Potential Problems in Developing Sourcing Strategies with Key Suppliers - Research Paper Example

Potential problems and issues in developing sourcing strategies with key suppliers Introduction It is common for many organizations to enlist the services of other contractors to achieve their operations. Thus, on the event that an organization is not able to undertake certain functionality under its jurisdiction, it can subcontract other firms or individuals who specialize in that area to execute the functions for them. This process of using external help to execute some core functions of an organization is referred to as outsourcing (Williams, 2012 n.p.). Therefore, this report seeks to explore various problems and issues that an organization would need to consider when developing sourcing strategies and relationships with key suppliers, with a focus on how such issues and problems can be mitigated. 2) Potential problems and issues in developing sourcing strategies The essence of outsourcing for any given organization is to lower the costs involved in executing the outsourced functions. This is because; the practice is associated with minimizing costs, based on the fact that it does not involve direct hiring of employees by an organization (CIPS, 2012 n.p.). Thus, through contracting for the provision of such services, an organization passes on the responsibility of hiring and retaining staffs to the contracted firm. This strategy has however proved to be more costly than it was anticipated. After a thorough scrutiny of the costs involved in this strategy, it was observed that, despite the fact that the federal employees are highly paid, the US government paid the contractors 1.83 times higher than its employees on average (Williams, 2012 n.p.). Thus, the strategy has proved to be a cost incurrence affair in the guise of cost minimization. This is because; outsourcing for contractors to offer services on behalf of an organization results to three elements of costs minimization, which may work to the disadvantage of the organization. First, to save on their costs incurrence and improve their profitability, the firms contracted by an organization embarks on the cost minimizing strategy by reducing quality or resource utilization. Therefore, they may reduce the number of staff they hire, to minimize their expenditure, which on the other hand results to poor service delivery to the organization’s customers (Brown & Wilson, 2012 p58). Secondly, a firm can minimize its costs by transfer savings, where the firm engages in hiring employees at a lower cost, through paying them less. However, the problem associated with this concept is that employee protection shields the employees against such practices, which would mean that the firm might be forced to hire employees of a lower caliber, who might not have the expertise, skills and experiences desired by the organization outsourcing the services (McGovern & Quelch, 2005 p19). Alternatively, the firm offering the outsourced services can minimize its costs through efficiency savings, which involves the use of highly qualified staffs, better work processes and equipments, and high technology usage (Compton & Jessop, 2001 p40). Nevertheless, to achieve efficiency saving, there are other costs involved before the economies of scale is attained. Therefore, in a nutshell, outsourcing of suppliers and contractors is no longer a cost saving strategy. As it turns out, outsourcing has become a costly affair for the organizations involved, prompting the need to revert into in-sourcing and back-sourcing (Emmett & Crocker, 2006 p22). 3) Potential problems and issues in relationship with key suppliers There are potential problems that can be experienced with key suppliers in the outsourcing markets. First, the issue of different expectations between the supplier and the outsourcing company can result to a failed business relationship. The expectations of the supplier and the outsourcing organization should tally, to ensure that the supplier offers services to the customers of the organization, as expected by the organization itself (Christopher, 2005 p11). Another potential problem is that of lack of integrity and commitment on the side of the key suppliers. This would mean that the suppliers fail to give the customers quality and efficient services, as would be desired by both the outsourcing organization and its customers (Brown & Wilson, 2012 p56). This poses a threat to business failure, since dissatisfied customers may opt out of organization. Lack of supplier loyalty is yet another potential problem with the key suppliers. A good relationship with the suppliers is a ticket to competitive advantage (Bird, 2011 A1). However, when the suppliers are not loyal, they can become a competitive disadvantage. Thus, it is vital to cultivate and sustain supplier loyalty, integrity and commitment to achieving the organizational objectives, while keeping both the expectation of the organization and its key suppliers at par. Transfer of Undertakings (Protection of Employment) TUPE Traditionally, the advantage associated with outsourcing was the fact that it was a cost minimizing strategy, where an organization transferred the costs of hiring and retaining employees to the contracted firm. If it proved that the firm could not deliver appropriately, then an organization had the option of terminating the contract and looking for other efficient contractors (Williams, 2012 n.p.). However, the problem associated with this is the fact that, though it is possible for the organization to change the contractor, it is not possible to change the employees, due to the TUPE regulations (Williams, 2012 n.p.). Considering that all outsourced services are covered under TUPE, many suppliers of services are not willing to engage in new quotations for service rendering, where they are not sure of the TUPE liability that goes with such a move (Williams, 2012 n.p.). This has made the process of shedding one contractor and picking another one very hard for organizations, which has made the minimizing cost strategy of outsourcing more inconvenient for organizations, calling for other viable alternatives (Lysons & Farrington, 2006 p14). Changes in the world of business Outsourcing of services is done with the intention of solving a current need or the one that can arise in the foreseeable future. However, the world of business is ever changing, making it difficult to retain the current situations or circumstances in the business or even to predict the likely future changes with a high degree of precision (Cooper, Lambert, & Pagh, 1997 p7). Thus, the existing need to outsource today might change towards in-sourcing or back-sourcing. The danger associated with this, is the fact that once a contract is entered into, rescinding it is not easy and it comes with greater costs and inconveniencies. Additionally, rehiring staffs to continue with the provision of the services becomes more expensive than it would have been to retain the employees (CIPS, 2012 n.p.). Therefore, effecting a change in the world of business is becoming harder and harder by the day. Thus, the inconveniences and costs associated with cancelling a contract already entered, forces an organization to continue with it, even if it is not serving its purpose well. Alternatively, the organization is left without any option but to incur the costs associated with rescinding the contract (Dam Jespersen & Skjott-Larsen, 2005 p9). For example, in 1990, Sears retailers sought to revoke a contract they had entered for 10years with Andersen Consulting, which increased rehiring inconveniencies on top of paying a high contract retraction fee (Williams, 2012 n.p.). Nurturing competition The main objective of an organization, while outsourcing for the supply of services, is to enhance its customer loyalty and goodwill, through ensuring that they are well served by the contractor, who might have specialized in the area than the organization. Therefore, outsourcing is meant to help an organization improve its customer’s experience, while minimizing on the costs involved (Corbett, 2004 p5). However, as the contractor continues to provide the organization’s customers with the services, it becomes a learning experience, always learning and solving the problems associated with the organizations delivery of products or services to its customers (Bird, 2011 A1). This serves to build a competent competitor to the business, since the contractor may opt to move to the market served by the organization, with the confidence of beating the organization. Thus, outsourcing has been a source of threat to the market share possessed by organizations, since it is the preparation of a more competent and well equipped competitor, who is close to the organization’s customers than the organization itself (Emmett & Crocker, 2006 p25). For example, IBM outsourced enlisted the services of Intel and Microsoft, which have eventually outdone it in the computer world, almost throwing it out of the computer manufacturing business (Williams, 2012 n.p.). Liability transfer The essence of contracting for the provision of outsourced services is not to transfer the business of the organization to the contractor, but to assist the organization in disseminating its responsibilities to the customers (Christopher, 2005 p10). Therefore, contracting does not eliminate the liability of the organization to ills committed by the contractor (Jespersen & Skjott-Larsen, 2005 p16). This means that the liability caused by a contractor to the customers is transferable to the organization, making it liable for the collateral damage (Brown & Wilson, 2012 p60). The transfer of liability does not only occur in the form of payment of damages only, but also in the form of damaged reputation for the business and loss of customer loyalty and goodwill. Therefore, despite the fact that outsourcing is seen a s a way of minimizing costs associated with service provision, it is a concept of increasing the organization’s business risk, both in terms of legal liability and loss of customers, on the event that the contractor messes up (Compton & Jessop, 2001 p35). For example, BP enlisted the services of a contractor, who caused damage to the facilities of Deepwater Horizon, causing BP to be held liable for the payment of damages (Williams, 2012 n.p.) Loss of control In addition to nurturing competition, increasing the risks of losing customer loyalty and the transfer of liability to the organization, outsourcing has contributed to a loss of business control by organizations (Hugos, 2011 p85). Business control is the most vital aspect of an organization seeking to grow and achieve its targets. However, without sufficient business control, it becomes impossible for an organization to steer its business towards the realization of the set objectives (Emmett & Crocker, 2009 p70). Thus, for an organization to regain control of its business, it is vital that it fully takes charge of customer relationships, supply chains and quality provisions to its customers. However, while using the services of a contractor, it becomes impossible for the organization to take control of customer relationship, which is the main determinant of the fate of a business (GSCMF, 2007 n.p.). Loss of control could mean that the business of the organization is driven by other forces, which may lead to a different direction from the one desired by the organization itself. Therefore, while enlisting the services of contractors, it is apparent that an organization has to flow with the rhythm set by the relationship between the contractor and the customers, making it impossible for the organization to take charge of its fate (Lunsford & Glader, 2007 A8). Thus, other than helping an organization to achieve its objectives, outsourcing hinders the goal attainment of an organization. For example, IBM outsourced enlisted the services of Intel and Microsoft, which have eventually made IBM loss control of its business and saw Microsoft and Intel take over its business (Williams, 2012 n.p.). 4) Mitigating the problems The strategies applicable for mitigating the problems and issues associated with outsourcing include: Writing a comprehensive contract with the supplier There are many risks posed by enlisting the services of a contractor or supplier by an organization. Therefore, to mitigate these risks, it is vital that the organization enters into a comprehensive contract with the supplier or the contractor, which covers all aspects of the business and service delivery. The contract should cover such areas as the extent of business control by the contractor and the legal responsibilities for liabilities caused by the contractor (Corbett, 2004 p6). The contract should also cover the issue of contract duration and the possibility of termination in case of a need, stipulating all the terms underlying such an occurrence. This is vital, to set an organization free to take charge and consequently control the manner in which the supplier or the contractor deliver their services (Emmett & Crocker, 2008 p64). For example, Bain Capital has established a long-term service contract with SMTC Corp, which has allowed the two companies work together for long (Christopher, 2005 p16). Undertaking a rational cost-benefit analysis This entails the active involvement of the organization in determining the need for the services of the contractor or suppliers and their benefits as well as the costs. In so doing, an organization is in a better position to understand the risks posed by enlisting this service, and thus prepare to deal with such risks in advance (McIvor, 2008 p31). Alternatively, should the organization find that the costs and the risks involved are higher than the benefits, then, it can opt for the provision of such services internally (Emmett & Granville, 2007 33). Thus, the services of suppliers or contractors should only be enlisted, in the event that they are necessary and inevitable, and where the internal capability of an organization is not sufficient. For example, after a careful analysis of the benefits and costs involved, Coca-Cola FEMSA has enlisted outsourced technology services of HP. This has seen a successful long-term relationship, which has seen Coca-Cola meet its technological needs, which it could not meet otherwise (Rushton, Croucher & Baker, 2010 p71). Ask for bids from contractors and avoid selecting the lowest bidder Through asking for bids from the suppliers and contractors, it is possible for an organization to completely indulge the interested bidders. This will provide an opportunity to assess their qualifications, efficiencies and capabilities, while also seeking to evaluate their integration into the organizational culture (IFPSM, 2012 n.p.). This is relevant to ensure that an organization only enlist qualified and efficient contractors, who are compatible with the organizational cultures and goals. This goes a long way in enhancing quality service provision to the customers, while guarding against any disparity in their service provision from the target of the organization (Emmett & Crocker, 2008 p59). This can be illustrated by Saudi Mobily’s five-year signed outsourcing contract for its technology operations with IBM, even though it was not the cheapest bidder, to perceived efficiency of IBM in this field (Brown & Wilson, 2012 p62) 5) Conclusion Outsourcing is an important and vital concept in the field of business. In fact, it is virtually indispensable for many businesses. 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