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Distribution Outsourcing: Advantages & Disadvantages

Distribution Outsourcing: Advantages & Disadvantages
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Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

More and more, companies are realizing that outsourcing non-core practices, like accounting or distribution, has many advantages. However, as this lesson shows, there are also potential disadvantages to consider when outsourcing distribution.

What Is Distribution Outsourcing?

Every company has different strengths, that is a given. However, most companies also have the same basic operations that must be performed. Businesses have to have accounting and payroll departments, janitorial teams, and any other number of activities that are in no way related to their core business practice. For many of these roles, companies choose to outsource to different companies that specialize in those fields. As a result, payroll companies exist that handle the payroll accounts of hundreds of other companies. After all, as long as the work gets done, it's not like a manufacturing company is going to increase its market share because it has a superb payroll department.

For most companies, distribution, the act of getting finished goods to customers is a similar task. Of course, it needs to be done, but warehouses and shipments aren't the sort of things that the board of directors or management gets excited talking about. For those firms, the option to outsource distribution is an easy one - why accept mediocre practices within a firm's distribution when you can pay for the best? However, it's not right for every company. In this lesson, we take a look at distribution outsourcing, hiring a company that specializes in distribution to handle it for your company's needs, to see how it would work and the advantages and disadvantages of doing so.

Example of Distribution Outsourcing

Let's say you owned a manufacturing business with clients all over the world. However, you have exactly one manufacturing site. You have to make sure that your goods get everywhere. Different shipment companies have different rates for different locations, and you've got to balance all that information on top of information on warehousing requirements, customs payments for overseas shipments, and any other number of distribution- related tasks.

All that changes when you outsource your distribution. Suddenly, you are responsible to get your goods to exactly one entity - the distribution company. They handle everything from there, from making sure that each shipment arrives on time to learning your habits in order to post highly demanded goods in warehouses close to customers so as to increase efficiency.

Advantages of Distribution Outsourcing

As you can imagine, there are plenty of advantages of hiring someone to handle your distribution requirements. Foremost is the fact that they are focused solely on distribution. That means that the best professionals in distribution will be working at that company. However, it's not just the people who work there. Because of the fact that distribution companies are the biggest customers of shipping companies, that means that they can leverage those relationships for better deals. That could lead to lower costs for you.

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