CASE STUDY ON FASHION RETAILING AND HIGH TECH MANUFACTURING

QUESTION

Outsourcing
Core Competency 2.0:
The Case For Outsourcing
Supply Chain Management
Carlos A. Alvarenga and Pancho Malmierca
Table of Contents
1. Executive Summary
2. Test One: Is the Function
Really a Core Competency?
3. Test Two: What Kind of Knowledge
Does the Function Require?
4. Test Three: Who Will Improve the
Function Most in the Future?
5. Test Four: What Is the Externalization Risk?
6. Supply Chain Management
Outsourcing Examples
7. The Future of Outsourcing and
Outsourcing Decision Making
“I can’t understand why people
are frightened of new ideas. I’m
frightened of the old ones.”
John Gage, Scientist
“Ideas are a commodity.
Execution of them is not.”
2
Michael Dell, CEO
3
1.
Executive
Summary
For decades, outsourcing has been an
integral part of most global supply
chain management (SCM) operations.
At many companies, in fact, the rise
of third party logistics entities such
as DHL and UPS has resulted in the
elimination of in-house transportation
fleets; likewise, the high-technology
and automotive industries frequently
outsource some or all of their
manufacturing operations, thus
making it possible for them to
focus on activities such as research,
product design and marketing. Still,
there are many non-logistical supply
chain functions—forecasting, supply
planning, and inventory management,
for example—that generally remain
in-house. While most supply chain
executives may never have considered
outsourcing these non-logistics
functions, the fact is that outsourcing
such activities is now not just possible
but in some cases preferable to
performing them in-house. This article
will argue that outsourcing even the
highest-level supply chain function
is quickly becoming an economic and
strategic option. As this phenomenon
4
gains more exposure, it is important
to have a mechanism to structure
decisions about keeping an SCM
function in-house or externalizing it to
a third party service provider. In this
article we present such a framework,
built around four key questions:
1. Is the function really a core
competency?
2. Is the knowledge management
strategy associated with the
function fully understood and
aligned?
3. Who will improve the function most
in the future?
4. What is the externalization risk?
Understanding how to answer
these vital queries can help readers
determine if a particular supply chain
capability is best outsourced or kept
as an internal function. Based on our
analysis of dozens of SCM outsourcing
contracts, we will argue that in some
cases engaging an outside company
to handle activities such as inventory
optimization or forecasting is actually
superior to hiring, training and
providing for those functions inhouse.
Our
main
contention,
in
other

words,
is
that
what
matters
most
is

not
who
executes
a given
function

but
who
executes
it
best,
and
that
the

former
will
usually
be
the
organization

with
the
most
economic
incentive
to

improve
that
function.
After the analyses noted above
(sections focused on each of the four
questions), we present three case
studies, followed by an examination
of risk and liability in supply chain
outsourcing.
Our contention is that what
matters most is not who
executes a given function but
who executes it best—and
that who executes best will
usually be the organization with
the most economic incentive
to improve that function.
5
2.
Test one: is the function really
a core competency?
Ever since Gary Hamel and C.K.
Prahalad laid out the concept of the
“core competency” in their seminal
1994 article, “The Core Competence
of the Corporation,”
1
legions of
managers and executives have
struggled to define, build and maintain
their own versions of this concept.
Sixteen years later, however, many
companies’ idea of a core competency
bears little resemblance to what
Hamel and Prahalad described. Some
executives think of their companies’
core competencies as “the things
we need to get right” while others
describe them as “the things we do
best.” Still other executives define a
core competency as “the basic skills
required to compete in our industry.”
Interestingly, some leaders simply
ignore the concept altogether.
Returning to the original concept,
however, it is interesting to note
that Hamel and Prahalad define core
competencies as “the collective skills
and learning inside an organization
that create competitive advantage.”
This perspective is illustrated Figure 1.
In other words, a core competency is
not a competitive advantage in and
of itself. Instead it is the source of a
company’s competitive advantage.
In their follow-up book, Competing
for the Future,
2
Hamel and Prahalad
further argue that core competencies
must provide a company with either
a real or perceived competitive
advantage in the minds of customers.
For example, customers may think
that a certain package delivery
company is more likely to deliver an
overnight package on-time, even
though statistical analyses show that
it is no better than its competitors.
The reason customers hold this belief,
however, is that the company has
great advertising. Thus marketing is
the real core competency that makes
the company stand out. Of course,
core competencies also can create real
1. Harvard Business Review, July-August, 1994.
2. Gary Hamel, C. K. Prahalad. Competing for the Future. Boston, Mass: Harvard Business Press, 1996.
6
advantages, not just perceived ones,
and surely this is the main idea that
most supply chain executives have in
mind when they seek to define their
company’s core competencies.
In the context of supply chain
management, like so many other
business areas, the idea of core
competency is as common as it is
varied. For the sake of this article,
however, let us consider what we
believe to be the most common
definition: A core competency is any
function a company must execute well
in order to be successful.
Given this definition, it is commonly
believed that activities such as
forecasting and inventory optimization
are core competencies. But is this
really the case? To answer the
question, consider the case of logistics:
a function that has been outsourced
so often that most supply chain
executives would never consider it a
Figure 1: Hamel and Prahalad’s original view of core competencies
Competencies: The Roots of Competitiveness
1
2
3
Competence
1
Business
1
4 5 6
Business
2
Competence
2
End Products
Core Product 2
Core Product 1
The corporation, like a tree, grows from it’s roots. Core products are nourished by
competencies and engender business units, whose fruit are end products.
core competency. In the 1950s it was
rare for a company not to manage
the physical distribution of its own
products. After all, it was important
to deliver products on time and to
keep a watchful eye on one’s goods.
However, as companies such as FedEx
and UPS arrived and focused their
talent exclusively on the physical
delivery of goods, their logistical
skills significantly eclipsed those of
many manufacturing companies.
Moreover, since a company such as
FedEx can amortize its investments
over many clients, no single client
has to bear the full cost of leadingedge
logistics
technology
or a highly

sophisticated
logistics
management

team.
Consequently,
what
probably

was
a core
competency
in
most

product
companies
in
the
1950s
now

is
seen
as
almost
completely
(at
least

in
the
“developed”
world)
as
a function

best
performed
by
an
external
entity.

What
is
interesting
about
this
example

is
that
the
change
in
perspective
was

3
7 8 9
Business
3
driven by external agents (the logistics
companies themselves) rather than by
suboptimal performance of in-house
logistics teams. This observation
points out an important critique
of core competency theory—that a
company can be great at something
until an external force comes along
that minimizes the relevancy of that
capability and/or causes it to be
handled better in some other fashion.
Another significant strategic change is
the rise of outsourced manufacturing.
Many people are surprised to learn
that companies such as Apple and
Sony—as well as entities in industries
as diverse as fashion, pharmaceuticals
and cosmetics—do not “make” their
own products. Most people do know
that a lot of manufacturing happens
in low-cost countries; however, they
probably think those manufacturers’
factories belong to the brands
themselves. Discovering otherwise,
people’s reaction is logical: “If a
3. Ibid.
4 For a thorough discussion of this topic in the high-tech industry, see From Silicon Valley to
Singapore by David McKendrick, Richard Doner & Stephan Haggar
Competence
3
10 11 12
Business
4
Competence
4
manufacturer does not manufacture,
then what exactly does it do?” In
other words, “if manufacturing is not
a core competency at a manufacturing
company, then what is?”
The rise of outsourced manufacturing
is a complex phenomenon brought on
by many factors.
4
As was the case with
logistics, even companies that wanted
to keep manufacturing operations
in-house came to see that outside
specialists were offering higher levels
of expertise and equal (if not lower)
costs. In response, the manufacturers
started letting subcontractors build
their products, while the manufacturers
themselves focused on engineering,
design, brand management and (in
some cases) supply chain management.
Once again, what had been a core
competency became less (or non) core,
in large part because of the rising
capabilities of external parties rather
than the deficiencies of in-house
manufacturing teams.
7
Figure 2: Outsourcing cost and performance evolution
Outsourced
Service Cost
Service Provider
Cost
First Contracts to
Outsource Function X
A
B C
Outsourcing Function X
Becomes Common Option
Nor are logistics and manufacturing
the only examples of how core
competency definitions evolve.
Information technology, accounting
and payroll also used to be considered
“core” but seldom are now. However,
the most interesting reference point
in the core competency discussion
may be the outsourcing of business
strategy itself. One would think that
defining a firm’s strategy would
be the most core activity of all.
However, most large companies now
employ consultants to help define
their business strategy. In some
cases, consultants conduct the basic
research, analytics and strategy
definition, so clients have only to
select a strategic direction from
among a small set of options. Again,
if someone outside a company can
successfully execute a critical function
such as strategy definition, then why
would most any supply chain function
be considered off limits?
8
Outsourcing Function X
Becomes Default Option
Outsourced Service
Performance
Activities such as forecasting
and inventory planning have
been less subject to outsourcing
trends. However, that is about
to change for the very same
reasons that drove the shifts
in the areas discussed above—
namely, that specialist outsiders
are enhancing their abilities
in these areas at a faster rate
than most in-house teams.
Many of those outsiders also are
reducing the fees they charge
to clients, to the point where
the service providers’ rates are
equal to or even less expensive
than what it costs to maintain
in-house teams. This evolution
is illustrated in Figure 2.
Time
Activities such as forecasting and
inventory planning have been less
subject to the outsourcing trends
outlined above. However, that is
about to change for the very same
reasons that drove the shifts in the
areas discussed above—namely, that
specialist outsiders are enhancing their
abilities in these areas at faster rate
than most in-house teams.
We believe that supply chain
management outsourcing has recently
passed Line A in the evolution depicted
in Figure 2. As a result, outsourcing
will soon become a more common
operational option for supply chain
executives in many companies—even
those known for their supply chain
excellence. At this early stage, there is
a spread in service performance versus
service cost levels among different
providers, but some of these entities
have already passed the breakeven
point, thus making SCM outsourcing
an attractive option for many
companies. We expect that, in the
coming years, more service providers
will pass the breakeven point and that
SCM outsourcing will become more
widely discussed and put into practice
around the world.
The logistics and manufacturing
examples noted above are evidence
that functions previously considered
core eventually became non-core
and were outsourced after service
providers became more proficient than
in-house teams. If this is the case, then
what actually is a “core competency”
in supply chain management?
Our view is that the best definition is
the original one Prahalad and Hamel
suggested—with the addition of two
criteria. Thus, for an activity to be a
core competency within a given supply
chain function, it must satisfy three
conditions:
1. It creates real or perceived
competitive advantage.
2. It cannot be done better at an
acceptable higher cost, or equally well
at a lower cost by an outside specialist.
3. Any increased risk in externalizing
the function is both understood and
manageable.
We call this definition Core
Competency 2.0, and under this
expanded definition, whether a
company should be executing a
function internally or externally
depends not only on whether that
function creates a real or perceived
competitive advantage, but also on
whether an outsourcing services
provider can perform that function
better than the company itself. Our
third criterion is based on the fact
that any externalization of a function
involves risk. So it would be unfair
to compare performance and cost of
an internal operation and an external
operation without considering the
different risks these alternatives pose.
Returning to the example of
forecasting, if a company finds that
an outside specialist can execute this
function better, even at a higher cost
(so long as there is a positive return
on investment on the marginal cost
difference), then the company should
consider outsourcing its forecasting
operations. Likewise, if that same
company finds that a specialist can
perform equally well at a lower cost,
then outsourcing also should be
considered. This is especially true if the
outside specialist plans to invest more
to improve that function than the
company is able to do itself. We will
discuss this last point in more detail
later.
9
3.
Test two: what kind of knowledge
does the function require?
Most companies conduct periodic
process improvement initiatives to
increase supply chain performance
and add capabilities. Some of these
initiatives will fail due to underfunding
or lack of sufficient executive
support. However the most common
reason is generally the absence of
knowledge—the skills and experience
needed to execute the improvement
project or acquire/implement a new
technology. In this section, we will
discuss the different types of supply
chain knowledge that companies must
acquire and retain, and how this supply
chain knowledge dynamic impacts the
decision to outsource a given function.
For the purposes of our analysis,
consider three specific types of supply
chain knowledge:
•     Functional    Knowledge,    such    as
statistics, network dynamics and
production optimization.
10
•     Industr y    Knowledge,    such    as
customer demand patterns, product
lifecycles and material controls.
•     Internal    Company    Knowledge,
such as legacy systems, inventory
strategies and company policies.
Functional Knowledge is specific
to a discipline but independent of
any particular industry or company.
Examples of this kind of knowledge are
abstract (such as math and statistics),
applied (such as engineering or
biotech) or procedural (such as project
management and planning).
Functional Knowledge is acquired
first through formal education:
college, graduate school, certification
programs, training, etc. Indeed, formal
education plays the most important
role in the acquisition of abstract
Functional Knowledge, and thus it
is very difficult to develop this type
of knowledge internally within a
company. For this reason, companies
hire people with the required
educational credentials to perform
tasks that require abstract Functional
Knowledge.
Practical experience following formal
education typically complements the
academic base, helping to consolidate
and retain the concepts and skills
an individual acquired in his or her
academic setting. However, practical
experience rarely provides the
theoretical fundamentals required to
really advance Functional Knowledge.
For example, while someone with no
statistics background can be taught
how to input a forecast into a demand
planning system, that person will
not understand what mathematical
functions may be applied to that
forecast as it is merged with others
and integrated into larger demand
patterns.
Industry Knowledge is common to a
group of companies operating within
an industry, such as chemicals or
retail. Supply chain resources working
in these industries require knowledge
that is unique to the products moving
through their supply chains. For
example, to manage the production
of chemicals, employees need to
know the general concepts of the
manufacturing function, but they also
must be familiar with industry-specific
aspects, such as chemical by-products
and co-products. Furthermore,
the manufacturing of chemicals
often requires handling hazardous
materials whose use is governed by
environmental regulations. In effect,
the knowledge of how chemicals are
made is almost always acquired in
an industrial, not academic, setting.
Other industries, such as paper and
steel manufacturing, may share many
substance-related issues seen in
chemicals manufacturing, but they
will face other complexities and
regulations that are specific to paper
or steel production.
Internal Company Knowledge is
specific to each company. Examples
include: relationships with suppliers
and customers; subject matter experts
with particular insights that are
not widely known or documented;
experience with home-grown tools,
internal processes and approvals; and
political or organizational challenges
and how to deal with them. These
types of knowledge can be acquired
only through experience within a
particular company. There is no
external education or past experience
that can replace internal company
knowledge. Despite these unique
attributes, it is our experience that
internal company knowledge is rarely
documented properly: companies
depend heavily on the people who
have it in their heads. When these
resources leave, the knowledge often
gets lost, which generates unexpected
disruptions in process performance. Of
course, some companies do make an
effort to formally document internal
company knowledge. However, they
are aware that it is virtually impossible
to document each person’s knowledge
and every nuance of daily operations.
To achieve high performance in supply
chain management, companies need all
three types of knowledge. They need
to understand what each capability
means and involves, what constitutes
the optimal mix of skills, and how
they can best acquire or develop the
complete set of required skills. For
example, if a retail company wants
to implement a statistical forecasting
function, it will have to acquire
talent with statistical and forecasting
skills. Implementing a sophisticated
forecasting tool and setting up the
right forecasting process will not
be enough without the right team
to leverage the technology and
manage the process. In this case, the
company could be tempted to put
its current planners in charge of the
new forecasting process and tool.
However, given that new abstract
Functional Knowledge is required,
and that abstract knowledge is best
acquired through formal education,
it is quite likely that the knowledge
required by the new process/tool
and the knowledge available within
the team will not align. When this
happens, the tool, the implementation
or the process are often blamed, since
it is difficult for a company to realize
that not having the right people with
the required skills could have been the
cause of the failure. This is why system
implementations without the right
teams often fail or (at a minimum)
don’t deliver the expected results.
Companies also should know how each
type of knowledge is obtained so they
can invest in the right methodology
to acquire it. Continuing with the
same example, an organization may be
tempted to send its current planners
to statistics training to fill the gap in
skill sets required to manage a new
forecasting process. However, it is
unlikely that a short statistics course
will provide planners with the depth
of statistical knowledge needed to
maximize performance. Similarly, a
company whose demand depends
highly on a few government customers
could easily err by hiring a very
advanced statistician or forecasting
expert to run the forecasting process.
The reason is that the variability
of the forecast will depend mainly
on decisions made by those few
customers. In effect, company-specific
knowledge (e.g., the company’s
customer buying behavior) is key —
potentially more relevant than the
functional forecasting knowledge.
Thus the company might be better
off teaching forecasting techniques
to internal employees who already
understand the entity’s customers.
In summary, recognizing the types
of knowledge required to perform
each process allows companies to
understand the mix of knowledge they
need to optimize key supply chain
processes, and to make the right
investments to acquire or develop
knowledge in the most effective way.
Unfortunately, even when companies
know the types of knowledge they
need and how to acquire them,
acquisition and retention of such
knowledge remains challenging.
This is yet another reason why more
companies are considering outsourcing
various supply chain functions.
In addition, talent attraction and
retention are especially difficult
when a particular set of Functional
Knowledge is not critical for
advancement in a company. Consider
a retail company with complex
demand-management challenges that
is struggling to attract and/or retain
talent with these critical skills. Since
it is rare for a statistician to have a
clear career path to a senior executive
position in retail, a highly-trained
individual is less likely to find the retail
position attractive. Instead, the person
may be more drawn to a company
in which statisticians are valued as
revenue generators, such as a market
analysis firm, forecasting software
vendor or supply chain services
provider.
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Figure 3: Relationships among knowledge types and the outsourcing decision
Highly Required
Not Relevant
Internally-Dependent Knowledge: Systems, Customers, etc.
1. Do not outsource
• Company Knowledge impossible to replicate
• Sophisticated Functional or Industry Knowledge not required
• Regulatory constraints prohibit outsourcing
• If function must be outsourced, re-engineer to reduce
dependency on internal knowledge (e.g., by adopting external
standard) and plan for 3rd party learning curve
• Examples: Regulated materials documentation
2. Outsource for cost
• Capabilities and knowledge are not complex and learning
curve should be short
• Offshore to reduce cost of operation
• Examples: Tactical procurement support, product data
maintenance, basic analytics
Externally-Dependent Knowledge: Functional, Industry, etc.
On the other hand, internal company
knowledge is very hard to transfer
from company to company. For
example, the knowledge of a particular
home grown software tool cannot be
applied in a company that does not use
that tool. Thus knowledge of that tool
does not qualify an employee to do a
similar job in a different company. On
the positive side, deep knowledge of
a company’s products and processes
are strong assets for internal
advancement.
From a skills-acquisition perspective,
Industry Knowledge is a mixed case.
Important areas of Industry Knowledge
are developed inside each company
and companies have a special interest
in conserving these (and in ensuring
that competitors do not acquire them).
Also, there is Industry Knowledge that
is enhanced by working with multiple
companies in the same industry.
In this case, companies benefit by
hiring experts who have worked at
12
4. Outsource for performance
• Partner with service provider and set up a collaborative
process that leverages partner’s functional skills and the
company’s internal knowledge
• Minimize learning curve on both sides
• Partner on-site presence typically required
• Examples: Replenishment management for retail
operations, product forecasting in short lifecycle markets
3. Outsource for performance
• Outsource to service provider with demonstrated skills in
function and/or industry
• It will typically be more expensive and less successful to
develop sophisticated Functional Knowledge internally
• Examples: Advanced statistical analytics, advanced
inventory optimization, global transportation
management
Not Relevant Highly Required
competitors or in related industries,
and who would bring knowledge of
leading practices. This is one reason
why consultants can be so valuable:
they represent a way to leverage
Industry Knowledge without having to
hire experts from other companies.
In conclusion, when considering
whether to outsource a supply
chain function, one critical test is
understanding the fundamental
knowledge basis of that activity:
functional, industry or company-based.
This relationship between knowledge
type and the outsourcing decision is
summarized in Figure 3.
If a particular supply chain activity
depends on knowledge that is
function-based, then a top-notch
service company probably will be
more likely to attract and retain the
best people in that field. As a result,
outsourcing this function may be a
logical decision since there is a strong
chance that the services provider
employs the “best of the best.” If the
activity depends mostly on Industry
Knowledge, then an external services
provider with deep industry experience
may again be a logical option.
Only in the case where an activity
depends mostly on company-specific
knowledge might the choice favor
keeping the function in-house.
Only in the case where an
activity depends mostly on
company-specific knowledge
might the choice favor keeping
the function in-house.
In the section that follows, we argue
that it is in the area of Functional
Knowledge that outsourcing services
providers have the greatest economic
incentive to improve performance of a
supply chain activity.
13
4.
Test three: who will improve the
function most in the future?
Consider the dilemma faced by a
supply chain executive who takes over
a poorly-performing organization.
He completes the analysis described
above and decides that the most
critical activities depend primarily
on functional knowledge. More
specifically, what the executive needs
most are people who understand
complex multi-echelon inventory
optimization mathematics and
statistical forecasting. In our view,
what should happen next is a classic
“make versus buy” analysis.
•     “Make”    implies    that    the    company
owns the resources with the
required knowledge (hired from
outside or internally developed) and
assumes the responsibility and risk
of managing those resources to
maximize the value and benefits the
talent is expected to contribute.
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•     “Buy”    implies    that    the    company
realizes the results and benefits
generated by such talent by
engaging a service, such as
consulting, outsourced analytics or
outsourced business processes.
The case for “make” has been made
many times in many ways. However,
the case for “buy” is largely new to
areas such as forecasting and supply
planning, and we believe there are
several reasons why this alternative
is not just a valid option for many
companies but actually a preferred
approach. Below are several reasons
for this conclusion:
1. Third party services providers
are better prepared to deliver high
performance in operations that
require deep functional knowledge.
Third party services providers focused
on a function (e.g., forecasting,
inventory management, supply chain
management) can create the right
environment to attract and retain
experts. Because they help to generate
revenue, subject matter experts have a
clear career path with the third party
service provider.
2. For the implementation of new
supply chain capabilities, companies
frequently face implementation risks,
cost overruns, extended timelines and
requests for functionality that is not
needed at present but may be needed
sometime in the future. By contrast,
third party services providers have
the advantage of lessons learned
from multiple implementations, and
thus may be able to shorten timeto-value
and
eliminate
much
of the

implementation
risk.

3. Third party services providers can
take advantage of economies of scale.
An advanced statistician may be
required only a fraction of the time
at a retail company, so it is hard to
justify a full-time position. However,
the third party services provider
can assign the functional expert to
multiple projects and clients and thus
divide the cost among them.
4. Third party services providers often
have valuable industry knowledge
because of their lengthy exposure
to multiple companies within
an industry. Third party services
providers usually specialize in specific
functions and organize their teams
along industries to create industry
subject matter experts. These entities
therefore have a mix of industry
knowledge that internal company
talent can rarely match, since the
latter are exposed mainly to the
realities and practices of their one
employer.
5. Third party services providers can
be a particularly preferable choice
if their client has positioned supply
chain expertise as a source of profit
to be maximized rather than a cost to
be minimized. Most in-house supply
chain teams struggle to acquire funds
to invest in new skills and technology.
However, a world-class service firm
will make these investments more
readily, since it sees those costs as
investments for which there is a direct
and measurable revenue stream.
It should be acknowledged that inhouse
operations
may
be
a superior

choice
when
internal
company

knowledge
is
a key
leverage
point.

After
all,
internal
knowledge
is
not

repeatable
across
multiple
clients

and
thus
economies
of scale
and
past

learning
curves
do not
present
an

advantage
for
a third
party
services

provider.
However,
this
scenario
is

comparatively
infrequent;
instead,

most
companies
seeking
to
improve

supply chain performance are likely
to determine that outsourcing’s
strengths far outpace its weaknesses.
15
5.
Test four: what is the
externalization risk?
Perhaps the most critical issue
that arises in any discussion
about outsourcing a supply chain
management function is the issue of
risk. Using forecasting as an example,
this issue typically is summarized by
two logical questions:
1. Why should I risk letting an outsider
do something as complicated as (say)
forecasting demand for my products?
2. Who is liable if a forecast created
for me by an outside entity is wrong,
and my company loses sales as a
result?
Point 1 might accurately be deemed
“execution risk”: the fear that a
partner will not be able to execute the
function for which it was contracted.
This concern is legitimate. However,
in Accenture’s view, the real issue
is not the failure of the services
provider but whether that firm has a
16
higher probability of failure than the
organization that hired it. After all,
internal teams can (and do) fall short
as well.
Direct Risk in Supply Chain
Outsourcing
To answer the first question more
fully, consider the five potential causes
of functional failure in supply chain
management noted in Figure 4. Of
these five, only one is potentially more
prevalent in an outsourcing context:
“incomplete or wrong information
used to perform a function.” Because
many supply chain processes depend
on company knowledge, failure to
apply or communicate that knowledge
may increase the chance of failure
when performed by an external
partner. An example from retail might
be promotional forecasting: in these
operations, knowing which category
managers really understand the
impact of sales or rebates on final
consumer demand is critical. However,
this determination is seldom easy
to make without several months of
experience. Another example could
be spare parts planning in consumer
electronics—where calculations
are heavily tied to new product
introductions and products’ end-of-life
cycles. Both these scenarios present
potentially higher risk with a service
partner. But the key to ameliorating
such problems is not complicated:
thorough documentation and constant
communication between client and
service provider can diminish this risk
to a level similar to that encountered
by an in-house team.
Figure 4: Supply chain outsourcing risk drivers
Risk Driver Higher  Direct Risk in External Service Partner?
External Disruption, e.g.,
•     Weather    disruption
•     Supplier    quality    failure
•     Product    launch    failure
System Failure, e.g.,
•     Crash    in    planning    system
•     Bad    data    results    in    un-usable    production    plan
Process Failure, e.g.,
•     Incorrect    calculations
•     Failure    to    execute    a    process    correctly
Indirect Risk in Supply Chain
Outsourcing
Along with direct risks, there also are
indirect risks involved in any decision
to outsource. Examples include:
•     Bankruptcy    of    the    ser vice    provider.
•     Sensitive    information    not    handled
correctly.
•     High    turnover    in    ser vice    provider
staff.
•     Commitment    of    the    ser vice    provider
to supply chain management
outsourcing as a long-term strategy.
•     Poor    chemistr y/working    relationship
between client and service provider.
•     Challenges    posed    by    extended
time differences and geographical
dispersion of teams.
No (Risk level is identical for both external and internal teams)
No (Risk level is probably lower for external teams)
No (Risk level is identical for both external and internal teams)
•     Failure    to    adequately    update    required    skill    sets No (Risk level is higher in most internal teams)
•     Lack    of    sufficient    Company    Knowledge,    e.g.,
promotion/discount impact on customer behavior
Yes (Risk level is probably higher in most external teams)
It may not be possible to fully
eliminate these risks; however, they
can be managed at an acceptable
level if the relationship is anchored
by committed, communicating and
highly competent third parties and
framed by an appropriate operating
model. Moreover, it is Accenture’s
experience that, in areas such as data
security, outsourcing can actually
increase the level of rigor within client
organizations.
Liability in Supply Chain
Outsourcing
In the outsourcing arena, “who is
liable when something goes wrong?”
is a viable concern. Imagine that
a third party forecasts X amount
of sales for a fashion retailer and,
based on that forecast, the retailer
only stocks Y levels of merchandise.
When the merchandise reaches the
store, demand far exceeds supply.
Who bears responsibility for the lost
(missed) sales?  Or perhaps a third
party is inaccurate in its planning and
purchasing of MRO materials for a
manufacturer?
These examples might seem to suggest
that outsourcing a function such
as sales forecasting or spare parts
management is inadvisable. However,
evidence and experience suggest that
this is not the case. Moreover, the
actual process of determining liability
can be very useful to both sides.
Consider the methodology outlined
in Figure 5: a formalized approach to
determining “degrees of separation”
between output and outcome.
17
Figure 5: A high-level liability definition model
1: Define process
and process
inputs/outputs
To understand the degrees of
separation concept better, consider
the case of an electronics company
that outsources spare parts planning
to a third party services provider.
The services provider collects return
and warranty data from its client’s
repair centers, combines the data
with product launch and termination
plans, and creates a parts plan that
it provides to the client and its main
suppliers. So what happens if the
third party orders too many or too
few parts on behalf of the repair
centers? Referring to Figure 5, the
service output in this scenario is the
forecast, while the service outcome
is the client’s inventory level, which
ideally is neither too low (which would
cause service disruptions) nor too high
(which would elevate inventory costs).
The key is determining the degrees of
separation between the output and the
outcome. Two potential analysis results
are presented in Figure 6.
18
2: Define desired
business outcome
3: Define “degrees
of separation“
between output and
outcome
Referring to Figure 6, it is not hard to
see that the relationship between the
service provider’s output (forecast)
and the client’s service outcome
(inventory levels) is more closely
linked in Scenario A than in Scenario
B. Consequently, one would expect
that there is greater likelihood of risk/
liability transfer from client to service
provider by applying Scenario A.
However, this is not always the case.
In outsourced supply chain contracts,
clients sometimes opt to not transfer
risk, even when they are able to do
so. This reluctance has several causes,
not the least of which is that service
providers will usually seek a premium
for agreeing to a risk transfer. More
often than not, it is simpler to develop
a performance mechanism based on
service level targets and incentives/
disincentives.
4: Build service
liability model on
basis of “outputoutcome”
analysis
Whose Risk Is it Anyway?
The question of risk and liability is
extremely valid. However, Accenture’s
view is that not only can the issue
be resolved, but that the resolution
process often produces additional
benefits. For example, the kind of
analysis illustrated above can help
companies identify the real drivers of
supply chain performance and better
understand the relationship between
a supply chain function and specific
business outcomes such as product
sales, working capital requirements
and new product introductions. In the
end, the supply chain executive must
understand the drivers of both internal
and external risk. But he or she should
not assume that externalizing any
function automatically entails higher
degrees of risk.
Figure 6: Output-outcome analysis results
Scenario A Scenario B
Output: Spare parts forecast created by service partner
Degree 1: Forecast accepted by client with (at most) only
minor deviations within 72 hours
Degree 2: Forecast accepted by repair centers and
suppliers with no changes within 24 hours
Degree 3: Suppliers send forecasted materials with (at
most) only minor deviations from forecast within 7 days
Degree 4: Materials received in repair centers in good
condition and put into stock in accordance with forecast
within 24 hours
Outcome: Inventory of materials calculated per a given
period becomes reality in repair centers within 7 days of
Output
Output: Spare parts forecast created by service partner
Degree 1: Forecast accepted by client two weeks later but
with major changes
Degree 2: Forecast accepted by repair centers one week
later
Degree 3: Forecast accepted by suppliers two weeks later
Degree 4: Suppliers send forecasted materials with often
significant deviations from forecast
Degree 5:  Suppliers send forecasted materials in
shipments that often arrive weeks late
Degree 6: Materials received in repair centers in various
conditions
Degree 7: Materials put into stock in as late as two
months after original forecast
Outcome: Inventory of materials calculated per a given
period becomes reality in repair centers only months after
Output is created and then with changes
19
6.
Supply Chain Management
Outsourcing Examples
Fashion Retailing
A North American retailer specializing
in women’s fashion and household
products has more than 1,000 retail
outlets. With the help of a third
party services provider, the company
implemented a state-of-the-art
statistical forecasting software
package. However, the company was
unable to train or recruit enough
people to master (and thus leverage)
the new software. For this reason,
it opted to outsource forecasting
to the same services provider. The
“externalization decision logic” was
clear:
•     Is    forecasting    a    core    competency
in our company? No; others can
perform it better than we currently
can.
•     Does    the    function    depend    on
company knowledge? No; it depends
primarily on functional knowledge of
mathematics and statistics.
20
•     Are    we    likely    to    invest    heavily    in
forecasting in the future? No; the
major investment was already made
and there are no plans for further
investments.
•     Does    externalizing    mean    higher    risk
of failure? No; since the forecasting
services provider implemented the
system, it clearly knows best how to
make it work.
The services provider that implemented
the forecasting system subsequently
deployed an expert forecasting team
staffed partly at the client’s location in
North America and partly in India. The
team successfully managed statistical
forecasting for three years and the
contract was recently renewed and
expanded to cover demand analytics.
High-Tech Manufacturing
A global consumer electronics
company based in Japan set out to
implement a spare parts planning
system for its European service
operations. However, the project was
over budget and behind schedule, and
the company was having difficulty
finding staff in central Europe to
execute the function once it was
implemented. Like the fashion
retailer, the electronics company’s
“externalization decision logic” was
straightforward:
•     Is    spare    parts    planning    a    core
competency at our company? No;
others can perform it better than we
currently can.
•     Does    the    function    depend    on
company knowledge? No; it depends
primarily on functional knowledge
of mathematics and transport
optimization.
•     Are    we    likely    to    invest    heavily    in
spare parts planning in the future?
No; the major investment was the
software implementation.
•     Does    externalizing    mean    higher
risk of failure? No; the company
was already facing a high risk of
implementation failure.
An outsourcing services provider with
deep skills in spare parts planning
was contracted and the company’s
internal software implementation
was halted. The services provider
licensed a different spare parts
planning application, implemented it,
and then staffed a team in Europe to
forecast and plan spare parts for its
client’s repair facilities. The contract’s
financials were based on parts volume
and driven by the performance of the
outsourced planning team. Three years
later, the relationship has been a great
success and the contract was recently
renewed and expanded to include
additional products across Europe.
Chemicals
A large European chemicals
manufacturer had no advanced
forecasting systems or team, nor was
it equipped to handle global demandsupply
synchronization.
Sourcing
and

transport
of raw
materials
(mostly

from
China)
was
neither
optimized

nor
synchronized
with
production

demand
in
Europe
and
North
America.

To
reach
an
outsourcing
decision,
the

company
addressed
key
externalization

decisions,
such
as:

•     Are    advanced    forecasting    and
demand-supply synchronization
core competencies? No; this activity
does not provide a perceived or real
competitive advantage.
•     Does    the    function    depend    on
company knowledge? No; it depends
primarily on functional knowledge
of mathematics and transport
optimization.
•     Will    we    really    invest    in    the    function
in the future? No; the company did
not want to spend money on new
systems or staff.
•     Does    externalizing    mean    higher
risk of failure? Possibly; which is
why the outsourcing arrangement
began with a full-scope, six-month
transition period, during which the
internal/external model was defined,
implemented and refined.
Two years later, the external team
is performing at a high level and
the company has asked the service
provider to assume long-term
responsibility for this function.
Moreover, the company and service
provider have begun to refine the
service in other ways, such as
accounting for carbon impact to help
confirm that the operation meets
the company’s environmental supply
chain standards. This green investment
was driven primarily by the service
provider.
21
7.
The future of outsourcing and
outsourcing decision making
Supply chain executives often ask us if
there is a “decision tree” that can help
a company determine if a function
is worth “externalizing.” Figure 7
illustrates this sort of “externalization
decision logic.”
Obviously, a great many factors
influence an outsourcing decision.
However, the decision tree is a good
place to begin because it can guide
high-level options for improving a
flawed function, determining whether
to “build or buy” needed capabilities,
and deciding if significant supply
chain investments are justified, given
a company’s long-term strategic
direction.
We also recognize that corporate
culture and external (e.g., industry
and market) factors influence the
outsourcing decision process as
much (or more) than cost and current
performance; and that these drivers
cannot easily be mapped. However, it
still is possible to chart the state of
22
supply chain management outsourcing
(as distinct from areas such as
strategic sourcing or logistics). This
“state” is presented in Figure 8.
Based on the trends implied by the
graphic—combined with evidence
presented in this paper—it should not
be surprising that more and more
world-class companies are outsourcing
supply chain management functions
such as product forecasting, retail
replenishment, inventory management
and spare parts planning. At first
glance, some supply chain practitioners
may perceive this evolution as a threat.
But a closer look could reveal to them
the strong potential for turning one or
several supply chain functions into a
competitive weapon or even a revenue
generator. This is a profound change
that can open new career paths, create
broader recognition of supply chain
management’s power and even create
stronger companies that subsequently
become leaders in internal as well as
market growth.
The foundation is being set for
a world where virtually any
operational function—from
logistics to manufacturing to
engineering—can, with the right
effort, be performed equally well
inside or outside an organization.
Figure 7: Externalization decision logic
1: Is it a Core
Competency
2.0?
2: Does it
depend most
on purely
Company
Knowledge?
Outsourcing’s evolution also will
be significant because it could
generate new options for executives
and operational strategists who,
until now, have had to depend
exclusively on internal organizations
to achieve excellence in supply
chain management functions.
Already, the foundation is being
set for a world where virtually any
operational function—from logistics
to manufacturing to engineering—
can, with the right effort, be
performed equally well inside or
outside an organization. As this
happens, supply chain strategists will
discover more (and more impactful)
operating models. This freedom will
allow entirely new companies to be
built—companies that operate in
fundamentally new ways. For all these
reason, supply chain outsourcing will
ultimately be a positive force that
will continue to move supply chain
management toward the forefront of
business strategy.
3: Will we
really invest
and improve
this function
in the future?
Figure 8: Current state of SCM outsourcing.
4: Does
externalizing
really mean
higher risk of
failure?
N N N N
Y Y Y Y
Keep In-HouseKeep In-HouseKeep In-House
Outsourced
Service Cost
Service Provider
Cost
First Contracts to
Outsource Function X
SCM
Outsourcing
Keep In-House
A
C
Outsourcing Function X
Becomes Common Option
B
MFG
Outsourcing
Outsourcing Function X
Becomes Default Option
Outsource
Logistics
Outsourcing
Outsourced Service
Performance
Time
23
About The Authors
Carlos A. Alvarenga is the global lead
of Accenture Supply Chain Services.
He is also a senior research fellow
at the Robert H. Smith School of
Business at the University of Maryland.
Pancho Malmierca is a senior solution
architect with Accenture Supply Chain
Services.
Copyright
2010 Accenture
All rights reserved.
©
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
ACC10-1386
About Accenture
Accenture is a global management
consulting, technology services
and outsourcing company, with
more than 190,000 people serving
clients in more than 120 countries.
Combining unparalleled experience,
comprehensive capabilities across all
industries and business functions,
and extensive research on the world’s
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses
and governments. The company
generated net revenues of US$21.58
billion for the fiscal year ended
Aug. 31, 2009.  Its home page is
www.accenture.com.

SOLUTION

The two Case studies chosen by me are Fashion retailing and High-Tech Manufacturing.

1^st Case Study: Fashion Retailing

According to Barney and Hesterley (2006) the VRIO Framework involves deep analysis of the internal environment of the Fashion Retailing Industry. Therefore questions which need to be asked are:

1. The question of Value: If we consider the outsourcing of statistical forecasting software to another firm, it does not pose any kind of environmental threat or exploit any environmental opportunity. Since Fashion retailing already tries to implement the forecasting by hiring and training its own employees and found it unsuccessful. This clearly indicates that Statistical forecasting is not the forte of Fashion Retailing. The main forte or core competency of this industry is to design women clothes and household accessories and supply them on time to the huge chain of retail stores it has all over the world.

2. The question of Rarity: Statistical forecasting which has been outsourced by Fashion Retailing to another firm does not have very huge market. There are small numbers of firms which control this genre of forecasting and moreover the forecasting is not related to fashion retailing at all which is the core competency of the company. A statistical forecasting company would just need data’s, statistics and will need to apply some functional knowledge of statistics and mathematics to the facts and figures collected from the fashion Retailing Company and deliver the required Results.

3. The question of Imitability: The Fashion Retailing firm will not face any kind of cost disadvantage in developing it on their own. The reason being they have already invested good amount of money in buying and trying to implement the state-of-art forecasting software. So in near future they do not have any plans to invest in the area of statistical forecasting themselves.

4. The question of Organization: Yes the fashion retailing firm is ready to support and get exploited its valuable, rare and costly-to-imitate resources with the outsourced company. There is no risk of failing or falling flat for the fashion retailing industry, the reason being it is sharing just the data and the figures and not the designs and various trade secrets which might harm it in near future.

The reason being the service provider who is implementing this statistical forecasting does not have any competition with the fashion retailing industry.

Thus we can very well see that in order to gain competitive advantage for the forecasting service provider it has to get access to the valuable, rare, costly to imitate and properly organized resources of the fashion retailing, which is not being done here and that is the reason why the VRIO findings are the same for me and as suggested by Accenture.

2^nd Case Study: High-Tech Manufacturing

1. The Question of Value: Spare parts planning are not a valuable or rather the core competency of the high-tech manufacturing company which has been outsourced. Had it tried to outsource its core competency which is High-tech manufacturing it would have been disadvantageous for the company.

2. The question of Rarity:  The spare parts planning do not require any of the tricks of the trade or the latest technology and secrets used by the High-Tech manufacturing company. The spare parts planning are totally dependent on the statistical data and the mathematical functions of the High-Tech manufacturing company. SO again there is no competitive disadvantage for the Core Company.

3. The question of Imitability: The High-Tech Company will not face any kind of cost disadvantage as suggested by Barney and Hesterley (2006), in the VRIO framework as they have stopped the internal software implementation. Thus they will be saving upon the cost of software implementation and there are no future plans of investing in spare parts planning by High-Tech manufacturing company.

4. The question of Organization:  Sharing the statistical and mathematical data is fewer drawbacks than going through the failure of implementation of internal software implementation.

Thus here we see that the spare parts planning firm is not using any valuable , rare or not costly to imitate statistical data only of the High-tech manufacturing firm that why the danger of facing any kind of competitive advantage for the main firm is null and void.

In both the cases the findings are the same as done by the Accenture because according to them and me the core competencies of both the firms are the same as I have found. In case of fashion retailing the care competency is fashion designing and the women clothes along with household times it makes. Since nothing related to that is being shred while outsourcing statistical forecasting so the firm will not face any competitive disadvantage.

Same way in the case of High-Tech firm too, the core competency of the firm is to manufacture High-Tech products and when it is outsourcing spare parts planning to another firm it will help in saving the risk of facing failure of implementation of software implementation of spare parts planning as suggested by Prahalad & Gary (1990).

References

• Alvarenga, C.A & Malneirca, P, Outsourcing Core Competency: 2.0 the Case for Outsourcing Supply Chain Management, Accenture, 2010.
• Barney, J.B & Hesterley , Firm resources and sustained competitive advantage, Journal of Management 17, 2010, p 101.
• Prahalad, C.K & Hamel, G,the core competence of the corporation, Harvard Business Review, June 1990.

GF93

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