The Recession and the Outsourced Supply Chain

Companies that outsource manufacturing, logistics, call centers, IT support, and various back office functions can be better equipped to ride out a recession, particularly if the payments are transaction based.  Less demand means fewer transaction fees associated with supply chain services.  These companies have minimized their fixed overhead costs, and their warehousing, transportation, and manufacturing costs become variable costs that are strongly correlated to new orders.  This becomes even truer if your company can negotiate vendor owned inventory agreements with suppliers. 

This strategy, however, will not work for everyone, and it is particularly ineffective for companies whose value proposition is being a low cost provider.  Walmart, for example, owns and operates both a large fleet of trucks and a large network of warehouses.  They incur the fixed overhead costs, but because they operate their logistics assets very effectively, they can run their warehouses more cost effectively (or at least, as cost-effectively) than a logistics service provider could.  Interestingly, because Walmart is a low cost retailer, they have gained market share during this recession and are performing relatively well financially (the company recently reported earnings per share at the high end of the its guidance to Wall Street).

But for companies that compete on product innovations or service, the outsourced supply chain can provide real protection during a recession, but not without risks.  Imagine a key contract manufacturing or LSP partner going out of business.  This could be ruinous for companies that put “all of their eggs in one basket.”  Obviously, companies should monitor the financial health of key partners.  But even if a company does this and becomes alarmed that a key partner is becoming financially unviable,  finding, qualifying, and ramping up a new relationship is not quick or easy.  In fact, in these situations, it is often less costly to invest resources to ensure that the partner survives the recession.

In addition, managing outsourced supply chains can make it harder to have an effective Sales & Operations Planning process.  The S&OP process is used to balance supply with demand.  If you are able to successfully forecast less demand, but can’t expeditiously ramp down the upstream supply provided by manufacturing partners, you can end up with excess inventory.  Further, if your contract manufacturer is not good at lean processes, building in smaller lots more closely aligned with demand, they are apt to end up with excess raw materials, and those costs have a way of eventually migrating downstream, one way or another.  Further, in all fairness to offshore contract manufacturers, it is difficult for offshore partners to get truly lean because of the long lead times.

In short, like so many things, the benefits and tradeoffs of having an outsourced supply chain during a recession vary by company and supply chain strategy.

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