Supply and distribution Te whakarato me te tohatoha

Outsourcing is choosing to buy goods or services from a supplier instead of making them yourself. When you outsource, you’re contracting someone else to complete a part of your product or service.

Businesses often outsource an activity so they can focus on something else. If you identify a business activity you can do better than anyone else, focusing on that activity is a good way to increase your competitive advantage. But first you need to free up resources (time and money). Outsourcing a different activity that isn’t a point of difference helps you free up those resources. 

For example, a gourmet food producer might excel at quality and coming up with new varieties, but struggle with striking distribution deals and fulfilling orders. They could choose to ship their products to a wholesaling company that finds customers and distributes their products for them. Outsourcing distribution lets the food producer focus on their strengths.

Ask yourself these questions to decide about outsourcing an activity or keeping it in-house:

• Is this activity an important part of your business strategy?
• Do you have the specialised knowledge to do this well?
• Are you currently doing this better than everyone else?
• Will you need to change or improve this activity in the future? 

If you answered yes to any of the questions, keeping the activity in-house could help you keep control, stay flexible and maintain quality. If you answered no to every question, consider exploring vendors who could do this activity for you.

Some pros of outsourcing are:

• frees up cash flow by not owning a plant and equipment
• reduces admin workload to spend time on strategic work
• grows your business with less investment up front
• delegates an activity to a specialist provider.

Some cons of outsourcing are:

• paying a premium for someone else to do work you can do yourself
• losing strategic control of your processes or information, like trade secrets
• facing problems with quality control
• relying on the availability and business continuity of another business.

When thinking about outsourcing you need to:

• take your time and choose partners wisely, with a particular eye on quality control
• have a non-disclosure agreement (NDA) in place, because you will be sharing information with your partners. For example, confidential information about production methods or planned production volumes are examples of trade secrets that might not be protected by a patent or trademark.

Outsourcing may lead you to lose your competitive advantage. 

Companies may lose:

• control of valuable knowledge about production methods
• product and market feedback when they are too distant from their customers. 

Make sure you’ve considered everything before you start outsourcing.

Deciding if you want to rent or buy things you need is related to outsourcing, but different. Renting equipment is a bit like outsourcing your supply of equipment that is suitable and ready to use. 

Lease agreements often cost more in the long run but remove the need to pay upfront for equipment – saving you the cost of finance or freeing up money to invest in something more strategic. 

Leases that include maintenance ensure your equipment is reliable and ready to go – and if something goes wrong, you are spared the cost and stress of fixing it. 

If your business is growing or changing, leases can also give you flexibility to upgrade your equipment easily when you need to.

 

Vertical integration is taking ownership of or creating something in your production process. It’s also called a ‘make vs buy’ decision.

Vertical integration is roughly the opposite of outsourcing, starting from the situation where you don’t own or make something yourself. 

For example, a wine maker might initially buy grapes from around the country, make wine, and then sell it to the supermarkets. They decide to purchase a vineyard so they can control the supply of grapes for their winemaking. Or a café might initially buy coffee beans from a local roaster. They decide to source their own beans and roast them so they can manage availability and freshness better.

Ask yourself these questions to decide about vertically integrating by taking on another activity or buying another business:

• Is it difficult to depend on other businesses?
• Would it be harder for your competitors to enter your market if you vertically integrated?
• If you bought another business, would it be easier for you to enter the market?
• Can you still adapt to change quickly, even as a larger business?
• Do you have the skills and expertise to run the business you plan to buy?
• Can you afford the cost of vertical integration and still have money left for your main business?

Don’t vertically integrate unless it’s necessary to create or protect value. Vertical integration is risky, hard to reverse, and costly in time and resources.

Some pros of vertical integration are that you:

• don't have to pay someone else to do work you can do yourself
• keep strategic control of your processes, quality control, or information like trade secrets
• don't have to rely on the availability and business continuity of another business.

The control you gain can help you create or protect value. Areas you could gain control in include:

• supply
• capacity
• distribution
• assets and intellectual property.

Some cons of vertical integration are that you’ll need to:

• buy your own plant and equipment, learn how to use it efficiently, and keep it running smoothly
• spend time and energy on operational problems instead of focusing on the strategic work you’re good at
• make commitments that are hard to reverse, with a lack of flexibility to grow your business quickly or follow trends.

It’s important that you decide the location of your business’s:

• shopfront, whether it’s a website or a physical store
• place of production, both for services and for products.

Your ideal location depends on many factors, including where your customers and suppliers are.

Your shopfront and place of production may be together or in different places, depending on:

• customer need and perception
• cost factors
• logistics of suppliers.

For example, an accounting firm serving tradespeople might set up near a hardware store, where clients already go, and work from the same location to stay accessible. However, a catering company might use a cheaper, out-of-town warehouse, since customer interaction happens only at delivery.