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Definition and Understanding of Outsourcing in Business

Definition and Understanding of Outsourcing in Business

Definition and Understanding of Outsourcing in business is a type of work within a company but carried out by other parties or companies that have the ability to do the work.

The choice of using the outsourcing method is based on the transfer of investment elements into operating costs. It is this logistics cost factor that is generally the basis for the development of the outsourcing industry today. 

For example, in developed countries, the component of logistics costs is 6-10% of sales. Meanwhile, in Indonesia, logistics costs are still high, at 25% of the sales value. 

This can happen because of the many hidden costs in supply chain and distribution activities. Because companies do not want to bother dealing with these hidden costs, then they make outsourcing their main choice.

By using the outsourcing method, the company fulfills 2 main objectives, namely:

  • Increasing service level by improving flexibility and inventory management
  • Reducing costs

Third Party Logistics (3PL)

Third Party Logistics is part of Outsourcing which is specialized in logistics. The things handled by 3rd PL can be whole or only part of the activities of a logistics chain based on a certain time and reward contract.

Consumers who use 3rd PL services in Indonesia in general are:

1. Multinational foreign companies

2. Manufacturers

3. Retailers with networks

In general, there are 2 types of 3rd PL services, namely:

  • Physical movement of goods (warehousing and transportation)
  • Management

3PL service:

  • Basic Service : Does not require dominant coordination.
  • Physical contract logistics service: The company is still in control of management, and only some physical activities are outsourced.
  • Management contract logistics service: Warehouse and transportation management have started to be outsourced.
  • Integrated Contract Logistics: Physical activities and management are outsourced.

One of the problems that become a logistical weakness in Indonesia is the absence of data that can provide a reason for 3rd PL activities. Therefore, Mercer 

Management Consulting 1995, a survey of the 500 Largest American manufacturers provides guidance from the survey results why a company uses 3rd PL services, including:

  • Lower costs, which is around 38%.
  • Access to new technology and more innovative solutions (options w/h or new delivery etc.) so as to increase market capability by 24%.
  • Can carry out more in-depth coordination between manufacturers, distributors and operating efficiency of 11%.
  • Improve Customer Service, which is 9%.
  • The company can penetrate the market better by 7%.
  • Greater flexibility and reduced risk investment assets (ownership of trucks, warehouses and so on) by 5%.

3rd PL Contract System 

The interesting thing about using 3rd PL services is to determine the method of payment of fees as stated in the contract agreement. 

There are several basics that must be understood first before determining what system is best for the implementation of the 3rd PL contract.

There are 5 systems that are generally applied, including:

1. Fix rate

2. Cost Plus

3. Unit rate

  • Pure Unit Rate
  • Volume rate

4. Combination of "Share Saving" 

The following is an explanation.

Fix Rate

Fix rate or fixed price is the easiest and simplest method which is "uncommon" used in the 3rd PL industry.

This fix rate option is usually used by companies that are not operationally dynamic and who have a "safety player" spirit.

The advantages of choosing this system are as follows:

  • Companies and 3rd PL service providers get certainty about the costs needed every month.
  • There is no sudden element of higher or lower costs.

Meanwhile, the weaknesses of this system selection are as follows:

  • There is no stimulus for both parties to develop capabilities (improvement).
  • When sales decrease, the percentage of costs / sales will be greater

Example:

Company ABC only pays Rp. 10,000,000 to warehousing service providers who carry out the work of receiving goods, storing and delivering goods. If there is over time, the over time will also be paid according to what happened but there is no increase in the payment for the 3rd PL service, which is still Rp. 10,000,000,-

2. Cost Plus

This cost plus system is very well used by companies that use 3rd PL services early. Usually this system will be changed to a unit rate system in the future when 3rd PL service users can already feel the positive benefits and the amount of fees will be used as the standard for imposing the next fee.

The advantages of the Cost plus system are as follows:

  • There is openness for both parties in cost management and logistics activities.
  • Users will get all data related to operational implementation and a "yes" or "no" decision on an action is given to the service user.

Meanwhile, the weaknesses of this system are as follows:

  • 3rd PL only gets a fixed fee throughout the validity period of the contract.
  • The entire "content" of the 3rd PL service company is wide open to be known by its service users.
  • Does not pose a challenge to act “better” (improvement).

Example:

If the contract states that the 3rd PL fee is 10%, then the cost of shipping goods from Jakarta to Surabaya using a double truck (CDD) is Rp. 5,000,0000 per trip plus 10% as a service fee.

Share percentage Fee from the costs incurred for the cost plus system are usually as follows:

  • FMCG industry around 10% - 20%
  • Oil industry around 7.5% - 15%
  • Pharmaceutical industry around 5% - 10%

That's the article review on Definition and Understanding Outsourcing in Business. I hope this article can give you a better understanding and information in understanding outsourcing.

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