Benefits and Drawbacks of Outsourcing Strategies in Managing the Supply Chain - Essay Example

Table of Contents Executive Summary 2 2. Introduction 4 3 SCM Outsourcing 6 3 A Discursive Analysis of the Outsourcing Paradigm 6 3.2 Cost and Benefit of SCM Outsourcing 9 3.2.1 Inventory Planning and Management (IPM) 11 3.2.2 Customer Service and Support 13 3.2.3 Physical Distribution 14 3.2.4 Transportation Management 15 3.2.5 Procurement and Strategic Sourcing 16 4 Conclusion 17 5 References 19 1 Executive Summary Outsourcing, as explicated by Domberger (2005), is fundamentally based on sound economic precepts and best business practice principles. Whether defined as off-shoring or contracting, it is a response to the exigencies of keeping business to customer service and production costs low, without impinging upon the quality of either the services of the products offered on the market. It is, in other words, a decision imposed upon corporate entities by an increasingly competitive environment and a practice facilitated by the evolution of globalisation (Domberger, 2005). As pertains to supply chain management, especially in consideration of the multiple steps involved therein, outsourcing, as in contracting, has always functioned as a predominant characteristic of the process. It is outsourcing, as in off-shoring, which is a novel addition to contemporaneous supply chain management paradigms (Teece, 2005). While corporate experiential and empirical evidence pertaining to the outsourcing of some functions and steps within the totality of the supply chain management framework have fortified arguments in favour of the referred to business phenomenon, others have solidified opposition to it. Certainly, and as the experiences of both Nike and Dell Computers indicate, outsourcing has evolved into an integral componential element of the supply chain management paradigm, not only significantly reducing production and service costs while maintaining the integrity of quality standards but, it has significantly contributed to organisational capacity for efficient and effective operation and resource allocation. That, however, does not imply that outsourcing is not without its problems or that organisations do not have to contend with often formidable challenges prior to reaping the benefits of outsourcing. The failure of many organisations to do so, or to fully appreciate the importance of the outsourcing planning stage, concomitant with a comprehensive articulation of the areas of supply chain management to be outsourced, and the outsourcing paradigm of each, should not be interpreted as evidence against the outsourcing of supply chain management functions. Instead, it should be more accurately understood as evidence for the exigencies of planning. 2. Introduction While popularly perceived of as a new phenomenon for which globalisation is held responsible, Domberger (2005) contends that outsourcing, as contracting, is a historical practice, solidly grounded in economic imperative and principle. As defined by Domberger (2005), outsourcing is best understood as a form of extra-contracting whereby, to reduce overall operational and manufacturing costs and maximise efficiency, firms and manufacturers have, traditionally and historically, contracting out specific steps in the work process, preferring to allocate work process steps according to specialisation, rather than the organisation assuming responsibility for the totality (Domberger, 2005).Outsourcing, from this definitional perspective is, thus, a cost reductive strategy, based upon the precept of specialisation. Concurring with the above definition, Sako (2005) maintains that outsourcing is the redesign of relationships within product manufacturing, organisational operation and supply chain management architecture. The components and principles of the aforementioned architecture have remained, despite technological evolution and innovation, the same but, the componential relationships within them have changed. Hence, while the supply chain management (SCM) architecture are still comprised of procurement, inventory planning, customer service, distribution, and transportation, the methodology by which each is executed and the relationship between the one and the other, have changed consequent to their no longer being in-house, or intra-organisational, activities (Sako, 2005). Within the context of the stated, and as defined by Sako (2005) outsourcing is the reworking of linear relationships within the organisational or SCM architectural model, primarily guided by the imperatives of reducing costs and maintaining quality. Although many management and organisational scholars have presented outsourcing, as defined in the above, as having seamlessly and naturally integrated into SCM, consequent to the nature of its componential elements, this is largely untrue and indicative of unqualified optimism, as opposed to qualified realism. The integration of outsourcing into SCM is a complex process, impacting both the traditional structure of SCM and organisational operation, especially as pertains to risk management strategies (MacPherson, 1997). Outsourcing is expected to have a significant impact on the SCM process, especially as regards relationships between its variant constitutive elements and its success is largely dependant upon the extra-organisational communication and information flow which frames it. Proceeding from the articulated conceptual framework, the research shall assess the benefits and drawbacks of outsourcing and, following a discursive analysis of the most common associative traps, shall present a best practice framework. Supporting arguments shall draw from the experiences of both Dell Computers and Nike. 3 SCM Outsourcing Establishing the interrelationship between SCM and outsourcing is inextricably dependant on the articulation of the precise implications and framework of outsourcing, concomitant with a discursive analysis of its perceived costs and benefits of the practice. Following from that, and in fact, building upon that, SCM shall be discussed, with particular focus on the extent to which outsourcing is integrated within each of SCM's five levels, together with an articulation of the concomitant advantages and disadvantages. 3.1 A Discursive Analysis of the Outsourcing Paradigm From the domestic perspective, outsourcing is a highly unpopular practice. Butler (2003) explains that the basis of domestic opposition to outsourcing, primarily articulated by the Labour Party, is the fear that outsourcing will simultaneously increase unemployment rate and lower UK worker wages. Since outsourcing was initially encouraged by the Conservative Party, whose economic policies were founded upon the minimisation of state presence in the economy, the large-scale privatisation of the public sector and wholesale support for the adoption of a free market, including the labour market, economy the phenomenon has been largely viewed from a prejudiced perspective. Prejudicially viewed, outsourcing implied increased support for domestic corporate interest and decreased governmental concern and support for the domestic labour market, whether as pertains to unemployment or minimum wage rates (Butler 2003). Expressing objective support for outsourcing, Butler unequivocally dismisses the above articulated fears as unfounded. Outsourcing, as later realised and admitted by one of its primary opponents, the Labour Party, makes economic sense and will constructively contribute to the increased competitiveness of British products and services (Butler 2003). Chandler et al. (1999) concur, adding that outsourcing has always been regarded as a theoretically valid economic practice, insomuch as its founding premise is the exigencies of efficient allocation of scarce organisational resources, the exploitation of labour specialisation and the minimisation of production costs, even while maintaining quality, in order to maximise profit margins. Outsourcing, therefore, is not just theoretically valid but, within the context of an increasingly competitive globalised world economy, often presents itself as the only viable option for corporate survival, let alone, expansion (Chandler et al., 1999). As immediately pertains to the UK economy, Sako (2005) validates support for outsourcing through a discursive analysis of the cost and benefits that it has had, thus far, upon the UK economy. In particular, he calls attention to the fact that through its decision to adopt WTO rules and regulations, on the one hand and, its decision to accept its EU integration, albeit with some reservations, the UK has effectively exposed its economy to both the costs and benefits of regionalisation and globalisation. UK firms have considerably benefited from the removal of capital controls, as has the UK economy. However, benefits are no without costs and among the more significant of these costs is increased competition. Response to competition is, naturally, decreasing production and service costs while maintaining, even enhancing quality. Outsourcing is a primary strategy for achieving the stated (Sako, 2005). While Sako (2005) fortifies his support for outsourcing through reference to economic theory and facts and statistics on the cost and benefit of the practice to the UK economy and workforce, he fails to articulate the reality of the challenges confronting the practice or its immediate impact on the British economy. An Economist article, entitled "Time to Bring It Home" (2005), explicates these challenges, or the primary disadvantages to outsourcing. In the first place, outsourcing has had an unequivocally adverse impact upon UK employment rates. The United Kingdom accounts for 19.5% of the totality of outsourced jobs, second only to the United States. While not articulating the precise implications of the cited figure, "Time to Bring It Home" (2005) affirms that outsourcing has had a deleterious impact upon the domestic job market. Quite simply stated, that the UK should rank as the world's second largest outsourced jobs' provider means that jobs would have otherwise been offered on the UK market are being offered from without it. Needless to say, one may very well assume that the economic cost, represented in unemployment rates and benefits, not to mention increased willingness among UK labour to accept lower wages as an alternative to job loss, is high. As serious as the aforementioned may sound, numerous economists and management scholars have contended that the adverse economic cost of outsourcing is temporary and will naturally resolve itself as the labour market adjusts to the outsourcing phenomenon and begins to generate alternative employment opportunities within the domestic context (Domberger, 2004; Sako, 2005; Chandler et al., 1997). Furthermore, as affirmed by Linder et al. (2002) outsourcing is, from the micro-economic perspective of the individual organisation, especially the manufacturing one, an incontrovertible economic imperative which, although might demand a restructuring of the work process and SCM framework, is a strategy for competitive success and organisational survival. Hence, despite the validity of some of the critiques forwarded against outsourcing, the globalisation of corporate competition has determined its evolution as a business and economic imperative. That outsourcing is an economic imperative and that its integration into SCM has determined the increased operational and financial efficiency of the former, despite existent drawbacks and risks shall now be highlighted with supportive exemplifications from Dell Computers and Nike. 3.2 Cost and Benefit of SCM Outsourcing As depicted in Figure 1 and, as briefly alluded to in the above, the supply chain is comprised of an intricate and complex set of interrelated, but differentiated processes. The management of the supply chain, aiming towards efficiency, flexible response to volatile demand and cost reduction, is a complex undertaking. Complexities associated with SCM are only enhanced should an organisation attempt the impossible task of maintaining in-house control of the process, insofar as the stated approach is both a waste of scarce organisational resources and talents and, thus, unsustainable in an increasingly competitive global economy. Hence, to maximise competitiveness through the more efficient allocation of resources and cost reduction, corporate entities have embraced the outsourcing of components within SCM (Tafti, 2005). Criticism of SCM outsourcing has been very vocal in recent years, with critiques ranging from accusations of its contributing to increased domestic unemployment and labour impoverishment to its being a departure from the traditional SCM paradigms which, above all else, highlighted the centralised organisational control of SCM for the purpose of efficiency and effectiveness (Butler, 2003; Domberger, 2005). However, indirectly responding to the stated critiques, Bag and Sambukumar (2004) contend that while SCM outsourcing may have rendered management of the supply chain more problematic, it was effectively imposed upon firms by the exigencies of corporate survival insofar as the former can only be achieved through the cost reduction strategies which outsourcing provides. Not only that but, as the dynamics of supply and demand interrelationship have changed, whereby, rather than create a supply and direct demand towards it, demand precedes supply. In other words, and within the larger framework of the lean organisational and manufacturing principles, supply/manufacture is a response to demand, necessitating a substantial level of SCM flexibility so that the supply chain can immediately respond to demand (Bag and Sambukumar, 2004). Consequently, complexities and criticisms aside, the outsourcing of many of the componential elements within the SCM ha been imposed upon organisations by the very nature of the operative demand-driven, competitive globalised economy. As one evaluates SCM activities, one finds that the outsourcing of many of the sub-components within effectively enhances an organisation's capacity for effective and efficient operation, despite the undeniable existence of some drawbacks and risks, as shall be illustrated through an analysis of each of the SCM activities. 3.2.1 Inventory Planning and Management (IPM) Popularly identified as the first of the SCM activities, IPM is devoted, not just to inventory planning and management but, to the forecasting of demand based on current and past figures, and the management of demand. The outsourcing of this particular SCM activity is popularly perceived of as unwise by numerous organisational development and management scholars, with arguments predicated on the assumption that the outsourcing of the key organisational functions contained within this particular SCM activity will culminate in organisational fragmentation and the loss of centralised control, leading to a reduced capacity for the articulation of strategic plans as would promote the attainment of defined organisation objectives (Sako, 2005; Domberger, 2005). There is little doubt that IPM comprises key organisational functions, over which many firms would be reluctant to loose control. As noted by Corbett (2004), however, while criticisms over SCM outsourcing most commonly pertain to the implied loss of control over key functions, others have argued that these key functions, generally requiring execution by specialists, can best be fulfilled within the outsourcing context. The above is a rather contentious claim insofar as the outsourcing of IPM is concerning. At first glance, inventory and demand management outsourcing appears extremely unwise, effectively threatening an organisation with reduced control over its functions, culminating in inability to meet strategic goals (Corbett, 2004). The articulated risks are incontrovertible but the experience of Dell Computers with partial IPM outsourcing proves that, with strategic and centralised planning, the experience may prove successful. Dell Computers, as explicated in Maximise big ticket supply,' (2003) has partially outsourced its IPM activities whereby inventory and demand management and forecasting are carried out by a third party. However, insofar as the aforementioned third party is a specialist in the stated functions, these tasks are being efficiently and effectively executed, with the IPM outsourcing relationship, as a result, contributing to Dell Computers' increased corporate global expansion and supply-demand flexibility (Maximise,' 2003). Accordingly, even though the outsourcing of IPM may carry the risk of reduced centralised organisational control over key activities, thereby negatively impacting efficient organisational operation, if it is strategically planned and well managed, the outsourcing of the key functions comprised within this activity can substantially enhance organisational efficiency and maximise flexibility, while significantly reducing costs. 3.2.2 Customer Service and Support Customer service and support, the second activity in the SCM framework, and executed by data-input IT personnel and customer call centres, is increasingly being outsourced. According to Teece (2005) several leading HR academics have opposed the outsourcing of customer services and support, maintaining that it effectively undermines an organisation's capacity to control its intra to extra-organisational communication paradigm insofar as it resigns a key HR function, customer services and relations, to a third party, independent contractor (Teece, 2005). While not disputing the centrality of human resource management to an organisation's success, Davidson (1998) maintains that the tasks comprised within this level of SCM are non-core HR functions, with the maintenance of an in-house call centre constituting a waste of scarce organisational resources. Hence, support for the outsourcing of functions contained within this SCM activity are predicated on the supposition that customer service and support functions re non-core and can be more efficiently executed were they outsourced. Dell Computers outsources customer service and support (Maximise,' 2003) as does Nike (Teece, 2005). The outsourcing of customer service and support to third party managed and operated offshore call centres has, not only allowed organisations to significantly reduce their operational costs without jeopardizing service quality levels but it has further allowed organisations to focus on their specified areas of competencies and to channel all their resources into those areas (Teece, 2005). As Leavy (2004) writes in relation to Nike, the outsourcing of SCM functions which do not fall within the organisation's area of competency, which is the design and production of sportswear and sports goods, is directly responsible for much of Nike's growth and global expansion, not to mention its increased market share (Leavy, 2004). 3.2.3 Physical Distribution The third activity within the SCM model has, in recent years, been popularly outsourced both as a cost-cutting and efficiency maximisation strategy. As noted by Teece (2005) physical distribution of goods occurs in response to demand and organisational efficiency and success, including the maintenance of its current market shares within a particular sector, is predicted on its capacity for flexible and immediate response to demand. In order to attain the requisite level of responsiveness, especially within the context of a globalised economy, it is contingent that firms have distribution centres, warehouses and storage facilities located at multitudinous strategic centres, concomitant with assembling and loading capacities. This can only be achieved were physical distribution partially outsourced to third party contractors and facilities, not only in the corporation's home economy but across the world (Teece, 2005). While some have critiqued the outsourcing of this activity, noting that it carries the risk of reduced organisational control over product quality checks and inventory management, empirical evidence effectively negates the stated (Teece, 2005; Domberger, 2005). Dell Computers outsources this particular activity and consequent to the fact that it has designed a framework for tracking and management distribution and has established stringent criteria for product quality checks, has not experienced the aforementioned potential problems (Maximise,' 2004). Similarly, Nike has outsourced this particular activity and not only has it not experienced the cited problems but outsourcing of physical distribution has enhanced its capacity for global expansion through the maximisation of flexible response to demand (Leavy, 2004). 3.2.4 Transportation Management As pertains to this fourth step, Domberger (2005) maintains that the failure to outsource transportation management, within the context of a transportation management model established by the organisation itself, is simply bad business practice. While an organisation should retain control over import and export issues, it is hardly in a position to oversee and execute such tasks as delivery and shipment management and, were it to do so, the cost would be untenable. Therefore, best business practices outline the exigencies of outsourcing this activity to a specialised third party which, would not only be capable of better managing the process but would do so for lesser cost than were the organisation to maintain this activity in-house. Again as pertains to Dell Computers and Nike, and as with all multinational organisations, this process is outsourced (Domberger, 2005). 3.2.5 Procurement and Strategic Sourcing Management and organisational development scholars are engaged in a debate over the exigencies of outsourcing this particular SCM activity. On the one hand, outsourcing would be cost-cutting and could enhance an organisation's flexibility capacities. On the other hand, the outsourcing of such tasks as risk management and speculation, not to mention supply management, is unsustainable insofar as they risks they carry could cripple an organisation's operations. Quite simply stated, some activities, by virtue f their centrality to organisational operation and he fact that they are the basis upon which strategic organisational objectives and plans are designed and managed, need to remain entirely in-house (Domberger, 2005). In an effort to resolve the debate surrounding the efficacy of outsourcing the fifth and final activity in the SCM, Domberger (2005) proposes partial outsourcing as currently pursued by Dell Computers but nit by Nike which is more attuned to comprehensive outsourcing. Within the context of partial outsourcing of this activity, functions such as risk-management and direct material sourcing will remain in-house, while activities such as assortment management, indirect material vendor sourcing, supply trading/exchanging, and purchase order transaction management can be outsourced (Domberger, 2005). This partial outsourcing strategy has worked or Dell Computers and allowed it to reap the benefits of the process while avoiding the costs (Domberger, 2005). Nike, on the other hand, and insofar as the organisation itself is more solidly based on the outsourcing principle (Leavy, 2003) has opted for the near-comprehensive outsourcing of this cavity and, in the process, has paid the cost. As noted by Domberger (2005), Nike's outsourcing of the majority of functions included within this SCM activity has had an adverse impact on corporate image insofar as the third parties it contracted functions such as supply to were revealed as exploitive operators of sweatshops who, in many cases, additionally violated the law through the employment of children (Domberger, 2005). Consequently, despite the fact that the outsourcing of this activity can be economically beneficial, the risks are often unsustainable whereby the optimal approach is the partial outsourcing of functions within this activity, as implemented by Dell Computers. 4 Conclusion As argued in the above, the efficacy of outsourcing some functions within the totality of the five activities which comprise the SCM model, is inarguable. As noted by Sahay, Cavale and Mohan (2003) ever increasing competition has made it imperative that organisations adopt cost-cutting strategies which, at the same time, do not adversely affect quality or organisational flexibility. The outsourcing of specified functions within the SCM paradigm enables organisations to do just that; survive and expand in a competitive global economy while maintaining product and service quality. Even though the efficacy of outsourcing is unequivocal, this does no imply that outsourcing does not carry its own set of risks or that it does not compound the intensity of existent organisational risks. As noted by Power, Bonifazi and Desouza (2004), the failure of organisations to comprehend the complexities of outsourcing and the level of strategic planning that must precede it, often leads to the collapse of the relationship, resource wastage and economic loss. Consequently, if organisations are to exploit the benefits of SCM outsourcing while avoiding, as far as possible, its risks and drawbacks, decisions regarding SCM functions to be outsourced must be carefully made and the outsourcing relationship need be minutely and strategically planned. 5 References Bag, A. and R. Sambukumar, 2004, An introduction to demand driven collaborative supply chain,' WIPRO Technologies [Online]. Available from: http://www.wipro.com/insights/ddsc.htm [5 January 2006]. Butler, P. 2003, A history of outsourcing', The Guardian. [Online]. Available from: LexusNexus Academic Universe. [3 January 2006]. Corbett, M.F., 2004, The outsourcing revolution: Why it makes sense and ho to do it right,' getAbstract, [Online]. Davidson, L., 1998, Cut away noncore HR,' Workforce, [Online], 77, 1. Available from: EBSCOhost. [3 January 2006]. Chandler, A.D. et al., The Dynamic Firm - The Role of Technology, Strategy, Organization, and Regions, Oxford University Press, Oxford. 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