The word “outsourcing” may have one of the worst connotations of any word that is likely to come up in a business conversation. That’s because, too often, outsourcing has come to be associated with moving jobs overseas to countries with more affordable labor. However, when taken at face value, the practice of outsourcing (defined by The American Heritage Dictionary of the English Language as simply “the procuring of products from an outside supplier”) can be a boon for companies in all types of industries, including material handling. The most common application for material handling distributors is outsourcing installation of racking, shelving, conveyors and dock equipment to a third-party laborer.
Nelson Marches Toward 100 Percent
“Our experience with industry peers throughout the country indicated that we were one of very few companies that had our own in-house department employing workers to do installation and various services,” says Kurt Nelson, vice president of Nelson Equipment Company (Shreveport, LA). “We are now trying to move toward outsourcing 100 percent of our installation work.”
Nelson estimates that within the last two years, the company has flipped its percentage of work that was outsourced from 15 percent to its current level of 85 percent. “We wanted to free up our salespeople to sell and not concern themselves with how the product would be installed, but have faith that it would be taken care of in a timely, professional manner,” Nelson says. To do that, the company operates on a process very similar to how it would determine which vendor gets a product order. “We have various vendors available to do installation service work for us, and we call our primary supplier first,” Nelson explains. “If they aren’t available when the order is processed, we have to find somebody else whose time schedule will allow it. Hopefully, they’ll come within the same price range.”
Involving an outside installer does inflate the price of a job because of travel costs, which can lead to an uncompetitive quote. However, Nelson says that risk is mitigated by the benefits outsourcing provides. “With our own workforce, we’re guaranteed to write a check to our crew even if there is no guarantee of work for them to do,” Nelson says. “It becomes a balancing act to keep a small workforce that can still maintain quality and profitability.”
As the company looks to export more of its labor, it does require some foresight. “We work from a projected work schedule of what’s in house, and we look very closely at the sales projections to determine our future availability,” Nelson explains. “If it’s not cost-feasible to bring in an outside team, we come up with an alternate solution.” Alternatives include having a sales engineer oversee the installation with temporary labor. “The sheer volume of the project dictates what’s available. We never want to say no, so we tend to walk a fine line,” Nelson says.
One place outsourcing does have an undisputed positive impact for Nelson Equipment Company is on the bottom line. “Installation is now a profit center because we know exactly what we sold the project for and how much we paid the installer. With that firm quotation, we can treat it exactly like the sale of a product.”
Overhead Is Under Control at Industrial Shelving Systems
Industrial Shelving Systems has always outsourced some of its work, but decided to become more active in outsourcing about a year and a half ago. “We already used installers 50 percent to 60 percent of the time,” says Daniel Compton, vice president. “So we knew who was good and which installers we wanted to partner with. We really try to represent quality and communication on jobs, and it has worked out well for everybody.”
The company scaled its warehouse staff down to three people and now does hardly any of its own installation work. “At one point we did most of our labor in house and it was a selling point to be able to say these were our employees,” Compton says. “But there’s a cost associated with that, plus we often had to find busy work for them to do during slow periods. Eventually that got old. We did a long study and discovered that what we were paying our own guys wasn’t much different than what we were going to pay someone else.”
During busy times the extra cost is not as significant because the company can afford to pay it. The benefit really shows up when business is slow and the excess overhead is not hanging there. As an example, Compton points to a recent project that was delayed for two weeks while some permitting issues were settled. “We didn’t have 10 guys on our payroll for two weeks waiting for the install to start,” he says. “Outsourcing has provided us a way to drastically reduce our fixed costs.”
On the flip side, one of the installation teams they hired to complete the above project had a scheduling conflict after the delay and had to pull out. “Nothing comes without a price,” he admits, adding that losing control of the quality of the work can be problematic. However, those drawbacks are tempered by communication. “The biggest key is, once you outsource it, keep good lines of communication with the team. If you tell them when jobs are coming, good installers are happy to block out the time and work with you.”
The success has led Industrial Storage Systems to take the outsourcing concept even further. The company previously employed its own accountant but now uses a third party. “We pay a little bit more per hour, but now we don’t have to pay labor, workers’ comp or unemployment,” Compton explains.
The decision to outsource is one Compton is very happy with. “It’s working great so far. If it starts to slip, we’ll go back the other way, but I don’t see that happening at this point.”
On The Flip Side…
According to John Gillard, president of Action Installation (San Antonio, TX), the relationship between seller and installer is becoming ever more important. “Not a lot of companies still have their own installation teams, and those who do are usually only sent out on small, local jobs,” Gillard says. When a distribution company retains its own installation crews, the cost of labor is higher because the company offers more benefits. “That can become a problem because they often don’t have enough sustained volume to handle the peaks and valleys,” Gillard says. “In other words, they’ll train a bunch of people for a great big job but after that’s complete there’s no work for them to do. They lose all their skilled personnel.”
Plus, in today’s increasingly global marketplace, distributors are making more sales outside their traditional area and are therefore turning more to outside installers. “In many cases, we run the project and never see anybody from the selling company,” Gillard says. “The better salespeople are involved to help solve problems, but that’s an exception to the rule.” It is not uncommon for Action Installation to work directly with a customer even in the initial stages of a sale. “We have to know when the materials will be there and, more important, when the customer will be ready. It’s unfortunate to drive several hundred miles and not be able to proceed.”
Once a job is quoted, the installer’s work is just beginning. “The lag between the time of quote and the time of order can be anywhere from a week to a year or more, depending on the end-user’s approval process,” Gillard says. “We’re usually the last to know once the distributor salesperson gets the order.”
After the order is made, the salesperson will say when it needs to be done and that goes on the installation schedule. Gillard explains, “We keep a running schedule, and we have jobs on the books in February all the way into October. But, then again, it changes almost every time the phone rings! The schedule may change ten times between now and then.”
In material handling, control of an outsourced project can be a point of contention. “Too many times, the distributor salesperson thinks the installers work for him,” Gillard says. “He thinks the crew can do anything he asks beyond the scope of the job quoted.” The key to avoiding this is establishing parameters up front as to what exactly is expected. Quotes should clearly delineate exactly how much the seller will provide and what the material handling installer will provide. Any additional requests that arise once the work begins are subject to negotiation. If any additional equipment is required that wasn’t included, usually the dealer or manufacturer must bear the brunt of those excess expenses. “In some cases, the salesperson authorizes an order change and we are happy to do it,” Gillard adds.