Supply Chain Outsourcing - Term Paper Example

Supply Chain Outsourcing Abstract Outsourcing may be described as the tactical employment of external resources, to execute activities conventionally handled by inside workforce and resources. Outsourcing is a tactic, through which a firm contracts out key functions to efficient and specialized service suppliers, who become appreciated business affiliates. Outsourcing was not officially recognized as a business approach until 1989. Organizations began outsourcing functions, which are essential to run a firm, but not associated to the core business. There are various reasons explaining the outsourcing behavior of organizations. The following are the common reasons; to control and reduce operating expenditures, obtain access to world class competencies, and release in-house resources for other functions. Also, firms outsource if a function consumes a lot of time while managing it, if there are inadequate resources available within the firm and the firm is aiming to share perils with an associate firm. The paper discusses various problems, issues and concerns faced by organizations while considering outsourcing some of their business functions. Supply Chain Outsourcing Introduction Since the Industrial Revolution, firms have struggled with ways of exploiting their competitive advantage to augment their profits and enlarge their markets. In the 20th century, the business model was a momentous integrated firm, which may possess, administer and control its resources. In 1950s and 1960s, firms focused on diversification of their operations, to widen business bases and enjoy benefits of the economies of scale. Firms expected to protect earnings through diversification. In 1970s and 1980s, firms trying to compete internationally were strained by lack of flexibility resulting from bloated administration structures. In order to increase their creativity and flexibility, several prominent firms developed a novel strategy, which focused on the core business functions. The novel strategy required identification of vital processes and deciding which can be outsourced (Grahl, 2011). According to Grahl (2011), outsourcing was not officially recognized as a business approach until 1989. However, previously, most businesses were not entirely self adequate; they outsourced those tasks, which they had no internal competency. For example, publishers have frequently purchased fulfillment, printing and composition services. The utilization of exterior suppliers for these vital but auxiliary services may be described as the foundation stage in outsourcing evolution. In 1990s, organizations started focusing on cost saving measures. Organizations began outsourcing functions, which are essential to run a firm, but not associated to the core business. Companies were contracted to provide human capital, accounting, security, data processing, and plant maintenance services among others. The present stage is the progression of outsourcing in the progress of tactical partnerships. Firms are establishing partnerships, which enable them to outsource some of its core business functions such as customer service. Outsourcing Outsourcing may be described as the tactical employment of external resources, to execute activities conventionally handled by inside workforce and resources. Outsourcing is a tactic, through which a firm contracts out key functions to efficient and specialized service suppliers, who become appreciated business affiliates. Firms hire contractors for specified kinds of work or to level troughs and off peaks in their workload. Firms have established long lasting associations with those companies whose abilities complement their own. Actual outsourcing entails considerable restructuring of specified business functions including the transfer of employees from a firm to a specialist, typically smaller firm with the needed core capabilities (Rushton & Walker, 2007). Outsourcing could be divided into two wide categories; Knowledge Process Outsourcing and Business Process Outsourcing. In business process outsourcing, a precise process function is outsourced, for example, payroll processing. BPO work can be either front office work or back office linked. Front office functions imply client oriented work such as answering calls, marketing and technical support among others. Internal functions such as purchases and billing fall under the back office linked work. Examples of services under the BPO category include accounting, marketing, data entry, business consultancy, call center, medical billing and record, and web design and development among others (Rushton & Walker, 2007). According to Rushton & Walker (2007), Knowledge Process Outsourcing involves work that requires higher levels of participation from the employee. The employee has to use superior levels of research, technical and analytical skills and has to make a superior order as compared to BPO work. Examples of functions outsourced under KPO include pharmaceutical investigation and development, simulation, animation and intellectual property investigation. Data investigation and analysis, database establishment services, legal services, content writing and development are examples of services provided under KPO. There is another category of outsourcing known as the Information Technology Outsourcing. This category is usually integrated into the information technology functions of the firm. The information technology functions of a firm include the administration of BPO and KPO functions. Problems with Supply Chain Outsourcing The Key Problem - Cost Savings There are problems encountered by firms while outsourcing services. Outsourcing results to more efficient procedures. The beginning of the engagement entails the redesigning of the supply chain, transportation optimization, inventory optimization and sustainable packaging assessment. These evaluations streamline procedures and lead to expenditure savings. An outsourced affiliate will design and implement the most effectual supply chain for the company’s requirements. The outsourcer promises the outsourcing firm and in most cases these promises do not materialize. Outsourcers quote cost savings as one of the benefits that will accrue to an outsourcing firm (Tomkins et.al, 2005). Research has shown that an extremely small number of outsourcing projects save money. The problem of cost savings emanates from problems within the organization. Most organizations fail to value the services previously offered by internal employees. These services among other activities are valued and are hidden costs to the organization. The following are the causes of hidden costs; insufficient evaluation systems, failure to describe current information technology requirements, and failure to define future needs or failure to develop mechanisms for safeguarding price in the event of contingencies. Others include ambiguities in the agreement, not permitting the vendor a rational profit, and unforeseen, increasing, internal agreement management expenditures due to feeble contracting practice (Tomkins et.al, 2005). Fees charged by the service provider are a source of concern in the absence of cost savings. Research has shown that organizations engage in contract discussions without sufficiently guaranteeing that the services to be offered are correctly described. The fixed fees quoted by the outsourcer in the contract may not specify what the fees will cover. Failure to achieve expenditure savings may be due to inside issues within the organization. Studies have found that outdated policies, internal politics and poor administration within the organization prevent in-house information technology divisions from executing cost controls. The poor purchasing practices of several IT divisions and lack of information technology principles has contributed to a significant proportion of the increasing costs of information technology departments (Knaus, 2007). Firms should not outsource several of its administration related to information technology. Firms require employees to administer the outsourcing partner to make sure the vendor is providing services as per the contract. Activities such as discovery and development of tactical applications may not be outsourced efficiently. Firms are recommended to retain minimum key administration abilities within its control. These abilities include systems integration, tactical philosophy on information technology in association to the business, contract monitoring, eliciting firm demand for information technology, identifying business opportunities for the utilization of information technology and the capability to lever partner associations to a benefit. In most cases, organizations do not consider these activities when computing the expected expenditure savings (Burkholder, 2006). Many organizations do not consider the real cost of outsourcing. For example, the outsourcer employees may be incapable of performing the functions the firm has been contracted to perform. Therefore, outsourcer employees will learn on the occupation on how to perform these functions. The costs associated with this incapacity may result to loss of efficiency. A company outsourcing its information technology services may experience loss of work. For example, if a worker’s machines goes down, worker will lose the capacity to work until the outsourcer resolves the issue. The loss of output may be expensive depending on the response time of the outsourcer. The outsourcing contract signed by the parties contains the information of the service to be provided by the outsourced firm. The outsourcing company will be required to pay extra charges for anything not included in the contract. The outsourcing firm will incur legal charges of retaining a lawyer to review contracts signed (Knaus, 2007). Cheaper Technology Outsourcing firms assure organizations that they might reduce expenditures, since the vendors may purchase information technology software and hardware at much lower prices. Most organizations have established that they can benefit from the similar discounts of purchasing IT software and hardware in large quantities as the outsourcing firms. As the pace of technological innovations increases, firms have less time to pay the sunken expenditures related with buying new technologies. Outsourcing firms are aware that, in the long term such as one year or more, the hardware cost will reduce. Outsourcing vendors use this knowledge to form contracts with organizations lasting three to five years (Burkholder, 2006). Initially, the prices quoted by the outsourcing vendors are attractive. After a year, the real price of IT hardware reduces and organizations are not incapable of enjoying the reduction in prices. The cost of software is also adjusting in reaction to the outsourcing trend. Software vendors characteristically sell software on per client or per location basis. As more outsourcing traders absorb the diverse permits of their customers, return to the traders in relation to yearly maintenance and supplementary sales of software has been plummeting considerably. In reaction, the software traders have been developing novel structures of software pricing, which avoid the price benefit enjoyed by the vendors (Burkholder, 2006). According to Bragg (2006), some software vendors are charging their software on the basis of hardware size; larger hardware results to high charges. Several software traders dot not allow the software permit to be transferred. This implies that if the outsourcer is in charge of the entire organization’s IT resources, new permits should be bought be the outsourcer and hence paid by the firm. As a result, the firm pays double for the similar software. For those software vendors who permit to be transferred, organizations are required to pay transfer charges. Access to Latest Technology The outsourcing firms may be constrained in accessing the latest technology, if the outsourced firm is not using the new technologies. When a firm outsources services from another firm, it uses the technologies adopted by the outsourced firm until the end of the contract. The outsourced firm may be incapable of investing in research and development due to various reasons such as insufficient funds. In most cases, the outsourced firms are usually smaller in terms of size as compared to outsourcing firms. Incapability of the outsourced firm to be innovative and creative limits its clients into using the technology it has adopted until the end of the contract (Bragg, 2006). According to Bragg (2006), several organizations consider that outsourcing their information technology service will enable them to obtain access to the newest technology. Research has indicated that outsourcing does not mechanically offer access to novel technologies. Firms outsource in order to save costs while outsourcers invest heavily in technology. Therefore, outsourcers establish long term contracts in order to maximize their returns on investment. Organizations should be aware that if they want the new technology, they ought to realize that the new technology will cost significantly more than old technology. The organizations’ fallacy regarding the outsourcer’s capability to produce the novel technology, when the employees of an organization are allegedly incapable, can also result to the organization being confined to the inappropriate technology. The organization should consider whether they require having access to the newest technology or not. The decision will depend on the outsourced business functions. Access to Skilled Resources Organizations experience financial challenges while aiming to streamline its operations. Organizations aim at reducing expenses and increasing their profits. Outsourcing results to loss of experienced personnel. Outsourcing firms have expressed that they lack appropriate, skilled resources from outsourcers. Organizations may find that it is incapable of hiring the required personnel, and they are either obliged to disburse high salaries for these workers or high rates to outsourcers. Organizations search for outsourcers who claim to be having all the experienced resources as per the organization’s requirements. Research has indicated that most outsourcers do not have all these skilled resources they claim to possess. These outsourcers contract other agencies to hire employees on its behalf, which compromise the quality of work performed (Winker, 2009). The outsourcer typically undertakes to presume responsibility of all the firm’s IT employees. However, organizations have established that when they outsource to gain advantage of vendor’s skilled personnel, they end up being served by their former workers. When a company outsources some of its functions, employees who were previously performing these functions are affected. The organization arranges the absorption of employees affected by the outsourcing contract with the outsourcer. Research has indicated that not all employees are absorbed by the outsourcer and those who are absorbed leave the outsourced firm within one year. Most outsourcing negotiations do not consider the effects on human resources. Employees join an organization because of the organizational culture; outsourcing leads to reduction of employees’ dissatisfaction. Outsourcers take advantage of the skilled and knowledgeable personnel from the outsourcing organization. Outsourcers use these employees to provide services to other outsourcing organizations (Winker, 2009). Service Quality Outsourcing firms experience problems in quality of services emanating from the outsourcer incompetence to provide high quality services as promised. Outsourcers lure organizations to supply services claiming that they will provide higher quality as compared to in-house employees. However, research has indicated that outsourcing has resulted to drop in quality of services. Studies indicate that those organizations that outsource all their services frequently experience service degradation and in some scenarios increased expenditures. Studies have indicated that firms attempted to renegotiate the outsourcing contracts within a year citing the following reasons; price, quality and altering ideas concerning the needed services. Other studies have revealed that organizations have attained identical quality enhancements by in-sourcing their functions (Bragg, 2006). Sharing Organization’s Information Technology Knowledge with Competitors Organizations spend a considerable amount of resources in developing its knowledge base. Companies invest heavily in research and development, thus inventing and creating new technologies. Organizations also invest in development of its human capital. This collectively creates an extensive technical knowledge and intellectual capital. Organizations characteristically build up an affluence of knowledge for a long period regarding the utilization of information technology in their organizations. Some organizations use their expertise in information technology as a competitive weapon. Most organizations do not consider information technology as a core capability. However, the difference arises concerning how that technology is utilized by an organization in processing and storing precise corporate information (Knaus, 2007). The ways through which an organization processes and stores its information, using the technology, is the area where large organization may gain considerable and sustainable competitive benefit. Outsourcers aim at gaining control in these two areas. Once outsourcers obtain control of the two areas, they may sell the ability to other firms who have an identical requirement. This will result to loss of competitive advantage of the outsourcing firm. The outsourcer and competitors of an outsourcing firm benefit from the intellectual capital and technical knowledge of the organization (Knaus, 2007). Loss of Control by the Organization over its Information Technology Once an organization has outsourced some of its business functions, it loses control over these functions. In case of Information Technology Outsourcing, several firms have articulated concern over losing power of their information technology once it is subcontracted to an outsourcer. Organizations express concern that they will lose control over the future direction and focus of its information technology, which they have spent a considerable amount of funds and time while building (Smock, et.al, 2006). When the outsourced functions were in-house, and the personnel were internal employees of the organization, management of the organization had the capability to control the daily tasks and provide direction to their employees in the formulation of precise information associated projects. There was a guarantee that additional duties, which might be requested, would be performed with a sensible degree of certainty (Bragg, 2006). In case of outsourced functions, any additional tasks will first be reviewed by the outsourcer in terms of the agreement and the cost. The organization will no longer essentially dictate the way of performing tasks and who to perform them unless the agreement has permitted. Another issue is that, once the business functions such as information technology has been transferred to the outsourced firm, the outsourcer has a relative liberty to utilize them in any manner he or she deems appropriate as long as he or she continues offering the needed services. Outsourcing may also raise the query of security for critical information of an organization. The exceptional information of an organization is prospectively accessible by other organizations and outsourcer’s employees who might be employees of other organizations. Despite the regulations that may be there to safeguard exceptional information of an organization, they are complex to execute (Rivard & Aubert, 2008). Loss of Expertise According to Winker (2009), studies have indicated that once an organization has outsourced functions, it loses knowledgeable and skilled employees to the outsourcer. In several scenarios, workers transferred to the outsourcer are not accessible by the outsourcing organization. Some of the functions, which were speedily resolved by internal employees, may take days once functions are outsourced. Organizations lose the intellectual capital it has developed for several years, and it takes considerable time to rebuild these intellectual resources. Organizations may be incapable of taking advantage of a new opportunity since it does not have internal expertise to evaluate and exploit the new opportunity. Performance of the Outsourcing Vendor Organizations have been raising issues concerning the performance of outsourcers in the provision of services. Organizations have been raising issues that outsourcers are making decisions slowly, and they are not producing the preferred results. Low performance and service degradation result to decreased sales. However, studies have indicated that the problem is not as a result of the outsourcer, but also the outsourcing firm. Studies have shown that outsourcing organizations failed to develop appropriate performance measures of the functions prior to outsourcing. Therefore, it is tricky to appraise the recital of the outsourcer since there is no benchmark for comparison. Outsourcers might not have the required expertise to perform functions contracted to perform. Therefore, it may make time to recruit and train employees resulting to low performance during this period. Outsourcers may not have the competence to complete the functions contracted to perform, thus resulting to low performance (McIvor, 2005). Inadequate Measurement of In-House Services Levels – Service Level Agreements Service Level Agreements are an essential instrument for developing and assessing information technology service recital for an organization. The agreement formalizes the dedication of a service provider to offer services of a specified quality at a specified degree of response to clients paying for the services and consumers receiving the services. Through establishing and negotiating a Service Level Agreements with its clients, an organization could effectively plan to offer a variety of services covering the core services required by the management. Research has indicated that several firms try to pass the responsibility of their inadequacies to outsourcers. The partners fail to put into place monitoring systems for evaluating the performance (McIvor, 2005). Inadequate Definition of In-House Services and Inadequate or No Service Costing These are among the main problems in outsourcing. According to McIvor (2005), the underlying reasons for these troubles is as a result of insufficient administration controls and disciplines in the outsourced business functions such as information technology division. Research indicates that organizations failed to monitor its functions before outsourcing them. Organizations failed to develop Service Level Agreements, wholly describe and cost all business functions such as IT services and incapability to monitor recital of the departments as per established service levels. Poor Outsourcing Contract and Change of Character Clauses Research has indicated that outsourcing firms incur extra charges as a result of these two problems. Outsourcers changed character, which would not change the services with an aim of charging additional fees. There has been also a problem of poor contracting where the organization maximizes earnings at the leniency of vendors. Outsourcers have legal representatives who are experienced in outsourcing contracts, whereas the outsourcing firm’s legal representative may have minimum experience on outsourcing agreements. Research has indicated that outsourcers had an advantage during negotiations and execution of the contract (Bragg, 2006). The “Unintended” Consequences of Outsourcing There are problems in outsourcing, which results from unintended consequences. According to Knaus (2007), research has indicated that outsourcing has resulted to a considerable loss of employment. Employees of the outsourcing firm are transferred to the outsourcer premises which may be far away. Another aspect is that most outsourcers are foreign owned corporations, meaning profits go to foreign countries. The host country has low benefits out of outsourcing. Conclusion There are several problems and issues that organizations experience while they outsource some of their business functions. Most organizations outsource functions in order save money. However, research has indicated that firms do not save costs as they anticipated. There are various reasons why firms do not save money through outsourcing, which may include unrealistic anticipations concerning what the outsourcer will offer and insufficient internal practices that the administration was unaware or were anticipating alleviating through outsourcing. Other problems and issues may be in the form of failure of outsourcers to fulfill their promises, dwindling control of the outsourced functions, dwindling competitive advantage, interpretation of the contract, or outsourcer performance. One of the key problems in outsourcing is in the area of expenditure savings. References Bragg, S.M. (2006). Outsourcing: a Guide to Selecting the Correct Business Unit, Negotiating the Contract and Maintaining Control of the Process. New York: John Wiley & Sons. Burkholder, N.C. (2006). Outsourcing: The Definitive View, Applications and Implications. New York: John Wiley & Sons. Grahl, A. (2011). Success Factors in Logistics Outsourcing. New York: Springer. Knaus, M. (2007). Macroeconomic Issues of Offshore Outsourcing. New York: GRIN Verlag. McIvor, R. (2005). The Outsourcing Process: Strategies for Evaluation and Management. Cambridge: Cambridge University Press. Rivard, S. & Aubert, B.A. (2008). Information Technology Outsourcing. New York: M.E. Sharpe. Rushton, A. & Walker, S. (2007). International Logistics and Supply Chain Outsourcing: From Local to Global. London: Kogan Page Publishers. Smock, D.A., Rudzki, R.A., Karzorke, M. & Stewart. S. (2006). Straight to the Bottom Line. New York: J. Ross Publishing. Tomkins, J.A., Simonson, S.W. & Upchurch, B.E. (2005). Logistics and Manufacturing Outsourcing: Harness Your Core Competencies. Raleigh: Tompkins Press. Winker, D. (2009). Services Offshoring and its Impact on the Labor Market. London: Springer. Read More