The Potential Challenges of Organizations Developing Sourcing Strategies - Research Paper Example

?Contents Introduction 2 Background 2 Challenges and Solutions 3 Creating Competition 3 Different Interests and Terminating Contracts 4 Cost Control 5 Management Control 6 Hidden Costs 6 Privacy and Information Security 7 Conclusion 8 Bibliography 9 Introduction The term sourcing denotes and connotes several meanings; this range from suppliers who supply firms with raw material and it can also refer to supplies providing a range of services ranging from warehousing to manufacturing as well as transport. According to Andy Williams, outsourcing has become a common trend in Europe and America with firms sub-contracting outsiders to handle certain aspects of their production process since in the past this has been found to be cost effective (Williams, 2012). The primary focus of this paper, therefore, is to examine potential challenges that organizations may encounter while developing sourcing strategies and the issues they would need to consider developing relationships with key suppliers, and providing suggestions about how these problems might be addressed or mitigated. Background The firms in Europe and US often outsourced Asian countries with lower production cost such as china which is estimated to host over 6600 companies which have been outsourced there (Wright, 2009). As such, it is common to have a firm dealing with electronics, but it has subcontracted and outside source to handle the transport and logistics of the finished products to the market, another case can be a firm dealing with vehicles, but it only supplies the parts and subcontracts an outside source to deal with the assembling. This, however, does not come without challenges, a firms relationship with its suppliers is hence vital in promoting productivity and effectiveness, having a third part supply resources or services that are critical in the final products of the firm requires considerable mutual trust and understanding. It is hence incumbent of any organization to apply the best and most practical sourcing strategies to meet their goals and objectives. Sourcing strategies by definition are the process an organization undertakes to ensure they have the best suppliers and they nurture the supplier relationships to maximize the value for the firm (Rendon, 2005). As such, most organizations have sourcing programs that are unique to their needs, services or the goods offered, notably while, some have deliberately puts these strategies others use them without being aware of it. Such is to say that organizations have sourcing strategy whether they know it or not, this is because owning to the nature of their business, over the year a firm will repeatedly uses the strategies that have proven successful in retrospect and by so doing will be following a covert sourcing strategy. Like any other strategy, a sourcing strategy can be; “Strategic”, ergo effective, goal and objective oriented, on the other hand, depending on the competence of those managing the firm, it can be ineffective and inefficient. Naturally, each is an ideal extreme since no firm can be very efficient and neither can any firm be fully inefficient and yet continue to exist (Wheaton, 2008). As such, most strategies lie somewhere between with the best being closest to efficient and vice versa, sourcing program can either be “strategic” or meet its goals and objectives or it can be unproductive, ineffective, and poorly planned (Wheaton, 2008). Considering that the cost, quality and effectiveness of the goods or raw materials a firm is supplied with is directly reflected in its financial and operational results, it is only natural that thought and effort and time be devoted in the understanding of the various challenges that firms may encounter in the process and their possible solutions. Challenges and Solutions Creating Competition One of the considerations a firm needs to make before it commences any business transaction with supplies or outside sources is the potential for the supplier to become competition in posterity. This is because by taking these contracts, the company will learn new skills and develop its own economies of scale in the business, as a result after the expiry of the contract. The firm that had contracted use the contractor skills and contacts as well as good will to cut into the business, and the initial firm will have unknowingly created competition for itself. For example, when IBM was the giant in the computer business, they contracted Microsoft to make Operating systems and Intel for microprocessors; however, the two companies soon used this edge to develop their own production. They diversified and cut into IBMs market and as a result, while IBM faded into obscurity; the two companies occupy top hundred positions in the fortune 500. In the last few years, Microsoft and IBM have been competing in domains that were previously the reserve of IBM such as modelling because with Microsoft trying to dominate in that as well (Babcock, 2007). For a company to ensure it does dig its own fiscal grave in the form of creating competition, it should always ensure to retain the activities and knowledge that made them competitive in the first place. Firms should avoid dumping important aspects of their production process to other firms since while it may save them from expenses and risk in the short run; they will be jeopardizing their position and relevance in the market in the long run. As such, it is imperative that firms do not rely on outsourcing too much in the belief that a corporation can thrive simply by having a brand name, contractors and directors (Williams, 2012). Different Interests and Terminating Contracts Even before, a firm has signed a contract they should consider the potential consequences of engaging in business with suppliers beyond the short term; this is because termination of the contract can pose considerable challenges for both sides. Changes and termination of contracts may result in customer-supplier disputes, complicating relations other suppliers, before terminating such contract, a customer should for instance consider if the supplier has made an investment beyond the terms of the contract. Awareness of this is important since the supplier may not be able to use it in other ventures, as such; termination of the contract makes it worthless and results in losses. In some cases, the customer may take advantage of the situation and try to reduce the price; however, while they may benefit in the short run, they are likely to have problems getting willing suppliers in future due to their reputation (Mikkelsen and Freytag, 2007). Cost Control Cost control could also pose a challenge in the future relationship between an organization and its suppliers and before any commitments between the two parties are made, due consideration should be given to this. Today due to globalization and the delicate state of the global economy, the operating cost in the supply chain are subject to pressure and can change drastically over short periods. These include technology upgrades that could render already purchased technology obsolete, such as the move from analogue to digital television broadcasts. The rising cost of health care and insurance for workers as well inflation can also contribute to the supplier losing their control over the cost of the goods or services. In order to mitigate firms need to apply metrics that are used to determine the level of an organization’s success; a firm for instance could apply SCOR metrics, which are tailor made for supply changing evaluation and with this. In recent times more organizations are taking this approach to align their strategic sourcing goals with technology, they used predict and anticipate, as well as, make comparisons with the various existing suppliers and the supply chains involved before they can make a commitment (Jennifer, 2002). Another possible solution for this would be the application of tactical sourcing; this is a reactive method that covers eventualities, which cannot be planned for in advance such as changes in technology or natural disasters can be provided for within the strategic sourcing framework. It can for instance be applied in organizations that deal with rapidly changing technology that may require upgrades that were not planned for, for instance a firm may have ordered computers, but before they can be supplied changes make a model obsolete and uncompetitive. Management Control Whenever a company signs a contract to have another supply certain goods or perform services for them, they are turning over the management of that aspect of their production to a third part and by so doing also relinquishing control over that particular function. This can be a problem if the outsourced company does not apply or respect the same standards as the outsourced company especially if they are motivated primarily by profit relegating quality to a secondary position. At the end of the day, this might compromise the quality of services or goods provided, and if this spills over to the consumers, it will further compromise the integrity of the company. Take for instance the case of the BP oil spillage, while BP paid the price for cleaning up, and its reputation got colossally dented, not to mention the plummeting of its share, it is not the firm that did the work that caused the spillage but a company that it had contracted (Williams, 2012). As such, before a firm hands over control to another, it should thoroughly vet the latter’s effectiveness and commitment as well as ensure they will be contracting a firm that is fully capable of not only getting the job done but also upholding the reputation of the parent company. It is also makes sense after the BP incident to reduce the amount of work outsourced by major companies especially on such delicate operations especially those with the potential to pose health and environmental hazards (Pfeifer and McNulty, 2011). Hidden Costs When dealing with suppliers, the issue of hidden cost often arises, and this is because when one signs a contract with the supplier anything that is not included in the initial contract; including expenses will be the responsibility of the contracting firm. In the Information technology, considerable sums are eaten up by a myriad of hidden costs manages cannot pinpoint whenever there is outsourcing despite the admittedly otherwise high benefits (Barthelemy, 2001). Furthermore, the firm may have to incur legal fees since a lawyer must be present to review the contract before they are signed, when dealing with a firm that has specialized in outsourcing or supplying goods, one is often at an advantage since they are more experienced in that aspect of the business. Latter cost, which had not been planned for May, then latter emerge, this include; currency fluctuations due to inflation of shifting in global economics trends. For instance, and invoice sighed last year for a million pounds may become a million and a half the next year, this may cut into the firm’s profits. Another instance in which hidden cost can be involved is if when the contract involves, for example, a two year refresh on hardware such a personal computers, the contract and the outsourcing deal may differ with the latter exceeding the former by a year or two, as a result, the firm will be forced to cover the costs itself. Take the case of a pharmaceutical firm that assumed it would be compensated for an un rescheduled refresh by the company that had provided the machines, but they ended up spending as much as 20 million dollars themselves. To mitigate such eventualities, firms for the first instance should hedge currency risks; this can be done in several ways such as including caps and collars in contracts or mutually agreeing with suppliers to share responsibility for any unprecedented changes in the currency and inflation. In the issue of hardware updates, the firm should ensure they have all the details beforehand and not assume the suppliers will be responsible for their unscheduled updates (Brown, 2008). Privacy and Information Security In this today’s age, information is a crucial component in the running of any business; however, a lot of this information is highly confidential for purposes of brand exclusivity or even employee and consumer privacy. When a firm outsource the services of another, it is inevitable that information will be transmitted to the other firms, and these may range from financial records to employees or customer medical forms among others. If this information was to leak to a third party, there might be dire consequences in the form of stolen patents of even privacy violation lawsuits by clients or employees. Thus, before a firm outsources, it needs must carefully evaluate the other firm so as to ensure its private information is protected and ensure the contract includes a penalty should such a violation occur. In due consideration of this, the Indian government has put up hefty penalties for BPO firms, which compromise the privacy of information in accordance to the IT Act of 2000. Conclusion In conclusion, it clear form the points considered that while supply is and strategic sources are key aspects of most organizations; they are delicate issues that need to be approached with caution and due consideration. It is evident that there are several potential challenges that may arise from the interaction between the various parties in the chain of demand and supply, and these can have serious social and financial ramifications. In outsourcing, firms must consider the potential for creating competition, which may drive them out of business as well as well as the possibility of conflicting interest during termination of contracts that may make; what one business sees as a loss appear as profit in the other. Privacy is also another issue that has been examined since cooperating firms has to share information; leakage of which could be disastrous. There is also the issue of quality control where the supplying firm may be more concerned with the bottom line and compromise the integrity of the client firm. Ultimately, for any firm to go into business with a supplier or outsource services it is critical that they take into consideration all this and many other factors before sighing on the dotted line. Bibliography Babcock, C. (2007). "IBM Vs. Microsoft in Modeling." InformationWeek.1167: 30-. [Online] Available at http://search.proquest.com/docview/229105112/13B7372553A5F8F9458/1?accountid=1331 [Accessed: 5 January 2013] Barthelemy, J. 2001. The Hidden Costs of IT Outsourcing. MIT Sloan Management Review, 42(3), pp. 60-69. [Online] Available at http://search.proquest.com/docview/224961284/13B7373EF153FA0C006/1?accountid=1331 [Accessed: 5 January 2013] Brown, D. (2008). “Top 10 Hidden Costs of Outsourcing” CIO Insight. [Online] Available at http://www.cioinsight.com/c/a/Bottom-Line/Top-10-Hidden-Costs-of-Outsourcing/ [Accessed: 5 January 2013] Freytag, P. V. and Mikkelsen, O. S. (2007). Sourcing from outside - six managerial challenges. The Journal of Business & Industrial Marketing, 22(3), pp. 187-187. [Online] Available at http://search.proquest.com/docview/222012021/13B7374C2362C08AF53/1?accountid=1331 [Accessed: 5 January 2013] Jennifer, B. S. (2002). Strategic Sourcing Gaining Maturity. EBN, (1329), pp. 40-40. [Online] Available at. http://search.proquest.com/docview/228268787/13B7375DF1A1B479640/1?accountid=1331 [Accessed: 5 January 2013] Pfeifer,S. and McNulty, S . (2011). “The oil spill that changed the industry”. Financial Times. [Online] Available at http://www.ft.com/cms/s/0/d4507ab2-691c-11e0-9040-00144feab49a.html#axzz2H6A7epoG [Accessed: 5 January 2013] Rendon, R. G. (2005). “Commodity Sourcing Strategies: Processes, Best Practices, and Defense Initiatives”. Journal of Contract Management. [Online] Available at http://www.ncmahq.org/files/articles/jcm05_pp7-20.pdf [Accessed: 5 January 2013] Wheaton, G. (2008). “Strategic Sourcing Overview” Epiq Technologies, [Online] Available at. http://www.epiqtech.com/strategic-sourcing-overview.htm [Accessed: 5 January 2013] Williams, A. (2012).“ Back to reality: Outsourcing, insourcing, on and offshoring” Supply Management. [Online] Available at. http://www.supplymanagement.com/analysis/features/back-to-reality/ [Accessed: 5 January 2013] Wright, N. (2009). "China's Emerging Role in Global Outsourcing." The China Business Review 36.6: 44-9. [Online] Available at. http://search.proquest.com/docview/202712611/fulltextPDF/13B70E4116838E4A55D/5?accountid=1331 [Accessed: 5 January 2013] Read More