Benefits of Outsourcing in Supply Chain Management free essay sample

Supply chain management is a horizontal process that crosses the company and spans countries in scope. Time, distance and the nuances of operating in a vertical organization are challenges. Therefore identifying needs and problems requires that the process itself must be addressed and how outsourcing improves the overall process. Outsourcing focuses on business process outsourcing. Supply chain outsourcing will be divided along the lines of key needs and focuses on business process outsourcing (BPO). Supply chain BPO will be an active part as firms move to compress time and increase inventory velocity. Supply chain outsourcing can help an organization build a responsive, integrated supply chain that operates in real-time with suppliers, partners and customers,  a highly complex proposition that requires a unique combination of consulting, technology and services skills. Supply Chain Management offers an organization the opportunity to outsource supply chain while continuing to focus on its innovations and core competencies. The outsourcing transformation will lead to competitive advantages and to increased company and shareholder value. What Is Outsourcing? The term outsourcing did not enter the English-speaking lexicon until the 1980s and has since become a popular political topic of debate, especially during election years. Although a precise definition of the term outsourcing has yet to be agreed upon, many people view the following as the universal definition: â€Å"the contracting with a third party service provider, usually another company or person, to provide services or a particular function that might otherwise be performed by in-house employees of the business. In other words outsourcing is the contracting out of a business function to an external provider by entering a contractual agreement involving an exchange of services and payments for the function. Many people believe that outsourcing is a recent phenomenon, but it has actually been in as existence as long as work specialization has existed. Almost all companies have been known to use some form of outsourcing in one way or another. Typically, the function or functions a company chooses to outsource are those that are considered to be non-core to the business itself. Functions that require specialized skills that are unavailable to the open market are also commonly outsourced with a third party provider. III. Important Processes Relating to Outsourcing Recently many terms have developed that revolve around outsourcing and an explanation of these terms is needed to get a full understanding of outsourcing and what it entails. The most popular of these terms is offshore outsourcing, which is the practice of hiring an external organization to perform some business functions in a country other than the one where the product or services are actually developed and manufactured. Offshore outsourcing can be can be contrasted with offshoring, in which the functions being outsourced are performed in a foreign country by a foreign subsidiary. In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as nearshoring, multisourcing, and strategic outsourcing. Nearshoring, also known as nearshore outsourcing, has become competitive with outsourcing. Since the recent rise of fuel costs it has been expensive to outsource to far areas and many businesses have instead been sourcing service activities to a relatively close in distance, lower-wage, foreign country. By shifting work to a lower cost organization within a business’s region value is added by the flexibility, quality improvement, cost reduction, and enhanced commitment to core business. Multisourcing was first introduced in 2005 by the market/technology research firm, Gartner. It is a blending of business and information technology services from the optimal set of internal and external providers in the process of achieving business goals. In other words, it is a strategy that treats a given function as an array of activities, some of these which should be outsourced and others that should be performed by internal staff. Although the term may apply to any business area, it is most commonly used within the context of information technology. Strategic outsourcing allows not only the transfer or control to an outsider, but also the method of manufacture, allowing the use of a different technology or process. A company that uses strategic outsourcing may choose to transfer an entire product, product line, or an entire plant to gain strategic value. Overall the concept is the same as outsourcing, but goes more in depth with its definition. IV. Advantages of Outsourcing Almost every organization outsources in some way. Before jumping headfirst into outsourcing an organization must be aware of the impact it will have on the business itself. In order to find out if outsourcing is the right move and will provide a positive outcome, both the advantages and disadvantages must be taken into consideration. The advantages can be divided into two types; direct benefits and indirect benefits. The direct benefits are those which have an immediate impact and the indirect benefits are those in which outsourcing has impacted the processes remaining in house. A. Focus on Core Competency – (Direct) As mentioned before the whole purpose revolving around outsourcing is to allow a company to redirect their resources to focus on its main core functions. In rapid growth periods, the back-office operations of a company will also expand. This expansion may start to consume human and financial resources at the expense of the core activities that have lead to the organization’s success. Outsourcing allows the entire focus to be on those business activities that are important, without sacrificing quality or service in the back-office. This kind of focus can only improve the core functions. Since an in house employee has a better knowledge of the company and its business, the allocation of time solely to these core functions can only lead to a superior product with ever increasing improvements in accuracy, services, and quality. By hiring an outside third party to complete tasks that are not related to the company’s core competencies, it is more likely that those tasks involving the core competencies will be completed accurately and efficiently. In a complex working environment, a daily list of things to accomplish can be long and scattered throughout the organization. By outsourcing particular functions a company allows employees to perform one specific task. They are more likely to do a better job of completing this task in a timely, accurate manner. Outsourcing manufacturing and logistics greatly improves services by shortening cycle times and speed time to the market. When an organization is able to tap into capabilities that are not internally available to them, they can increase their schedule flexibility and resource availability, which in the end will result in a reduced time to the market. Third party logistics receive and store raw materials or finished inventory, consume inventory in the production process, produce finished goods, and ship finished goods to customers. By improving inventory visibility, accountability, and provide on-time delivery a higher level of customer satisfaction can be reached. Many companies that have used outsourcing found that it not only reduces overhead, but also improves the quality provided. Quality improvement can be attributed to the fact that outsourcing providers running volume operations have better quality assurance programs in place than those organizations still doing it in-house. The mass in a particular discipline llows them to develop reliable processes including quality control. The results from this are less damage, less rework, improved response time, and greater inventory accuracy, which overall lead to an improvement in quality. B. Cost Savings (Direct) One of the primary reasons that businesses look into outsourcing non-core functions is the reduction in costs. Since the costs associated with an in-house employee always prove to be significantly higher than the cost of an outside service provider out sourcing can help cut operational costs to more than half. Reductions in the cost of manufacturing and logistics services, reduction in head count of hourly workers and management, and the reduced capital investment and increased case flow are all positive cost saving factors resulting from outsourcing. By outsourcing manufacturing, logistics, or both it allows an organization to consolidate its operations. The organization no longer will have to maintain factories or distribution centers and frees it up of the responsibility for physical plants and personnel related to these functions. Therefore the manufacturing and logistics costs are lower and since the vendor might by providing a shared service, the company will not be paying for under-utilized capacity, which in turn will lower the inventory-carrying cost. Overall outsourcing can lead to a huge reduction in cost of manufacturing and logistic services. In today’s recent economic recession it is hard to swallow the fact that downsizing, mergers, acquisitions, and eliminations of products lines are actually beneficial to a company’s success. By doing these things a company becomes streamlined and lean in the marketplace. When an organization chooses to outsource they aren’t cutting the number of employees in a department, but instead entire departments that do not help maintain and grow the company’s core competencies. This means those departments that are responsible for maintaining and growing the company’s core competencies do not lose their valuable personnel but instead are given a greater opportunity for growth now that the core competency is their profession. By eliminating these departments and their workers the costs revolving around them are also eliminated, once again proving that outsourcing can lead to an increase in cash flow. Once the processes resulting from manufacturing and logistics are contracted out, the facilities previously used are removed from an organization’s balance sheet. Since a product is no longer made or assembled in these factories there is no purpose to maintain them and the distribution that once took place is now outsourced. This frees up capital funds, allowing it to become more available to an organization’s core functions. When an organization’s current assets are no longer needed they sell them. All of the equipment, facilities, vehicles, and licenses are usually sold to the service provider at book value. Either way an organization still ends up with an infusion of cash, or the capital investment is reduced. C. Indirect Benefits Indirect benefits are not as easy to define and usually come as an unexpected surprise. When achieved these benefits have a subtle effect on the company’s bottom line. Some of these benefits can be found when searching for core competencies. During the search the outsourced operations managed are outlined and an organization begins to take a closer look at engineered operations, planning, and scheduling. By doing this the end result is a better grasp of accountability and root cause of analysis, which in turn is an improvement on the core functions indirectly. After a successful outsourcing implementation is in place, the organization will be able to offer new services and capabilities due to the increase in performance. The increase in performance is due to the forms of shorter lead times and the reduction in the landed cost to the customer. The organization will find they have access to new business resources and personnel helping them to engage and form new beneficial relationships. It will also lead to the discovery of valuable information that can be studied and put to use within the organization. This results from the documentation of business process and their costs revolving inherent with the outsourcing implantation. D. Summary of Advantages Overall when the advantages of outsourcing are laid out it is easy to see that an organization can have a lot to gain by doing or planning to outsource. Before any organization makes the decision to outsource it needs to take into account the effects it will have on its customers and employees. As with any business process there are risks involved, and there is always the possibility of failure, but with the proper research, a reliable partner, and the right approach the benefits from outsourcing can help an organization to reach its true potential of success. V. Disadvantage of Outsourcing Although the advantages of outsourcing are extremely appealing, an organization must also examine the flip side of the process be making the final decision whether or not to outsource. The disadvantages will give the organization an opportunity to think about what it is really getting itself into and once again reassure it if outsourcing will be the right way to go. A. Outsource Provide When an organization chooses to outsource they will be turning over part of its business operations to another company. Not only will the business functions itself be in the hands of someone else, but the organization will become tied to the financial well-being of that company. If for some reason the outsourcing company goes bankrupt the organization will have to immediately move the processes in-house or find another provider, which in turn could costs them lots of money and time. Another issue to factor in when choosing an outsource provider is who else do they provide to and are they trustworthy? Since the outsourcing provider is most likely catering to the needs of several companies they may not be one hundred percent devoted to the organization, especially if they are receiving a greater payout from another company. Trust is a huge issue when trying to choose an outsource provider. The life of an organization depends on the information it possess to keep it up and running. There are security factors with payroll, medical records, and any other confidential information that is likely to be transmitted and available to the outsource provider. Information about company data and knowledge that have led to its success must also be taken into account. There is the risk that the confidentiality may be compromised and an organization needs to protect themselves and their data. A penalty clause within a contract is an option, but also the option of leaking only necessary information is another route. Either way the choice in the outsource provider can bare a huge risk to the success of the operation itself and the organization’s image if an incident were to occur. This is the greatest disadvantage in outsourcing. B. Lacking in Customer Service Another disadvantage a company might face when choosing to outsource is the lack of attention to customer service details. By outsourcing an organization will begin to focus its attention on the business process that is being outsourced and in turn may forget about its duty to cater to the needs of its valuable customers. This can also lead to a lack of internal and external customer focus. Since customer service outsourcing is on the rise an organization may also want to consider the risks involved in doing so. Most of the outsourcing of customer service jobs is based out of foreign countries. Large corporations such as credit card companies, shopping networks, and computer manufacturers are making this changed. The problem behind this is the communication barrier. It can be very frustrating for a consumer who is calling in with a customer service issue when this individual cannot understand the customer service representative they are speaking with. In the end this just causes more frustration and does little to solve the problem at hand. Organizations cannot forget that their customers are what attribute to their success and ability to stay in business. The focus on a customer’s needs, feelings, and attitudes cannot be overlooked. C. Loss of Control Many organizations that choose to outsource particular functions may experience or feel a loss of control over the process. When signing a contract to have another company perform the functions of an entire department or single task, the organization is turning the management and control of that function over to that company. Although there is a contract in place the managerial control will ultimately belong to another company. It must be recognized that the outsourcing provider will not be driven by the same standards and missions that drives the organization seeking their assistance. They instead will be driven to make a profit from the services that they are providing to the organization and other organizations that also use them as an outsource provider. The end result is the frustration and difficulty to manage the offshore provider when comparing the managing processes within the organization. This frustration can also be found in other disadvantages resulting from the lack of control such as; renewing contracts misunderstand of the contract, lack of communication, poor quality, and delayed services amongst others. Any organization planning to outsource must be prepared for these consequences and disadvantages that can arise. They must organize a plan to overcome them, otherwise the result of outsourcing will led to failure, costing the organization time, money, and an unnecessary hassle. VI. Current Changes in Outsourcing As mentioned earlier, outsourcing has been around long before the term was ever recognized or defined: Trucking companies were used instead of a company having its own fleet. Public warehouses were used instead of employing bricks and mortar to build a company-owned building. Freight payment services paid bills and collected data. So now that organizations are becoming acquainted with the ever increasing familiar term what has evolved with outsourcing? With the growth and amount of functions placed outside firms outsourcing has led to the creation of new businesses with 4PLs and 3PLs. In the beginning the functions being outsourced were often those that represented non-core and non-vital activities, or some other determinant where the company did not want to invest its own resources, capital, people, technology and facilities. Now outsourcing is seen as a strategic way to align the supply chain within the organization. This helps the organization to become a leading-edge practitioner and is also recognized as a tactical way to better manage service and costs. Offshore outsourcing has become an ever increasing popular activity and global sourcing is seen as a competitive requirement if the organization wants to stay afloat in the business world. This business change has been a driver in supply chain management evolving into a global function and in the outsourcing of the import supply chain. Global sourcing has created an extended supply chain, as to distance and time, which has a menu of supplier and logistics demands. Directing the offshore supply chain, as to costs, performance, inventory, visibility, collaboration, integration and agility is an imperative for corporate success. To effectively manage the offshore supply chain, as to suppliers, logistics service providers and their coordinated integration from vendor door to final delivery location, has caused organizations to assess the utilization of outsourced logistics providers, either 3PL or 4PL. Some organizations have seized this outsource opportunity to transform their total import supply chain. They see this transformation as a way to compress cycle time and decrease inventory levels. Others have focused on arranging the transportation parts as outsourced needs. Overall outsourcing has taken some great turns over the years and has increased both its popularity and success. The use of outsourcing can be a huge advantage as to whether or not an organization has competitive advantage in the market. VII. Outsourcing Works! Outsourcing does work and can provide many ways to cut costs and increase an organization’s business. Today, thousands of organizations are reaping tremendous business benefits by outsourcing functions not related to their core competencies. As stated before there is always a risk of failure involved with any business process, but the overall advantages of outsourcing far outweigh the disadvantages. Before outsourcing an organization must take in the interests of their customers and employees and find a reliable provider.