Supply Chain Management: Outsourcing, Offshoring, and Inventory Optimization

Outsourcing

Subcontracting work to a different firm, which could be located within the U.S. or outside the U.S.

Offshoring

Moving work to a different country, which may be under full ownership by the same firm or outsourced to a 3rd party overseas.

Nearshoring

When a business moves its operations to another country located near its home country, usually in the same geographic region.

Reshoring

When a business moves its operations back to its home country.

Benefits of Offshoring

This provides labor-cost savings through lower wages, lower turnover rates, and reduced hiring and training costs. It allows companies to substitute high-cost capital with low-cost labor, utilize capital equipment more extensively by running factories 24/7, and access specialized skills. Ultimately, it lowers the cost of production and gives consumers more affordable goods.

Downsides and Risks of Offshoring

Developing economies face skilled-labor shortages that drive up salaries, and companies face higher shipping costs and mismanagement of inventories. Other risks include poor local infrastructure, intellectual property risk, loss of flexibility, loss of competitive advantage, and higher supply chain disruptions.

Bullwhip Effect

Occurs when slight demand variability is magnified as information moves back upstream in the supply chain.

Causes of the Bullwhip Effect

It is driven by errors in forecasting, un-forecasted sales promotions, sales incentives, and "shortage gaming" by customers who order more than needed to account for shortages. Other causes include lack of supply chain coordination, delayed material or information flow, and overreaction to backlogs.

Impacts of the Bullwhip Effect

This results in excess inventories or stockouts, increased shipping costs from expedited shipping, and increased material costs. It also leads to lengthened lead times, quality problems, poor customer service, and lost sales.

Ways to Minimize the Bullwhip Effect

Companies can improve communication, use Vendor Managed Inventory (VMI), and utilize Radio Frequency Identification (RFID) to streamline inventories. Sharing supply capacity and demand information eliminates gaming, and stabilizing prices with everyday low prices prevents extreme demand variation.

Radio Frequency Identification (RFID)

A technology that uses radio waves to transfer data between a reader and an item, using tags to automatically track goods and inventory throughout the supply chain.

Benefits of RFID

Scanners can read tags from over 100 feet away, and multiple tags can be read simultaneously without human intervention. The tags are reusable, can tolerate harsh environments, and result in fewer stockouts and less theft.

Supplier Scorecard

A "report card" used to assess new and existing suppliers' performance on measures like quality, cost, on-time deliveries, and sustainability.

Benefits of Supplier Scorecards

They help weed out ineffective suppliers, improve supplier communication and coordination, and reduce expensive supplier disruptions and risk.

Cross-Docking

A procedure where goods are shipped from supplier to manufacturer to distribution center to retailer, moving from inbound to outbound trucks within 24-48 hours without ever placing them in long-term storage.

Benefits of Cross-Docking

It reduces holding and warehouse overhead costs as well as costs associated with missing, spoiled, or obsolete items. It also streamlines supply chains and improves visibility of inventories.

Electronic Data Interchange (EDI)

A standardized data-transmittal format for computerized communications between organizations, used to share documents like purchase orders and invoices.

Benefits of EDI

It provides an increased speed of transactions, faster communication, reduced errors, and lower paperwork costs. Indirectly, it provides better coordination and faster delivery times.

Vendor Managed Inventory (VMI)

A partnership where suppliers monitor and replenish inventory for their buyers.

Benefits of VMI

It reduces stockouts, excess inventory, and inventory holding costs. It also minimizes the impacts of the bullwhip effect and reduces customer returns.