February 01, 2010
Forging a Better Business
by Lauri Dodd
It started as a catchy phrase, a marketing mantra. “Working smarter, not harder” is a term that began to be tossed around in the late 1980s to encourage people to be more efficient at the office so that they could then spend more time doing what they truly enjoyed. Now it has come to mean so much more.
Coincidentally, that’s about the same time outsourcing really hit its stride in corporate America. Companies realized they could do more with less, oftentimes by sending jobs overseas to countries where the labor market was not as savvy (i.e., it was cheaper). Working smarter at the corporate level translated to slashing jobs—termed “downsizing”—as a way of cutting costs, regardless of the human toll it took.
“In the past, we were spreading ourselves too thin. Outsourcing allows us to laser-focus on our own core competencies.”
Potentially because of those sometimes ruthless tactics, outsourcing conjures up a whole host of feelings, almost all of them negative, and maybe deservedly so. After all, many Americans have lost jobs so that companies can farm the same work out to other countries for much less money. But can we really blame business? In today’s volatile economy, American companies are fighting to stay afloat, much less thrive. And from the industry’s standpoint, outsourcing is only a logical answer to the problem of rising costs.
The ideal would be to find a more humane way to address both sides—to streamline and remain cost-effective without all the workforce carnage that has become so commonplace, amounting to essentially balancing the books on the backs of American workers. It seems of late that some companies may have found a way. Here again, corporate America would be well-served by taking note of their direct selling counterparts.
Bucking the Trend
While corporate America has been outsourcing for nearly 20 years, the trend is still relatively new to the direct selling industry, where it has taken a somewhat different form.
The reasons for the move toward outsourcing are twofold, really. In addition to cutting costs, it also enables businesses to focus on their strengths by allowing another company to enhance operations with their strengths as well. For many in the direct selling industry, both reasons equally drive the decision to outsource.
“For nearly 20 years, we owned and operated our own distribution centers, but within the past five years, we have begun to partner with third-party logistics companies,” says Tom Lunneborg, Director of Production and Distribution at Oxyfresh. “We actually made the move to outsource our distribution before the bottom fell out of the economy, so when it did happen, we were in a better position to rebound.”
Keeping America Strong
Are things built here truly better here, or is it more a matter of national pride and preservation that drives many people (and many companies) to seek out products and services stamped “Made in America”? The short answer is maybe a little of both.
Specifically, within the direct selling industry, as they choose to outsource certain functions of their business, many organizations have made a conscious decision to only partner with American companies.
“Our manufacturing has always been outsourced,” says Tom Lunneborg, Director of Production and Distribution at Oxyfresh. “We work with about 100 manufacturers, and 99 percent of all our products are made in the United States. Part of the reason for that is that it’s easier to be on-site in the United States. If there is a problem with anything, I can be there today. In addition to that, we absolutely believe in keeping our money here in the United States and employing people in America.”
In the past, if The Longaberger Company needed a product or service, they would take care of it themselves. Now, it is no longer feasible to do that, so they opt for the next best thing. To obtain the wood veneer and wood panels they need to handcraft their baskets, they turn to eight different suppliers—all American-based companies.
“We’ve looked to other American suppliers for the raw materials so that every piece of our baskets, from start to finish, has been American-made,” says Tom Matthews, Executive Director, Corporate Communications, for The Longaberger Company. “It is important to us to remain true to our American craftsmanship, so we have chosen to partner only with other American companies. That has enabled us to continue to provide the finest-quality products and preserve jobs right here in America.”
As the first step in making the decision to outsource their distribution operations, Oxyfresh analyzed their expenditures. “We no longer have to pay as much in fixed overhead,” Lunneborg says. “We immediately experienced cost savings in the equipment and real estate that we no longer needed to own, such as forklifts and warehouse space, which has definitely helped during this economic hard time. And we saved on labor costs as well, because human resources and managing employees can be very time-consuming.”
As a wholly owned subsidiary of Jockey International, Jockey Person to Person’s situation is different from most. They are fortunate that they can utilize the resources of their parent company to keep the most critical functions in-house.
However, the direct selling arm of the major clothing retailer does rely on an outside company for their fulfillment and returns processing. “We’ve been fortunate to find good partners, and we have mined those relationships,” says Glenn Mills, Vice President of Operations and Administration for Jockey Person to Person. “We have lowered our costs significantly, and we have been able to improve our service to a level that is better than it was before.”
Everybody’s Doing It
The sad reality is that outsourcing has become, for all intents and purposes, a dirty word in recent years. The feeling is that jobs will be lost, quality will suffer, and ultimately American businesses, along with their ingenuity, will fail. And the great conundrum is that almost everyone is doing it in some form or another.
The news reports support that fact. For instance, Amway Global recently laid off 93 American employees, with plans to outsource a portion of their business to Costa Rica. According to their spokesman, Stephen Duthie, Senior Advisor of Corporate Communications, their situation is a little different. He says it’s not a move to streamline or cut costs, but more of a political one, of sorts. “What we’re doing in Costa Rica is not really outsourcing in the true sense of the word,” Duthie says. “South America is a growing market for us, and moving a portion of our operations to Costa Rica will give us an opportunity to have a presence in an area that is geographically closer to one we are looking to expand.”
“We have to be very careful with the partners we choose, because they are an extension of our company in the customer’s eyes.”
—Tom Lunneborg, Director of Production and Distribution, Oxyfresh
Like a majority of clothing manufacturers these days, Jockey’s products are made in foreign countries, where the labor costs are lower. “Our products are designed and executed internally, but third-party companies make fabrics and end-products to our specifications,” Mills says. “We hang on to everything that ensures the best fit and quality when it comes to our products, but we don’t necessarily sew every item in-house.”
In reality, a growing number of companies are outsourcing at least some portion of their business. However, the interesting aspect of that is many companies refuse to talk about it, possibly for fear that it may paint them in a negative light. Those that do discuss their strategy often call outsourcing by a different name—partnerships, alliances, agreements. Call it what you will, but it’s outsourcing, and it’s here to stay.
In order to ensure that vendors or partners maintain a desired level of excellence, the corporate world has established a set of standards. ISO 9001 began as a military model after World War II to quantify what made American businesses great.
In 1987, the standard was modified and brought to the commercial market as a way to facilitate the sharing of products and services that met a set of criteria for quality.
“In the past, if you wanted something done right, you did it yourself,” says Bob Lackland, President and CEO of Quality Incorporated. “You would develop the technology and control the quality every step of the way. But about 20 years ago, companies started to realize that was no longer cost-competitive, and they developed standards for outsourcing.”
The understanding is that people expect a certain level of quality in their products and services. That level is what dictates the standards, and if you want to remain competitive and retain partnerships with other vendors and suppliers, you stay in compliance.
Getting Lean and Mean
For many years, the Longaberger Company has been in the business of making baskets, until it just got to be too much.
“At one time, our business model at Longaberger had us doing everything in-house. Not only did we make our baskets, but also all the raw materials that went into them,” says Tom Matthews, Executive Director of Corporate Communications, Longaberger Company. “We started to get bogged-down and needed to streamline our processes.”
“We immediately experienced cost savings in the equipment and real estate that we no longer needed to own.”
—Tom Lunneborg, Director of Production and Distribution, Oxyfresh
In late 2008, the company shifted their business model to work with outside partners for some of their key operations. “We realized that partners can often bring expertise that we don’t have and take our business to a higher level,” Matthews says. Now, Longaberger partners with an outside company to run its fulfillment operations and eight different suppliers for the raw materials used to make their baskets.
“In the past, we were spreading ourselves too thin,” Matthews says. “This move allows us to laser-focus on our own core competencies, which are direct selling, handcrafting one-of-a-kind baskets, and offering the best home and lifestyle products around.”
The Direct Selling Difference
It goes without saying that direct selling is a different way of doing business. That means many companies may run into challenges when searching for just the right partner organizations.
“It took us two years at Oxyfresh to perfect the partnerships, because most of the fulfillment companies we screened didn’t understand our industry,” Lunneborg says. “Network marketing companies have a different way of fulfilling an order. We have to be more finicky with the way our products are delivered than with something bought from Amazon.com. Speed is crucial, but presentation is everything.”
That meant Oxyfresh spent a great deal of time upfront teaching their partners about the importance of presentation. “Our customers need to have a good experience from start to finish when they receive our products,” Lunneborg says. “For instance, we want a thank you note on top of the products as the customer opens the box, and the products need to fit perfectly, instead of rattling around in a box that’s too big.”
On the surface, that may seem almost silly. But the devil is in the details. And if you think about it, a box that’s too big is inefficient. You certainly don’t want to send a subtle message to your customer that you’re a wasteful company. “This is not a normal mode of sale,” Lunneborg says. “Someone may have taken two hours or two days to complete a sale. And the customer paid a premium for our products. If we send a message that we’re not worth that premium, then we will lose that customer in the future.”
When Jockey Person to Person was looking at third-party logistics companies, they knew standards needed to be met. And to be absolutely certain they were forging the right partnerships, they sought advice from their leaders in the field. “When you are thinking about outsourcing, you need to make sure you consider the effect on the end-consumer and the field,” Mills says. “If it’s not the best move for all involved, then don’t do it.”
When looking for an organization to pair up with, Oxyfresh says it’s imperative to maintain complete control over your own operations. “We knew going into this that we would have to be very careful with the partners we chose, because they are an extension of our company in the customer’s eyes,” Lunneborg says. “They don’t know that their product was shipped by an outside vendor. All they know is that it was sent by Oxyfresh.”
The bottom line is that with vendor partnerships, you are placing a phenomenal amount of trust in their hands, so take your time during the selection process. “Before we partner with a company, we assess their reputation and their company culture to make sure they are the right fit and the right circumstance for Longaberger,” Matthews says.
It’s true that when the Longaberger Company formed their various partnerships, employees were laid off. However, it was not your typical layoff. “When we formed our partnership with Billy Casper Golf to run our golf course, we did lay off our employees to accommodate that move,” Matthews says. “They are no longer on our payroll, but many of those same employees were hired by our partner to do the same job. They just work for a different employer now.”
That’s relatively unheard of in corporate America, where the unemployment numbers continue to stack up to near-crisis proportions. And it’s just that concern for the human element of business that continues to set the direct selling industry apart from the traditional workforce model.
In the Big Leagues
An added bonus to outsourcing is that it can serve to level the playing field for smaller to midsize companies.
“This is an important trend for companies who are not billion-dollar businesses,” Lunneborg says. “The ideal would be to have enough money to be able to afford to own every step in the process. That is the only way to really ensure you have absolute control over quality, with regard to the products and services you provide. But for smaller companies, great partnerships are key.”
This distinction is essential, especially since the direct selling industry is peppered with fledgling startups and smaller businesses that could use any extra boost to grow and thrive in today’s less-than-welcoming economy. It would make sense that down the road we might expect to see an increasing pool of direct selling companies choosing to hop on the outsourcing bandwagon.
That’s why Oxyfresh has developed relationships with companies they trust, that let them maintain supervisory control over every aspect of their product delivery. “Now that we have that comfort level that they will perform up to our standards, we can focus on what we do best: our marketing and direct selling,” Lunneborg says.
Drawing the Line
“In the past, if you wanted something done right, you did it yourself, but that is no longer cost-competitive.”
Most companies agree that while outsourcing is an acceptable way to do business more effectively, there are simply some things that are off-limits to vendors. And those things vary from company to company.
“There are some things Oxyfresh will never outsource, such as customer service, marketing and event planning,” Lunneborg says. “Those aspects of our business are just too important to us; no one can deliver the same level of quality in those areas. And we want to ensure complete control over our branding and our name. Basically, if anything goes wrong there, we want only ourselves to blame. So there is a limit to what we would send out.”
For Jockey Person to Person, the field relationship is paramount, and no one can do it better. “We will definitely always keep in-house any communication with our salesforce and anything related to our brand image,” Mills says.
The landscape of American business has changed dramatically over the last decade. It is vastly different than it was even five years ago. High among the many reasons, an unstable economy has necessitated that companies operate at their absolute optimum levels, leaving very little room for missteps.
It’s difficult to remember a time before globalization and outsourcing. If you think about it, outsourcing has become an essential function of the way we do business. The good news is that the changes that have evolved have opened up opportunities for companies with less than billions to spend to remain viable. Since that description fits many direct selling companies, they will reap some of the biggest rewards of the outsourcing trend.
However, in true industry form, direct sellers appear to be determined to forge their own path—and not let corporate America dictate the way they operate. With years of experience to guide them, direct selling leaders will continue to innovate, to tweak and modify, perfecting how outsourcing fits into their own unique business model. And only then will they be satisfied.