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MGT2104 – Supply Chain Design

ANALYSIS AND DISCUSSION OF OUTSOURCING STRATEGY, AND


OTHER SUPPLY CHAIN STRATEGIES AND THEIR IMPACTS ON
COMPANY’S PERFORMANCE.
BENEFITS OF INFORMATION TECHNOLOGY IN COMPANY’S SUPPLY
CHAIN

Report is prepared for Mr Ray Hingst, Lecturer (Administration Management)


– School of Management and Enterprise

and

Ms Mahla Babagolzadeh, Assistant Examiner,

School of Management and Enterprise

Prepared by Marina Udachina

Due date: 31/05/2019


TABLE OF CONTENTS

EXECUTIVE SUMMARY .............................................................................................III


INTRODUCTION .................................................................................................... IV
SECTION 1 – GENERAL INTRODUCTION TO OUTSOURCING STRATEGY AND ITS USE……..5

SECTION 2 – OUTSOURCING STRATEGY IN GRAIN COMMODITIES AND ITS BENEFITS....6


SECTION 3 – RISKS OF OUTSOURCING STRATEGY IN GRAINS COMMODITIES……………....7
SECTION 4 - FUNCTIONAL AND INNOVATIVE PRODUCTS CHARACTERISTICS
COMPARISON. DISCUSSION OF MOST SUITABLE SUPPLY CHAIN STRATEGY FOR BOTH
CATEGORIES WITH EXAMPLES ................................................................................. 8
SECTION 5 – CROSS-DOCKING STRATEGY INTRODUCTION. ITS BENEFITS AND
CHALLENGES. POSSIBILITY OF USING CROSS-DOCKING STRATEGY IN GRAIN
COMMODITIES ....................................................................................................... 9
SECTION 6 - DIFFERENT TYPES OF SUPPLY CHAIN STRATEGIES: INTERNATIONAL
DISTRIBUTION SYSTEMS, INTERNATIONAL SUPPLIERS, OFFSHORE MANUFACTURING
AND FULLY INTEGRATED GLOBAL SUPPLY CHAIN AND CHOSING AN PRROAPRIATE ONE 10
SECTION 7 - INFORMATION TECHNOLOGY BENEFITS DISCUSSION FROM CUSTOMERS
AND BUSINESS PERSPECTIVE .................................................................................11
CONCLUSIONS ......................................................................................................12
REFERENCES ........................................................................................................13

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EXECUTIVE SUMMARY

In recent years, there has been a great increase in numbers of firms expanding their
businesses overseas in order to utilise the competitive advantage of foreign resources, or
due to lack of expertise in some areas of a company’s operation. As a result, substantial
advantages may be achieved, however a company is also exposed to various risks.

Consequently, in this report outsourcing strategy is defined and discussed, in general, and
benefits and associated risks of such approach are explained.

An example of a grain company located in Toowoomba, QLD is reviewed and discussed to


better illustrate outsourcing strategy and its impacts on company’s performance.

The report also reviews two different categories of products: functional and innovative and
provides examples of suitable supply chain strategies for both categories.

Further, cross-docking strategy is discussed, followed by the review of its benefits and
challenges. The possibility of applying this strategy is then discussed using Grain
Commodities example.

Then different types of supply chains are reviewed: international distribution systems,
international suppliers, offshore manufacturing and fully integrated global supply chain.
Appropriateness of each is explained with some examples.

Last section of this report describes the role of information technology and its benefits for
both businesses and customers in today’s hi-tech environment.

The key findings are then summarised in the Conclusions section.

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INTRODUCTION

The use of outsourcing is becoming more sophisticated; more organisations are outsourcing
business processes; therefore, the process is discussed in detail in the first 3 sections of this
report.

Australian grain company’s example is provided to better illustrate how a company can
better concentrate on its core activities by outsourcing some of its functions to other
companies.

Using cross-docking strategy is also reviewed on the same company example.

For the purpose of this report the following assumptions are made in regard to the company
reviewed in sections 2, 3 and 5:

- Grain Commodities is Toowoomba-based grain commodity trader;


- The company had only five people at the start mainly with prior grower experience;
- The newly established company performed some HR functions in house and had their
own IT infrastructure;
- Over time the size grew to twenty-four professionals and it was decided to outsource
two functions: HR and IT;
- Furthermore, the company’s existing IT infrastructure could neither support growing
network requirements no they had required expertise to upgrade it;

The company’s vision was to only manage grain related activities with getting third party
providers looking after its HR and IT functions.

There are some limitations in this report. It does not describe initial IT and HR department
set up, but only after these functions have been outsourced. Therefore, it does not deal with
any performance metrics of before and after, but rather gives a general overview of the
strategy and benefits achieved.

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SECTION 1 – GENERAL INTRODUCTION TO OUTSOURCING STRATEGY AND ITS USE

Nowadays few companies function completely independently. Instead, businesses tend to


form partnerships with 3d party suppliers and contractors, which may help them to do
business more efficiently and effectively.

Companies usually outsource in two ways:

- a single component of daily operations may be outsourced;


- or they establish outsourcing as a company strategy.

(Cohn 2015)

The term “outsourcing” is very broad, but in general it is a business practice where services,
tasks, processes or job functions that would normally be performed internally are delegated
to a third party.

There are many forms that outsourcing can take such as:

- Using online services to do a single task;


- Hiring independent firms to perform tasks that are not covered effectively by
company’s internal staff;
- Contracting outsourcing 3d party companies that offer a broad range of services;
- Engaging with agency to help finding the right outsource contractors;
- Using online assistants and freelance contractors.

There are a number of business areas that can be outsourced, and they vary depending on
the industry type.

There are some examples listed below:

- Accounting;
- GR;
- Customer service;
- Service desk / technical support;
- Product design;
- Marketing;
- Parts manufacturing

(Overby 2017)

Above list is not an extensive list but rather a few examples as virtually any task can be
outsourced, providing a company considers the possible advantages and assess risks
involved when deciding on whether to outsource and what areas of the business if so.

Both advantages and disadvantages will be discussed in detail in the next two sections of
the report.

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SECTION 2 – OUTSOURCING STRATEGY IN GRAIN COMMODITIES AND ITS
BENEFITS

Grain Commodities is a Toowoomba-based grain commodity trader had a vision to only


manage grain related activities with third party firms looking after their HR and IT functions.

Before they took that decision, the management team conducted some research and found
that business owners generally spend about 30 percent of time on actual business functions.
The rest of their time is spent on administrative and other tasks that do not contribute to
revenue, which was not in line with their vision. Considering some other limitations (like
office space, for example) it was proofed to be beneficial to outsource both business
functions: HR and IT.

HR OUTSOURCING

The various functions of the HR department were too comprehensive and complex to
maintain in-house and Grain Commodities outsourced it to Drake International, also located
in Toowoomba. They provided Grain Commodities with HR solutions for every stage in the
employee lifecycle.

(Drake International 2019)

During this partnership the following benefits have been achieved:

- Overhead costs (office space, knowledgeable staff);


- Savings on performing payroll and recruitment;
- Avoiding penalties from noncompliance with employment laws and regulations;
- Employee development and performance;
- Reduced Employment-Related Expenses;
- Health Insurance Benefits.

(Hamlin 2019)

IT OUTSOURCING

Outsourced IT functions can include some or all the following two categories:

- Infrastructure outsourcing - service desk support, data center, network services, etc.
- Application outsourcing - new application development, legacy system maintenance,
testing, packaged software implementation, WEB development.

Grain Commodities used another Toowoomba-based company located in the same building
to outsource both categories for the same reason as for HR outsourcing - ability to focus on
core competencies. The functions performed and some of the benefits achieved during this
partnership include the following:

- Reduced up-front costs and time;


- Access to state-of-the-art technology;
- Help with website design and maintenance;
- Email management - archiving and protection against spam, digital attacks;
- Regular performance check-ups; an immediate help desk support;
- Data center management - data storage and backup, data processing.

(Khoja 2017)

One the main benefits achieved by outsourcing these two functions is saved time and extra
money to invest into its core activities.

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SECTION 3 – RISKS OF OUTSOURCING STRATEGY IN GRAINS COMMODITIES

Grain Commodities carefully assessed risks associated with outsourcing when considered
outsourcing providers for their HR and IT functions. Local and international providers were
reviewed.

Only local companies were considered for HR functions in order to gain benefits of local
knowledge, and to have the convenience of close location, which is especially important
when it comes to staff development, recruitment, compliance, etc.

Whereas when deciding on outsourcing its IT function, various locations were considered
including companies located in Asia. Although it looked more attractive cost wise, Grain
Commodities chose local company to avoid the following common risks of outsourcing to
overseas company:

- Time difference. It was critical to have help available immediately;


- Language barriers;
- Long distances can turn business trips into an expensive exercise.

(Overby 2017)

By choosing the local company, the above risks were illuminated. However, management
team understood that even with a local company there are still some risks such as:

- Project uncertainty;
- Risk of losing the personal service;
- Less control;
- Lack of coordination between business goals and IT goals.

Starting IT outsourcing, the management team was concerned about all the three risks
mentioned above as there were several projects planned such as new ERP system
implementation, continuous development of the grower App, and new system for managing
growing container business.

To overcome the above risks, the company selected the team of professionals from their
internal staff, Subject Matter Experts (SMEs). They conducted regular meetings with IT
people going through mapping current processes and desired outcomes, discussed unique
characteristics of their business and specific requirements.

The company also engaged with ERP vendors to design stages of implementations, and also
conducted regular group meeting to minimise risks of miscommunication between three
parties.

Overall, company was able to overcome challenges and risks associated with outsourcing by
careful analysis of possible providers as well as active participation in all stages of planning
and close monitoring of all projects once relationships were established.

(Ballard 2015)

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SECTION 4 – FUNCTIONAL AND INNOVATIVE PRODUCTS CHARACTERISTICS
COMPARISON. DISCUSSION OF MOST SUITABLE SUPPLY CHAIN STRATEGY FOR
BOTH CATEGORIES WITH EXAMPLES

The first step in determining a suitable supply chain is considering the products
characteristics, nature of demand, product life cycle, demand predictability and lead times.

Functional products are basic products with usually low margin and product variety but
predictable demand. These products are typically available in retail supermarkets, such as,
grocery, for example, however competition is high leading to low profit margins. Therefore,
functional products require physically efficient supply chains strategy, a push strategy with
focus on cost reduction and efficient forward planning.

Innovative products are new products to the market. They usually have high profit margin,
and high product variability although they also have unpredictable demand. Pull strategy is
the most adequate supply chain in this case, with its focus on service level, order fulfillment
and market-responsiveness.

Different supply chain strategies can have a huge impact on companies’ performance.
Therefore, choosing the right one is critical for company’s success.

For example, for a retailer selling functional products like apparel, the focus should be on
getting the total landed costs down, which are product cost, transportation, warehousing,
etc. to increase physical efficiency. Thus, sourcing from low cost countries is appropriate for
this purpose.

(Simchi-Levi & Kaminsky & Simchi-Levi 2008, pp. 288-289)

Whereas, when selling innovative products like Apple pocket mobile projectors, for example,
which are produced in low volumes due to high level of demand uncertainty, focusing on
reducing landing costs would be a wrong strategy as the main focus in this case would be to
reduce lead time and on supply flexibility. Proximity to market area is beneficial. However,
short lead times can also be achieved by using air freight or scheduling overtime
production. This strategy might be appropriate for really new products because high profit
margins can offset the cost premium for expediting orders.

On the other hand, some innovative products, like Apple iPads, still have high margins, but
their demand may be more predictable based on previous success in similar product
category leading to a larger number of units produced. Therefore, purely concentrating on
market responsiveness would be a wrong strategy whereas choosing a mix of effective
physical strategy and market responsiveness would be the most adequate choice in this
case.

(Fisher 1997)

In summary, matching functional and innovative products with the right supply chains is
critical. Prior to choosing the right strategy, careful analysis of products characteristics
should be undertaken. Based on the results, the right strategy or a mix of strategies should
be chosen.

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SECTION 5 – CROSS-DOCKING STRATEGY INTRODUCTION. ITS BENEFITS AND
CHALLENGES. POSSIBILITY OF USING CROSS-DOCKING STRATEGY IN GRAIN
COMMODITIES

Cross-docking is a warehouse management practice, where products arrive by trucks, and


are allocated to a receiving dock. Then products are immediately unloaded, sorted or
reorganised to be then moved to the outbound dock without being actually held at the
warehouse unless it is for a brief period of time.

Some of the main benefits of cross-docking are:

- Small parcels combined / large product loads broken down;


- Reduction in labour costs;
- Increased customer satisfaction due to lead time reduction;
- Reduction in warehouse space, and therefore storage costs;
- Saving in transportation costs;
- Quicker turnaround.

Despite many advantages, the strategy is challenging to implement and is associated with
the following risks:
- IT Support. Robust inventory control system can be costly;
- Facility design need be able to accommodate the cross-dock process;
- Reliability of suppliers;
- Reliability of freight providers;
- A high volume of product is necessary for cost effectiveness.

(Murray 2019)

Grain Commodities, the company reviewed earlier in this report, does not have its own
supply chain infrastructure to be able to use cross-docking consistently. However, company
has developed long-lasting relationship built on trust with GrainCorp, another grain
company with largest grain network on the East Coast.
The reached agreement has enabled Grain Commodities to use Opportunistic cross-docking
with a particular focus on truck/rail consolidation.
This strategy is mainly used during harvest in good years when crop is plentiful. The
strategy is implemented in the following way:
1. Grain is delivered from ex farm locations to required GrainCorp site;
2. Different commodities and grades are then blended as required;
3. Once blended it is moved via conveyor belts from vertical silo storages to rail wagons
for further delivery to Port Terminals;
4. The grain is then unloaded and either blended again with grain delivered from other
locations, or fumigated in accordance with importing country requirements;
5. Once out of fumigation, the grain is loaded to the vessel in bulk or packed into
containers with minimal time spent in storage.
Above requires a very close co-operation between all parties involved starting from the
grower to the vessel captain. Any interruption can be costly, however if implemented
correctly, may save thousands of dollars with the main savings on the following:
- Reduction on storage costs;
- Reduction in transportation costs – it is significantly cheaper to consolidate trucks
from different farm locations into closest GrainCorp site and move the stock by rail;
- Reduction in intake costs at port – rail intake fee is cheaper than road intake.
(O’Byrne 2015)

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SECTION 6 – DIFFERENT TYPES OF SUPPLY CHAIN STRATEGIES: INTERNATIONAL
DISTRIBUTION SYSTEMS, INTERNATIONAL SUPPLIERS, OFFSHORE
MANUFACTURING AND FULLY INTEGRATED GLOBAL SUPPLY CHAIN AND CHOSING
AN PRROAPRIATE ONE

Nowadays, global operations are becoming increasingly significant where international


supply chain networks may bring more opportunities for companies if managed effectively.

International distribution systems


Products are still manufactured domestically with distribution to overseas markets. It is an
appropriate strategy for any company entering other markets other than in a home country.
Also popular with companies who source raw materials locally and utilise local knowledge
when manufacturing specialised products.

International suppliers

Raw materials are sourced from overseas from foreign suppliers. However, final assembly is
done domestically. Appropriate strategy to mainly save on raw material costs, while still
utilising local expertise.

Offshore manufacturing

Product is typically sourced and manufactured in another country, which is then shipped
back to company’s home country.

It is appropriate choice when company’s primary goal is to reduce operating expenses while
still maintaining a high-quality product. This strategy typically provides the following
benefits: low costs of operations and production, tax benefits, availability of skilled labour.

(Simchi-Levi & Kaminsky & Simchi-Levi 2008, pp. 312-313)

For example, IBM employs more than 130,000 employees in India (more than in any other
country). Offshoring its operations to India helped the company to reduce the cost of
producing and supplying IT tech services and provided a sustainable competitive advantage
due to low-cost highly skilled labour force.

(Goel, V 2017)

Fully integrated global supply chain

Products are supplied, manufactured, and distributed from various facilities located all
around the world.

DHL is the perfect example of a truly global enterprise, which is presented in over 220
countries and territories across the globe. DHL is the world’s leading postal and number one
contract logistics provider furnishing fast, reliable express and forwarding services around
the world, and a leading innovator in supply chain solutions.

DHL Supply Chain aligned their global network to enable the development of sector-
specific supply chain solutions at a cross-regional level where each sector manager is
supported by a team of specialists who handle customers’ projects and ensure the
implementation of global sector solutions on a regional level.

(DHL 2019)

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SECTION 7 – INFORMATION TECHNOLOGY BENEFITS DISCUSSION FROM
CUSTOMERS AND BUSINESS PERSPECTIVE

Information technology is essential part of every business today. It drives innovation, which
results in smarter apps, faster processing, improved data storage, and better information
distribution thus making businesses run more efficiently by increasing value, and better
productivity.

There are many benefits of technology for a business:

- Ability to attract more potential customers;


- Streamlining operations, reducing costs, improve efficiency and minimising waste;
- Providing better service to customers increasing satisfaction;
- Supporting better relationships with internal and external stakeholders;
- Allowing customers to better guide the business.

Innovation through information technology has also allowed for the following changes in
business:

- Online shopping;
- Digital marketing;
- Social networking;
- Cloud computing;
- VoiP (voice calls using a broadband Internet connection) communication is more
efficient than regular phone line;
- Better inventory analysis with new warehouse inventory technologies (bar-codes,
RFID tags);
- Savings on time and money by organising meetings over the Internet.

From a customer point of view, the ability to use the technology is crucial. In today’s busy
business environment, it is necessary for the company to provide the ability to its customers
to use electronics means of interaction.

Therefore, almost any company nowadays have Websites to allow customers to find
answers to their questions such as products information, order creation and its tracking,
operation hours and so on.

Email is another useful tool for deals and discounts communication.

As well as that, Customer Relationship Management (CRM) is gaining popularity. CRM are
the software systems that specifically address the issues of dealing with customers on a
day-to-day basis.

The use of the system is beneficial for both, the company and a customer as it is a strategy
to learn more about customers' behaviors in order to better understand their needs and
develop stronger relationships with them. In turn, it provides the customer with more
customised service and better experience.

(Business2Community 2015)

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CONCLUSIONS

In today’s dynamic environment competitiveness and effectiveness is paramount, therefore


more companies tend to outsource some of their business functions. It has been established
in this report that main benefits achieved by outsourcing include:

- economies of scale, lower labour rates, thus lower costs;


- increased efficiency;
- increased focus on core activities;
- access to skills or workforce;
- lower ongoing investment in internal infrastructure.

Grain Commodities example proofed that outsourcing can bring many benefits and by using
this strategy company was able to achieve its goal and focus on what its staff do best and
outsource inefficiencies to professionals. They carefully assessed the risks and were able to
approach the challenges by close monitoring of outsourced activities.

It has been established that if HR and IT functions stayed in house it could have become a
cost burden rather than as strategic resources and too complex to manage. They also could
have run the risk of information technologies to become outdated, inflexible, expensive,
unmanageable – in short, obsolete. Therefore, outsourcing in this case was the right choice.

Next, following the review of different types of products it appeared that supply chain
strategy choice is dependent on products characteristics and factors such as nature of
demand, demand predictability and lead times. In many cases functional products would
require physically efficient strategy focused on cost reduction, whereas market-responsive
strategy focused on service level would be appropriate for innovative products. However,
some products would require a mix of different strategies.

Cross-docking strategy has then been examined. Overall, if implemented correctly, it


proofed to provide many advantages to the business such as increased efficiency and
handling times. In practice, however, it is not suitable for every company. Factors such as
costly robust inventory system, specific facility design, lack of trust in relationships with
suppliers, and so on can become an obstacle. Grain Commodities reviewed here as an
example has been able to overcome these challenges and even without their own
warehouse achieved an agreement with another grain company to use opportunistic cross-
docking in road/rail consolidation.

The report also provides explanation of international supply chains and which type can be
more appropriate for a firm. International supply chain range from companies that still
manufacture everything domestically but distributing to international market as well as
domestic, to those who use international suppliers to lower their overhead costs, then those
companies who find it beneficial to offshore their manufacturing functions, and finishes
discussion with a truly global fully integrated supply chain company example.

Ultimately, it has been concluded that suitability of every approach depends on company’s
goals (whether or not it wants to enter international markets), products it deal with (if
highly specialised, local source might be the only options), and ability to manage a global
expansion.

Last, importance of information technologies is reviewed to show the interconnectedness


between customer satisfaction and business success. Overall, use of information
technologies results in business growth via customer loyalty and expansion.

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REFERENCES

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20 May 2019, <https://www.itproportal.com/2015/05/15/5-risks-of-outsourcing-
your-it-infrastructure/>;

2. Business2Community 2015, “The Importance of Information Technology In Business


Today”, viewed 29 May, < https://www.business2community.com/tech-
gadgets/importance-information-technology-business-today-01393380>;

3. Cohn, C 2015, “Strategic Ways To Outsource, And When To Do It”, Forbes, viewed
on 21 May 2019, <https://www.forbes.com/sites/chuckcohn/2015/03/19/strategic-
ways-to-outsource-and-when-to-do-it/#5e8e205b2fcb>;

4. DHL International 2019, DHL International, viewed 27 May 2019,


<https://www.dhl.com/en.html>;

5. Drake International 2019, About Drake Australia, viewed 22 May 2019,


<https://au.drakeintl.com/about-drake/about-drake-australia.aspx>;

6. Fisher, M 1997, “What Is the Right Supply Chain for Your Product?”, Harvard
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supply-chain-for-your-product>;

7. Goel, V 2017, “IBM shifts center of gravity half a world away, to India”, The Seattle
Times, viewed 26 May 2019, <https://www.seattletimes.com/business/ibm-shifts-
center-of-gravity-half-a-world-away-to-india/>;

8. Hamlin, K 2019, “The Advantages of Outsourcing HR Functions”, Small Business


Chron, viewed on 23 May 2019, <https://smallbusiness.chron.com/advantages-
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9. Khoja, N 2017, “6 Benefits of Outsourced IT Support”, Business, viewed 23 May


2019, <https://www.business.com/articles/6-business-benefits-of-outsourced-it-
support/>;

10. Murray, M 2019, “Cross-docking Can Optimize Material Movement Costs”, The
Balance Small Business, viewed 29 May 2019,
<https://www.thebalancesmb.com/cross-docking-in-the-warehouse-2221394>;

11. O’Byrne, R 2015, “6 Tips to Maximise Cross Dock Efficiency”, Logistics Bureau,
viewed 28 May 2019, <https://www.logisticsbureau.com/6-tips-to-maximise-cross-
dock-efficiency/>;

12. Overby, S 2017, “What is outsourcing? Definitions, best practices, challenges and
advice”, CIO digital magazine, viewed on 21 May 2019,
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14. Simchi-Levi, D & Kaminsky, P & Simchi-Levi, E 2008, Designing and Managing the
Supply Chain, 3d edn, McGraw-Hill/Irwin, New York, USA.

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