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Outsourcing - A tool for fighting the crisis

Economic crises, as well as times of plenty, are part and parcel of the life of any company. The former, more so than the latter, tends to serve as a catalyst for the strategic definition, modernisation and, most of all, for the search of increased competitiveness, revealing great focus on the market and on outperforming the competition.

Although crisis is often a poor counsellor, few are the companies who take advantage of times of growth to rethink, reposition and make decisions in terms of cost and investment rationalisation.

Therefore, it is during lean times that companies cancel investments and reduce their resources to the bare minimum, compromising, oftentimes, that which they should ultimately preserve - the service to their Client, or the modernisation of their production equipment.

During  these times, the main and only concern of companies - that in which they should be investing all their efforts and resources, their proverbial blood, sweat and tears, if you will - should be selling.

Instead, many of these companies: keep warehousing and production infrastructures in noble neighbourhoods or very close to the centres of major cities; have, in most cases, ageing fleets, with a usage ratio below 50%, or thereabouts; and human resources relegated to warehouse and transportation departments, for lack of qualifications and/or the ability to perform other tasks.

What, then, is the most important issue? To reinforce the sales team or to hold on to staff who add no value to the business? To increase the sales floor area in stores or to keep tiny and expensive warehouses, attached to each shop, without adding a single euro to sales? To invest in advertising or to keep the transportation services and the warehouse?

When the crisis sets in, with loss of sales, we are left with steep, fixed costs in warehouses, vehicles, fork-lifts and staff. These become nothing more than a non-productive drain of money which could and should be better applied towards those things which are essentially the company's raison d'être - purchasing, be it raw materials for production, be it the products it markets - and sales, that is, the satisfaction of both the market's and the client's needs.  But, precisely when it is necessary to concentrate on sales, clients and purchasing, there is still the need for the manager (who is oftentimes the owner himself) to worry about what is going on in the warehouse, how to resolve the breakdown of that fork-lift which is essential to the warehouse's operation, whether the orders are late, if the truck is loaded already, how to guarantee the safe delivery of an order by a special client when the truck broke down on the road, etc.

Warehouses, machines, vehicles and poorly qualified human resources, with low levels of education and generally resistant to any attempts for modernisation, are all variables on an equation system called logistics.

This is an area which companies should look at if they want to raise the financial means they need to manage and overcome the crisis, and to turn a problem into part of the solution. How? By delegating these activities to a third party.

By doing so, liquidity will be generated, former fixed costs (which bore down so heavily on the generation of income) become variable costs, regardless of the company's sales - whether it be a lot or a little, and whether it has conservative stocks or needs to work with realistic stocks. The company will gain reaction capabilities to client's demands, will be able to operate more aggressively in the market, will eliminate stock shortage and, eliminate the need to know how many employees called-in sick, today, of all days, when that large order needs to be prepared and the client already threatened us that if we are late again, they will stop buying from us.

On a side note, it is worth mentioning that stock shortages will not be totally eradicated, as there isn't such a thing as a 100% level of service; the difference is that their cost is transferred to a third party - the logistics operator.

Managing a company and a business is, in itself, enough of a complex activity, requiring permanent focus on ensuring that you have the best portfolio and the best product at the best price, and this binomial is served by appropriate communication. These are the driving forces of the business and therefore, of the investment.

Besides companies who live off the real estate industry, what is the real advantage of holding on to an infrastructure, in which hundreds of thousands and millions of Euros are invested, or with a square metre cost of surely over 7 or 8 Euros, located inside or in the immediate suburbs of the cities? To alienate this location will mean, in those cases where it is a lease, reducing the cost of logistics infrastructures by more than half, since any operator will possess optimised locations in terms of cost which will allow for an immediate, monthly net gain. If these infrastructures are owned, then there is a great opportunity to raise money through its sale, taking advantage of the existing real estate speculation which exists in urban areas. But, as important as this immediate gain is, resulting from relocation, there is also the gain in optimisation. The fixed cost of owning the infrastructure is the same, in the generation of income, regardless if its occupational capacity is of 30% or if it is 80, 100 or 120%. While in the former case, the reflection of outsourcing is an immediate reduction of 70% in cost, in the latter case, it is the operator who will have to worry about solutions to guarantee an increase in activity. In either case, the company only "pays for what it uses;" that is, it now has a variable cost which directly follows the fluctuations of (your) business.

Thus, the benefits are: liquidity, which means more money to buy products or to invest in marketing; a direct relationship between sales and the cost of sale, with an immediate transparency between what is profitable and what is not; the overall streamlining of the company, preparing it to be increasingly more balanced and competitive; and the possibility for investment in activities which ultimately add value to the business.

This applies to any company, regardless of its size. It is wrong to think this only applies to other, possibly bigger, companies. No. The size of the problem might be different, but it is as valid for a company with a 500 sq metre warehouse, with a portfolio consisting of 10 or 20 products, as it is for a company with a 15,000 sq metre warehouse, with 20,000 different products.

At this point, we can already imagine the reactions of some of those who read this, who think that their particular business is so very specific and their logistics complex. "Only we can do it well," they'll say.

To those, I will say that in my 20 years of working in logistics, I have seldom seen this statement resist to analysis of such specificness! In times of crisis, this shouldn't be a barrier to outsourcing…at least before a trustworthy professional is given a change to analyse it.

Logistics today, as logistics operators see it, is a highly sophisticated activity using qualified people, in which the search for the most adequate and cost-effective solutions is consistent, and one which demonstrates high productivity levels, especially when compared with those of most companies which handle their own logistics. This happens not only because of all the reasons outlined above, but also because of existing synergies between different clients, which make operations, which seem small when viewed on their own, become one large-scale operation from which everyone benefits.

The same applies for the moving equipment, such as fork-lifts, order pickers, pallet jacks, etc., which will be able to contribute towards a gain in liquidity. Normally, times of crisis mean a reduction in sales, which is reflected in less work at the warehouse and the consequent under usage of the machines.

What is left to alienate? The vehicles. It is hard to understand why there are still companies today who own their own fleet, whatever their size. Obviously, there are exceptions. But what can justify the existence of company-owned vehicles, including the costs of their drivers and respective assistants, in a market where supply largely exceeds demand and where prices barely cover the costs, and as such, are much lower than would occur in a more transparent market?

Is it logical to keep a fixed cost with equipment and staff in an activity where profitability arises from usage ratio and scale? Of course not! Whether the vehicles are leased, rented or bought, the gain associated with transformation of transportation cost into variable cost will be identical. The only variant will be the degree of liquidity received.

Two other aspects which might be of great relevance in times of crisis are the so called value added and inverse logistics services.

Value added services are essential for a leverage in sales, namely with promotional kits and repackaging. These services are not restricted to these two examples, but these are the ones we are interested in analysing. These are usually activities which occur within a limited time span, and are labour intensive, often requiring sophisticated and expensive machinery. Again, it becomes obvious that under these circumstances, these would be expensive operations, in contrast with what happens with operators who take advantage of the economy of scale, with appropriate usage ratios for their machines. In periods of crisis, it is important for many companies to use these services as a way to boost sales. In this way, they can do so without risk and with a cost in line with the service rendered.

Inverse logistics is an area with a great savings potential for companies, especially those operating in the technology and communication sectors. Outsourcing to an operator all those tasks which do not require highly skilled labour (namely that which can be performed by unskilled labourers, such as small repairs or equipment returns), represents another opportunity to convert fixed costs into variable costs. Today, many multinational companies already take advantage of logistics operators in Portugal for the execution of these tasks, which is proof of the validity of this option, its cost, and the speed and quality of the service rendered. If it is valid for these companies, which have a permanent focus on costs and customer service, it would have to be true for all companies and it is, for sure, all the more valid during a period of crisis in which it is imperative to reduce costs without compromising customer service.

It is time for Portuguese companies to take these important steps towards their modernisation, which will mean becoming more competitive, both in the internal and in the external markets.

The outsourcing of logistics services is used by only about 10 to 12% of Portuguese companies operating in the commerce and industry sectors. This figure, in Spain, is about 25%, while in the United Kingdom, a country known for being a world leader in the realm of logistic services, the number is over 50%.

Let's take a look at the case of our neighbours. The Spanish economy has been steadily growing for the past 15 years while we, the Portuguese, keep thinking that the grass is greener on the other side, instead of trying to understand why this is so.

Fifteen  years ago, Spanish companies were small in dimension, had poor performances, poor organisation and methods, and the country had an unemployment rate which reached nearly 30%. A crisis was definitely present. Today, they have large sales volumes and distribution networks, even at a European level...! Is it by chance? What is the Spanish secret?

They have invested in sales and marketing, and in the modernisation of their companies. At the same time, logistics operators grew and became essential partners for this development, serving as an advanced guard to the invasion of the Portuguese market.

What prevents Portuguese companies from following the same path and applying the same solutions?

Portuguese companies do not run the risk of finding badly organised logistics operators with ancient methods. There are at least two dozen of these companies at the vanguard of what are the best practices used, in terms of organisation and in terms of IT sophistication.

The quality of many of the logistics operators one can find in Portugal is the best guarantee that the decision to outsource logistics will reflect in a better service at a better cost. It will be a fundamental factor for better living in times of crisis.