a number of different scenarios taking into consideration the evolution of those processes over time to generate a range of sustainable insourced and outsourced alternatives.
   
   In a world of increased value chain deconstruction, understanding how and when to make the key insource-outsource decisions can critically affect the longer-term health of a business
   
   Having conducted the analysis of Step 1, we can fix the objectives to be achieved. Typically there will be a cost reduction and frequently, an operational effectiveness improvement objective.
   
   
2. For operations returning in-house or being brought in-house for the first time, we ensure that all capabilities and necessary resources exist internally to be successful. For operations being outsourced, we ensure that there is an on-going, competitive process to procure the service externally. In both cases, start-up and steady-state operating costs as well as key operating metrics are modeled for all alternatives to ensure the right decisions are made.
   
   
3. PIP will then work closely with your team to set up the new processes. When bringing back in or setting up a new process internally, we jointly design the physical and information flows of the process and their hand-offs and interfaces to the current processes as well as defining job profiles and Key Performance Indicators to ensure operational success.
   
   When setting up a newly outsourced process, we will work with your team to negotiate with the vendors and ensure that all parties are properly aligned for the set of outcomes needed and that all the key provisions and clauses are included in the contracts.
   
   Each supply chain network is unique. As we have assisted many of our clients in the past, we help you explore joint supply chain opportunities with potential vendors and develop optimised fit-for-purpose supply chain solutions with them. Furthermore, we also help you develop ongoing improvement initiatives with your vendors to maintain lasting positive relationships that will continue to bring value to your business.
   
   Unlike other consulting firms that only tell you which suppliers to pursue, we assist you every step of the way, from negotiation preparation right through to signing new contracts. We use various tools and techniques such as contract optimiser to ensure that you obtain the most value from every negotiation.
   
   
   
   
   
   
4. Importantly, PIP will work with your line organization to make sure the gains from the newly configured insource-outsource processes are sustainable. Negotiating a good price is irrelevant if the value cannot be captured and sustained. We help you hard-wire the value into your organisation in two ways. First, we help you implement new contracts in the most efficient manner possible using our rigorous implementation methodologies. Second, we help you hard-wire in contract value by training your contract owners how to manage vendors by setting up vendor reviews with the right KPIs, sections and structure to make performance management easy.

Case Study 1: Outsourcing achieves 20% reduction in wharf costs with increased productivity despite the lack of competitive suppliers

Context

A manufacturing company had a long-standing in-house wharf operation. We helped them to reassess this operation and determined that there was a compelling economic case for outsourcing – but the limited number of suppliers meant that an innovative approach would be necessary to capture the benefits as shipping reliability was highly critical to the manufacturing operation, so a well managed partnership with the chosen supplier would be critical.

Approach

• Completed industry analysis that identified two suppliers who could provide the required service – but only by forming a JV to bring their complementary strengths to the deal.
• Reverse engineered the suppliers’ cost structure and ensured competitive pricing through “open book pricing” with agreed profit margins.
• Identified key performance drivers to establish clear and effective performance targets.
• Ensured that management had a deep understanding of the outsourced activities and initiated the first stage of productivity improvement BEFORE the new operator took charge.
• Completed risk analysis and ensured mitigation plans were in place for critical risks, including minimising the potential for industrial action by offering alternatives for future employment.
• Put in place a robust joint management team with monthly performance reviews.

Result

The company was able to:

• Achieve an immediate 20% reduction in total cost of wharf operations with a further 10% improvement delivered in the second year.
• A 15-20% improvement in loading and unloading times.
• Incremental revenue from increased volumes and prices for 3rd party shipping.
• No industrial action during the transition and all affected employees accepted one of the options of employment with the new contractor, redeployment and retraining in manufacturing roles or a redundancy package

Case Study 2. Selective in-sourcing with renegotiation of maintenance contract achieves 10% cost saving and increases plant uptime

Context

A major industrial site where maintenance had been outsourced several years earlier had not achieved the expected benefits from the outsourcing. With the contract due for renewal we reviewed the position to determine if the activity should be brought back in house or the contract renegotiated.

Approach

• Conducted economic analysis for all maintenance activities and concluded that by outsourcing planning and strategy to a single supplier they had handed over too much control of critical activities.
• Brought most routine maintenance back in-house and refocused contractor on plant shutdowns where they could deliver specialised expertise and achieve higher utilisation.
• Simplified the contract structure to eliminate over-charging and hidden mark-ups. Unbundled material supply from the maintenance contract to eliminate additional mark-ups.
• Reviewed past billings in detail and identified a number of significant over-charging errors to be recovered.
• Identified key performance drivers and established disciplined contractor management processes with clear and effective performance targets. Also ensured that management had a deep understanding of the outsourced activities.
• Used the proven PIP business improvement methodology with both company and contractor to generate and implement ideas to reduce the critical path on plant shuts and to extend the campaign length between shuts.

Result

• Our client gained a 10% reduction in total costs and the major contractor delivered improvements in maintenance time, especially in the duration and frequency of major plant shuts.
• An increase in throughput from reduced shut duration worth $5m pa with further throughput in future years as benefits of extended campaign life were fully realised.
• Improved coordination with production and established basis for operator-maintainers.
• Both company and contractor benefited from improved internal management and coaching of their employees in commercial and business improvement skills.

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