As supply chains become increasingly complex due to the proliferation of commerce channels and higher consumer expectations, businesses are turning to outsourced functions that can deliver on speed, quality and cost.
Insourcing Fulfillment
Many traditional retailers have relied on the belief that controlling more parts of their supply chain will bring costs down. This approach may work in the rarest of cases (see: Amazon). But ultimately this strategy will lead companies away from their core competencies and decrease their overall value to customers.
Disadvantages to insourcing:
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- Resource intensive. As mentioned before, insourcing can lead to cost savings in the long term if companies manage the process strategically and carefully. Most of the time, businesses will end up spending more money when they bring operations in-house because they pay for full-time employees, rent to store inventory and expensive equipment. All these costs can add up quickly!
- Lack of flexibility. One of the most common reasons businesses will bring a function in-house is because they believe they will have greater control. Oftentimes, the complete opposite happens:
- A limited selection of products: If you want to expand your store’s product line, the equipment you invested in may not be able to produce them.
- Inability to scale: What happens if you just executed a successful marketing campaign and demand for your product skyrockets? Your in-house fulfillment may not be able to handle your spike in order volume without overwhelming production capabilities.
- Operational impact due to economic factors: If your facility shuts down due to external factors, such as a global pandemic or a natural disaster, what happens to your orders? You won’t be able to fulfill orders or there will be a significant delay in fulfillment. Either way, you don’t have the redundancy of multiple vendors that can provide seamless fulfillment amidst disruptions.
- Increased errors. The supply chain functions that are brought in-house are usually not a part of a company’s key business differentiators — meaning there is a great risk of making errors and processing orders incorrectly, which will lead to frustrated customers. By concentrating less on logistics, businesses should focus on what they do best — designing, marketing and selling — in order to grow the business.
Outsourcing Fulfillment
Outsourcing fulfillment occurs when a business hires a third-party provider to manage some or all aspects of the logistics process, which can include storing inventory, fulfillment of orders, producing items and shipping orders. An outsourcing provider should be a fellow business partner that understands your goals, objectives and values, and should not be a cut-and-dry transactional supplier. At the end of the day, they should complement and enhance your needs so that you can spend more time on your core competencies and ultimately grow your business.
The Power of Outsourcing: Netflix x AWS Case Study
Most people know Netflix as one of the popular streaming platforms, but did you know that they are one of the highest users of global internet traffic? In 2018, Netflix accounted for 15% of global internet bandwidth, which was the number-one spot. While the data hasn’t been updated to reflect usage during the COVID-19 pandemic, when streaming skyrocketed as people stayed at home, it’s safe to assume that number has most likely increased.
As one of the biggest users of the internet, one might expect Netflix to have an in-house server network in order to maintain control and costs. Instead, it utilizes Amazon Web Services (AWS) for nearly all its computing and storage needs, including databases, analytics, recommendation engines, video transcoding and more.
Netflix partners with AWS so that it can focus on its core value: creating and curating content. If Netflix was too busy trying to efficiently distribute internet data on a global redundant basis, it would be heavily under-utilizing its core delivery.
By outsourcing key logistical and complex capabilities to AWS, Netflix has been able to improve customer experience, increase efficiency, and reduce costs (Amazon). According to John Bennett, a Senior Software Engineer at Netflix, “Netflix is heavily invested in AWS in part because it abstracts the underlying network, so we don’t have to deal with switches and routers. We’re monitoring, analyzing, and optimizing at a higher level of the stack — in ways we would never even consider if we were running our own data centers.”
Advantages of Outsourcing
- Cost-effective shipping and handling: Outsourcing can save your business a large amount of money over time. When you use a fulfillment provider such as Gooten to handle your supply chain, it generally takes a margin only when you make a sale so that you aren’t paying up-front fees. This cost structure takes everything you need into account so that you never need to worry about unexpected charges hitting your bottom line. Additionally, most fulfillment providers get reduced shipping rates from preferred carriers and can pass those savings on to you.
- Greater Efficiencies: Outsourcing saves businesses a ton of time and money by streamlining their operations. Instead of focusing energy on fulfilling orders or managing shipping, businesses can concentrate on what they do best — designing, marketing, and selling.
- Scalability: Being able to focus on revenue-driving activities allows businesses to properly and more effectively scale. Executives don’t have to worry about hiring additional full-time staff or investing in new equipment or warehouse space. If volume increases or the company wants to add new products, it can use an outsourced provider to help support growth without any additional risk or costs.
A Hybrid Approach
To insource or to outsource has long been considered an either/or decision. However, in the past decade, businesses, especially traditional retailers, have started to understand the value of a hybrid model, where they can still remain in control of certain operational functions while leveraging a third-party provider for other or newer capabilities.
As Courtney Rogerson, a Senior Principal Analyst at Gartner Supply Chain Practice, states, “The question no longer is whether to outsource, but what and how much to outsource.”
With the power of a smart supply chain, retailers can get the best of both worlds through hybrid manufacturing. Predictive technology can automatically fulfill and route orders for bulk production or on-demand, depending on the company’s needs and requirements.
Hybrid Insourcing & Outsourcing Case Study for Retailers
A big-box retailer recently came to Gooten to help incorporate on-demand manufacturing techniques in order to quickly go to market with trending designs and products. While the retailer still used its legacy apparel supplier for bulk inventory, Gooten was able to step in and automatically route and fulfill orders based on production type: bulk or on-demand. This hybrid approach allowed the company to maintain its current operations and stay relevant to its audience without making a ton of investment in new technology and equipment. A win-win situation!
Conclusion
Many businesses are starting to understand the value of outsourcing their supply chain. It’s also never been easier to implement, especially when the company utilizes a hybrid approach that integrates directly into its current infrastructure. There’s no need to start from scratch or completely replace a well-oiled machine. Outsourcing some or all of your operations can help you build the perfect supply chain for your business so that you can focus on what you do best.
Dale Manning is VP of Business Development and Strategic Partnerships at Gooten, a globally distributed company that operates a smart supply chain for brands and retailers that are looking to utilize print on-demand manufacturing to transform the way they do business.
