#no2

by Thorsten Winkelmann
#AboutHealthcareAndSupplyChain #No2

Outsource integrated process chains and whole networks, or use best-of-breed service providers? (part 2)

This is the second part. In part 1 I discussed in which cases outsouricing integrated process chains or using best-of-breed service providers is the preferable. In short, outsourcing integrated process chains is superior in dynamic markets and environments which are unfamiliar to the outsourcing principal, e.g. tapping into new (direct) sales channels. This second part is bringing in a new dimension in by considering multiple geographical markets to be served. The question is: outsource whole regional networks to one strategic partner or use best-of-breed provider in each and every country?

Outsourcing whole regional networks to a strategic partner

Alongside the issue of outsourcing integrated process chains, another dimension involving a similar question reveals itself through the regionalization of logistics structures: Is it better to opt for a best-in-breed service provider in every country or to award the contract for a whole region such as Europe to one strategic partner?

In essence, when it comes to the regionalization of logistics structures it is a matter of optimizing the supply chain and associated inventories, availability, and costs for the whole region, rather than by each individual country. This can result in relying solely on central warehouses, on hub & spoke centers, or on several fully integrated warehouses in the region. Central warehousing concepts in particular can be effectively combined with field inventory management concepts such as consignment stocks and forward stocking locations in order to combine inventories in their entirety with the highest possible levels of product availability.

In cases where there are several warehouses in the region and possibly also field inventory management concepts, a key factor in the decision regarding whether to use a local best-in-breed provider or to outsource the whole network to one strategic partner is the potential economies of scale that can be achieved in functions that extend across national borders and company locations. Specifically, this involves IT, the management of the customer-supplier relationship in particular also with regard to the regular performance-indicator-based management of the business (reporting), and quality management in the healthcare sector. However, it is not all about cost degression in these functions, but also transparency, for example in inventories and sales figures by sales channel, as well as about speed, reliability, and security (compliance). 

As a rule, when outsourcing the whole network to a strategic partner, it is an obvious choice to also outsource the non-warehousing activities for a whole region to one partner. However, if doing so, it is important to bear in mind that when it comes to functions such as order and cash management, local best-in-breed providers may have a better understanding of the national market and business practices than multinational service providers. In addition to designing the supply chain activities – e.g. central vs. local order management – it is then important to consider whether the economies of scale in central functions and other central governance aspects outbalance the best-in-breed advantages offered by local providers. Ultimately, it is also important how quickly a strategic partner can acquire the local expertise and thereby close the gap as far as possible.

Conclusion and future prospects: The role of new technologies

The third outsourcing wave in logistics is currently being driven by new, direct sales channels, innovative and complex products, M&A activity on the client side, intelligent and digitalized systems in logistics and supply chains including the associated investments, and increasingly complex governance and compliance requirements. As part of this trend, increasingly integrated process chains and whole regional networks are outsourced to a strategic partner.

It is not yet possible to say whether and to what extent new technologies such as the cloud computing and services facilitated by it, blockchain, and uberization will affect supply chain and coordination structures in logistics over the long term. On the one hand they make it possible to efficiently handle interfaces, which would speak more in favor of best-in-breed concepts in the long term; on the other hand, however, the technologies must first be introduced and adapted, which in the short and medium term points to a strategic partnership with an integrated service provider who takes over the work.

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Dr. Thorsten Winkelmann

Dr. Thorsten Winkelmann

President - Healthcare