For small businesses especially, outsourcing has become the norm – and for a good reason. Specialized vendors can increase the efficiency of your company so you have the freedom to focus on your core business.
Still, this trend comes with drawbacks. Companies often confuse the outsourcing of business processes with the outsourcing of responsibility. In reality, you are still responsible for the quality and security of your products and data. Of course, outsourcing is often necessary, but external parties expand the scope of your risk, creating new potential vulnerabilities.
Let’s begin with the basics. A third party is an external contractor or vendor that provides products or services to your company. For instance, you may hire an accountant to manage your company’s finances, a cloud service provider for data storage, or supply chain vendors to produce components.
Vendor risk management (VRM) focuses on third-party risk management and planning. The purpose of a VRM program is to provide a framework that can help you to identify, measure, monitor, and mitigate the risks associated with external vendors.
What Are the Risks of Outsourcing?
There are risks in every business. Even the best supply chain management (SCM) program will experience some of the perils of outsourcing. Such as…
Loss of Control
The most significant risk of outsourcing supply chain management is the lack of control.
When you outsource a business process to external agencies, that leaves you with little or no control over it. When that external vendor mismanages the process, the quality of the outsourced service is affected, potentially harming your reputation.
Privacy and Security Concerns
When you outsource to any service organization, you expose all or part of your company’s assets to an outsider. That’s why you must pay attention to privacy, intellectual property, and data protection. This includes copyrights, patents, trade secrets, among others.
Although the odds of theft or a breach are low if you hire a reputable provider, the possibility always exists that the third party will steal or leak valuable information or trade secrets. This concern is magnified when hiring a vendor overseas that doesn’t understand or respect the laws and protections in your country.
Outsourced Product Quality
All companies aspire to deliver quality products as quickly as possible. When you enlist the help of a third party, you have to maintain the same commitments to your customers. When outsourcing, however, correcting a quality failure is often more complicated and takes longer.
Correcting your quality issue may not be the vendor’s top priority, particularly if the vendor has commitments to other clients. Plus, in the case of physical products, transportation of the corrected items will take time, especially if the supplier is overseas.
Business operations become smooth once the company integrates with a supply chain management (SCM) partner, but that transition itself can be a nightmare.
If the service provider sets unrealistic deadlines and appoints unqualified staff, the integration will be problematic. In addition, failures such as delayed inventories, slow distribution, and poor communication can reduce your revenue. In short, outsourcing requires both parties to invest a considerable amount of time and coordination.
The primary motive for outsourcing is to gain a competitive advantage through cost savings and profitability. That goal can suffer if hidden costs arise.
For example, taxes, shipping charges, and other hidden fees can get out of control. Some third-party logistics providers have considerable hidden costs, such as labeling, troubleshooting, and redistribution. To avoid this, only work with suppliers that are transparent with their fees, so you can protect your profit margins.
Thanks to technology, distance has become less of an issue for managing communications. For example, you don’t necessarily need to be concerned about the location of IT equipment if you outsource IT services. Still, you must consider the geolocation of the service provider when outsourcing physical products.
With greater distance, in-person meetings and inspections become more difficult; that forces you to rely on virtual communication services. Scheduling meetings and dealing with time zones can make collaborating with offshore suppliers tricky, resulting in challenges with monitoring performance and productivity.
What Are the Benefits of Outsourcing?
Outsourcing supply chain management helps to minimize costs, focus on your core competencies, meet customer demands more effectively, and have greater flexibility in maintaining and operating your supply chain. These benefits can be far-reaching when outsourcing and SCM activities are managed well.
Focus on Your Core Competencies
It’s easier to focus on your core competencies and future strategy once you’ve outsourced supply and distribution operations to a third party.
Outsourcing certain activities to specialized vendors can give you precious time to develop new ideas, market those ideas, and strengthen customer relationships – all factors that are crucial to long-term success.
Outsourcing SCM Offers a Competitive Advantage
When outsourcing to specialized firms, you can gain access to facilities, knowledge, and capabilities that were initially inaccessible or unaffordable. You then have the opportunity to leverage these resources to stay ahead of your competitors.
Companies can then focus their time, energy, and resources on what they do best: generating better products and services for their customers by outsourcing their supply chain.
When you engage a professional SCM firm, it will use its expertise and experience to help you save money on overhead. Usually, inventory, cold storage, sampling, overhead, and staffing expenses can add up and cause financial strain.
These costs can be cut significantly when working with the proper supply chain partner. The partner will simplify logistics and devise the most cost-effective strategy for lowering the cost of specific tasks. Better inventory management, achieving economies of scale, and transportation optimization may be among the new enhancements.
Meeting Customer Demand
The outsourced supply chain partner will share responsibility for supplying the products demanded by customers. With your guidance, the partner will be responsible for planning raw materials to meet production schedules. Your company can devote more time to growth and brand value creation by offloading these responsibilities to the vendor.
Outsourcing a company’s logistics needs reduces labor risks, as well as the financial risk of an investment in equipment, property, and transportation should your company suffer a downturn. Working with external supply chain partners can help you achieve greater security and control in areas such as compliance, quality, lead times, and inventory levels.
This increased visibility allows you to identify risk areas and take steps to mitigate the impact. For example, you can work with your supply chain partner to reduce lead times, prepare for audits, secure backup suppliers, and optimize safety stocks.
How Can You Safely Outsource Responsibility to Third Parties?
While your vendor may be at fault in a production or delivery glitch, your angry customer won’t see it that way. Instead, you’ll usually bear the brunt of the backlash. So consider these five best practices to outsource your supply chain management responsibly.
Develop a Detailed Contract
A contract between you and your third-party partner is essential. You need to be clear on expectations and how the contract will be monitored and enforced. For example: “Is this service provided on an ongoing basis?” “What are the service-level agreements?” “How are performance measures tracked and reviewed?”
Confirm that your organization has a process or mechanism to oversee your vendors and service providers. Perform regular business reviews and risk assessments to verify ongoing performance and compliance.
Determine Your Risk
Start by researching and cataloging how outsourcing a particular business process leaves you vulnerable. What can you do to protect yourself? What are your vendor’s controls to assure the safety of your data? Identify risks and identify the best way to mitigate them.
Take an Inventory of Your Vendors
Survey department leaders to see which vendors are used in each department and how they are managed. While IT solutions certainly play an essential role in vendor management, it’s not just an IT issue. Every department must play its part in controlling and managing the supply chain partners they work with.
Agree Upon Workflows
Establish workflows to manage and address third-party risks. For instance, mapping out workflows with a responsibility assignment matrix can help you determine roles and responsibilities between your team and the vendor’s team. It will also provide clarity on organization structure and points of contact.
Find the Right Tools for the Job
If you have limited time and resources, prioritize which vendor and risk management tools will provide the most benefits for your efforts. Consider scalable platforms so you can expand your use of features as your supply chain management and outsourcing program evolves.
Manage Third-Party Outsourcing with ZenGRC
ZenGRC is a single, integrated platform that reveals third-party risk across your organization. Don’t waste your time with cumbersome spreadsheets when ZenGRC provides a single source of truth to streamline risk and audit management for all your compliance frameworks.
Whether you’re enhancing an existing supplier risk management program or starting one from scratch, ZenGRC’s scalable interface will help you track risk across your organization. Insightful reporting and dashboards provide valuable information as your supply chain evolves.
Automation and workflow features allow you to efficiently distribute questionnaires and surveys to your suppliers. Risk ratings of vendors based on scored questionnaires offer a clear picture of what your company needs to do to keep threats at bay.
If you’re concerned about managing your outsourcing processes, schedule a demo to learn more about how ZenGRC can help you manage your supply chain risk.