Supply chains are where the smart money is when it comes to building competitive advantage. Building a ‘machine’ that blends production, logistics, sales and service for the best in customer satisfaction and enterprise profitability is the way to get ahead. Great supply chains are hard to copy, unlike pricing strategies or even technology. However, great supply chains are sometimes hard to build as well. For reasons of cost reduction or access to resources and know-how that they don’t have in-house, many companies outsource part or even all of their supply chain activity. The risk however often stays within the companies – and it’s been getting bigger and bigger.
In fact, outsourcing already made its way into the top 3 causes of supply chain disruption a couple of years ago. IT and telecoms disruptions were still the top cause, followed by bad weather. Then came outsourcing in third place. Although enterprises may seek to install and enforce severe penalty clauses on outsourcers, the results are likely to be mixed at best. In some situations, no clause can undo the damage of outsourcer failure. The Thailand floods and Japanese tsunami of a few years back have demonstrated that. In other cases, clauses may simply not be accepted. Cloud computing is a case in point. Your supply chain management in the cloud may be run with a hypothetical service level agreement, but the cloud provider that accepts penalty clauses in the event of under-performance remains a rarity.
A better answer is for organisations to work with their outsource suppliers to put adequate business continuity in place. This has several advantages including: business continuity measures that suit the organisation seeking to outsource; and greater prevention of problems instead of firefighting and legal battles afterwards. It can also be the opportunity for organisations to encourage their outsourcing suppliers to adopt processes and practices for greater efficiency and less cost; advantages that can then be passed back to the client organisation as reduced outsourcing fees.