Look for Renegotiation Opportunities: Outsourcing agreements are made at a certain time, under certain conditions and expectations, to support a given business and supply chain strategy. However, “when economic circumstances affect the business case for a particular deal, a review is not just a good idea, it's essential,” Millstein and Roughton say. “That's why now is the time to consider whether any element of your outsourcing agreement should be renegotiated to reflect fundamentally different economic conditions.”
For example, there might be restrictions on how and where a outsourced manufacturer can source parts that can be redone to allow additional savings in this environment. There generally are many terms related to mergers and acquisitions – now may be a great time to renegotiate those terms – before such a deal is actually announced or completed.
Find Leverage Points: Outsourcers may understandably not be wild about coming to the table to change an existing contract. However, there are leverage points that can be used.
For example, it may be easier to get the outsourcer to accept price reductions if the “carrot” is an extension of the existing contract.
Using more of the “stick” approach, it is often the case that outsourcers have violated some contract term that could allow contract termination, but would routinely be overlooked in normal times. Now, however, threat of invoking that clause could be used to win concessions.
Edicts can Backfire
Companies have to be careful they don’t use such leverage too hard, says Gene Tyndall of Tompkins Associates, an SCDigest contributing editor.
He cited a recent example in which one company, in effect, “ordered” its LSPs to reduce their prices by as much as 20% while retaining service levels, under the threat of losing the business when any current contract expired.
“This is simply bad business,” says Tyndall. “It makes as much sense as saying you are going to layoff 15% of your own workforce and get the same level of work done.”
Tyndall agrees, though, that it is often possible to reduce outsourcing costs. He recommends looking at three primary areas:
- The pricing mechanism a company is using with its outsourcers
- How outsourcers are being used – are the outsourcing strategy, locations and supply chain flows optimal?
- Performance – are the right metrics and analysis really being used?
Like others though, Tyndall says in the end, collaboration is key.
“Good LSPs and CMs are partners, and should be collaborating with key customers to reduce costs smartly,” he says. “That almost always works better than the heavy-handed approach.”
What are your thoughts on Millstein and Roughton’s recommendations? Good areas to look into, or too heavy handed? What has been your approach to rethinking outsourcing relationships in these times? Let us know your thoughts at the Feedback button below.
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