In today’s business environment, it is not easy for food manufacturers to impress Wall Street analysts, or simply to meet internal profit objectives. Operating in a fiercely competitive, heavily regulated and mature industry, many food companies have resorted to downsizing and outsourcing essential services in order to improve profits.
Simply defined, outsourcing is the transfer of services to a 3rd party service provider. A vendor transfers to an independent company the staff, assets and responsibility used to provide a particular service previously associated with an in-house function.
For food manufacturers, the potential benefits of outsourcing are attractive: reduced operating costs, generation of capital form the sale of assets, and increased focus on core competencies. At the same time, for service providers such as contract caterers and distributors, outsourcing is a significant growth sector.
Depending on the service you choose to outsource, the advantages will differ. By outsourcing your supply chain, food and beverage vendors can reduce time to market through faster product launches and lower operating expenses – two advantages that translate directly to the bottom line.1
Outsourcing manufacturing can relieve manufacturing constraints. Manufacturing flexibility is a related benefit of outsourcing production. Outsourcing can provide vendors with additional production capacity needed when product sales increase. It also allows manufacturers to discontinue a product quickly when sales do not meet expectations. It moves vendors toward a variable cost model, without all the fixed capital and human resources investment.
Outsourcing manufacturing also allows smaller firms access to new technology. They can leverage the technologies acquired or developed by the contract manufacturers to serve multiple customers.
The Bad & Ugly
Employee or union pressure is often a significant obstacle to outsourcing, as is internal resistance to change and fearing loss of control. Your employees can consider outsourcing as a threat. It becomes an obsession for some of these employees to prove why providing services in-house are far superior to outsourcing.
Other barriers include concerns over confidentiality or security, political pressures, and lack of management support.
Outsourcing often delivers less than promised, is more expensive than budgeted, and fails at an alarming rate. Trade analysts estimate that about 50% of the outsourcing deals lead to disillusionment and dissatisfaction of management, often already in their first year.
Choosing the Right Service Provider
Factors to consider in choosing a service provide include:
- Financial stability of service provider
- Client references
- Technology transfer capability
- Current performance metrics
- Responsiveness to customer demands
- Cultural fit
Once you have chosen a service provider, then the contract needs to be drafted and implemented. Sometimes, two agreements are required. The first outlines the one-off transfer of assets and/or staff to the service provider; the second with the long term service provision. You must consider the following points in any outsourcing contract:
- Length of the agreement
- Service levels
- Performance monitoring
- Change mechanisms
Once you have chosen a service provider and are nearing completion of a contract, vendors need to implement clear performance measures to ensure that the work being outsourced consistently meets expectations.
There may be more questions raised than answers in determining whether to outsource services. However, with careful consideration and lucid advice, outsourcing offers a long-term relationship that benefits both vendor and service provider.
–Peter M. Guyer
Peter M. Guyer is the Founder and President of ATHENA MARKETING INTERNATIONAL (athenaintl.com), an international marketing, consulting and business development firm serving food and beverage manufacturers. Tel. (206) 749-9255.
1 Please see Hospitality News, August 2004, Vendor Solutions, “The Bottom Line: Tips for Improving Profitability”.