Similar to all areas where the shortage of skilled workers is taking on a dominant role, the logistics industry is also undergoing an increasingly rapid transformation: warehouse logistics and the planning of these naturally play a decisive role. With this article we would like to give some food for thought:
Does outsourcing or insourcing play a decisive role and are the advantages of internally realized logistics processes really so great that a changeover is worthwhile? Is the trend moving in the direction of insourcing? Are the days of outsourcing really over? We will clarify this and much more in this blog post!
Insourcing is a business strategy in which a company takes responsibility for tasks, services or functions that were typically performed by external service providers or suppliers and performs them internally. In other words: Insourcing means that the company uses its own internal resources and employee:s to perform tasks or services that were previously performed by external companies. These tasks are again declared to be the company's own core competence.
Outsourcing, also referred to in German as "Auslagerung" or "external procurement", refers from a business perspective to outsourcing certain tasks or structures to external suppliers or service providers, which are then no longer managed internally within the company. Outsourcing is therefore a widespread strategy for being able to concentrate better on the core area of one's own business activities, e.g. in terms of warehouse logistics.
Pros and cons of logistics outsourcing
Where does outsourcing come from and why does it make sense?
The trend towards outsourcing and outsourcing one's logistics services to external service providers started many years ago and reached its peak in the 2000s. This strategy became more and more popular in the years before for valid reasons and is still practiced in many companies today. The biggest advantage of outsourcing was the ability to focus on one's own core competencies while reducing fixed costs. External service providers were usually able to hire their personnel for warehouse logistics at more favorable conditions until a few years ago, and by using external labor they were able to react more flexibly to changes and specific requirements.
In addition, the search for suitable warehouse logistics specialists in some regions of Germany represented a considerable challenge for companies' human resources management. This was another reason why many companies decided to outsource warehouse logistics along with its requirements. By drawing on the expertise and infrastructure of external service providers, outsourcing enabled companies to make their warehouse logistics processes more efficient and focus on their core areas.
Difficulties in outsourcing logistics processes:
- Dependence on external (logistics) companies: The dependence on external (logistics) companies in outsourcing should by no means be underestimated. If, for example, a delay occurs in the delivery of components, this can lead to considerable consequential costs for the client. For medium-sized and small companies in particular, these costs can be sensitively high. In addition, it is important to consider the personnel and financial effort involved in cooperating and solving problems with external partners. A lack of independence in logistics can lead to significant risks in corporate management. Companies that are overly dependent on external service providers may have less influence over their supply chains and less flexibility to respond appropriately to unforeseen events.
- Latent error potential: Uniform systems and interfaces are crucial for smooth processes in production and logistics. Too many different systems, e.g., through the use of solutions from numerous service providers, increase the potential for errors in outsourcing.
- Lack of willingness to invest: Short contract terms with logistics service providers have consequences: They cannot effectively implement innovations, which reduces companies' willingness to introduce new technologies. In addition, there is a lack of investment incentives. A lack of transparency on the part of service providers with regard to process optimization prevents manufacturing companies from benefiting from cost savings and additional optimization potential remains untapped. Limited cooperation between service providers and companies in outsourcing can prevent the full potential of logistics processes and possible savings from being exploited .
- Quality degradation and image damage: In dependency relationships, as can occur in outsourcing, it is not only the cost aspect that plays a role, but also the quality of services. In logistics, performance problems can have a negative impact on the brand and the manufacturer. Such situations have often resulted in lost sales in the past and should therefore be avoided at all costs. Reliable and high-quality logistics is of great importance in order to strengthen customer confidence and protect the brand reputation and image.
How does insourcing help with these problems?
- Reduce dependence on external companies: Insourcing allows a company to retain control of certain logistics processes internally. This reduces dependency on external service providers in these areas. Your employees can therefore manage critical processes that have a direct impact on the supply chain internally to minimize the risk of delays.
- Reduce latent error potential: Uniform systems and interfaces can be better managed if the relevant processes are performed internally. Insourcing therefore offers the opportunity to implement a consistent and well-integrated system and minimize sources of error.
- Increase readiness to invest: Insourcing allows companies to make long-term investments in their internal logistics systems and technologies, which can lead to innovation and efficiency gains. Closer collaboration between different departments within the company means that innovations and process optimizations can be better implemented through insourcing.
- Prevent quality degradation and image damage: By insourcing, companies can better control the quality of logistics services and ensure that they meet requirements. An internal logistics system can better monitor performance and respond quickly when problems arise to protect customer trust and brand reputation in the long term.
The limits of insourcing
Taking business processes in-house when insourcing can be more expensive initially, as it requires investment in staff, training, infrastructure and resources. Therefore, it is hugely important to ensure that the long-term cost savings justify the initial investment. Companies also need the expertise and resources to perform the tasks in-house.
In fact, compared to outsourcing, insourcing can limit a company's flexibility and scalability, especially when unexpected growth occurs. It always takes time to manage the transition to perhaps better, external service providers in such a situation. During this transition period, efficiency may be temporarily compromised. Therefore, you should always make sure that you focus on your internal core competencies! Insourcing non-core tasks can distract from more important business activities and thus reduce productivity. The quality of tasks performed internally must also be carefully monitored. With outsourcing, service level agreements (SLAs) can ensure quality, while with insourcing this must be managed internally.
In summary, companies that have relied heavily on outsourcing and offshoring will be challenged by the need to adapt to the new insourcing practices at the outset. Therefore, this step needs to be well structured and regulated in advance to keep potential complications as low as possible.
Conclusion: Co-sourcing as a solution approach
Is insourcing really going a similar way as outsourcing has done so far? Is it the future of warehouse logistics or just a trend? In summary, the decision to insource or outsource is a strategic business decision that should be carefully considered. This is especially true since the internal implementation of logistics processes without the appropriate expertise in insourcing poses some challenges. It has been shown that it can be worthwhile for manufacturing companies to be supported and accompanied by external companies. At the same time, however, it definitely makes sense to build up one's own in-house competencies.
It is therefore important for companies to find the right balance between outsourcing and in-house competencies : Keyword co-sourcing, i.e. a strategy that aims to keep core competencies within the company while ensuring a certain flexibility and control over logistics processes. Co-sourcing contributes to stable and efficient corporate management in the long term. A well thought-out logistics strategy for the company's own warehouse logistics helps to minimize risks and ensure the company's success in the long term.
Last but not least, it should be noted that these enormous potentials in the area of internal implementation of logistics concepts, have so far been recognized by only a few German companies. Although the number of companies taking over their logistics processes internally has been rising continuously since 2010, this increase remains moderate. This makes it all the more important to subject one's own value chain to critical scrutiny. In the long term, reintegration measures can be economically and qualitatively profitable for companies of all sizes, resulting in clear competitive advantages. It is time to focus more on internal supply chain management again and to subject insourcing and outsourcing to an examination for this purpose.
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