Concept of Strategic Outsourcing in Supply Chain Management - Essay Example

Question: Define and explain the concept of strategic outsourcing in the context of designing and reconfiguringsupply chain structures; discuss the decision process of outsourcing and influencing factors; explore what might be the difficulties and barriers in its operational implementation; and finally summarise the key benefits and potential risks. Answer: Strategic Outsourcing in the Context of Designing and Reconfiguring Supply Chain Structures Supply Chain Management is one the hottest careers of the current times which revolves around streamlining a business’s supply side activities so as to ensure supplies are made efficiently, ensuring there is no scenario of excess or under supply. Supply chain management focuses on maximizing value addition for the customers alongside ensuring that businesses involved gain, and are able to maintain a competitive edge in the marketplace (DOLGUI & PROTH, 2010). Strategic outsourcing in very simple words can be defined as the act of engaging a third party to take care of, or manage tasks that would otherwise have to be managed by the personal working in the company. While there are many reasons why companies may resort to strategic outsourcing, the key reason focuses on allowing a company to focus towards its areas of core competency, and separate itself from areas that may take time and can better be done elsewhere, in a much better and cost effective manner. According to a theory businesses get involved in the act of strategic outsourcing so as to be able to extract the best out of the assets currently in use, and allow it to move closer to the achievement of its ultimate goals and objectives. In the context of designing and reconfiguring supply chain structure however, strategic outsourcing has a different meaning. Here strategic outsourcing refers to outsourcing the supply chain structure so as to enable economies of scale and an efficient supply chain function, alongside making sure that the company remains focused towards its key area of business while all other activities that may take up time and effort, and may otherwise not add value proposition to the company are outsourced. The Decision Process of Outsourcing and Factors Influencing the Decision While outsourcing a product or an activity is not a big deal itself, taking the correct decision on whether to outsource it or let the activity or production carried on in house is a key decision that needs to be taken by the top decision makers. Before taking the critical decision it is essential to consider to key factors that undermine the decision to outsource a particular activity; cost, quality and benefit. While it may be evident from the top that outsourcing an activity would result in ultimate savings as the activity may be carried out but the outsourced vendor at a much cheaper cost, the question that needs to be considered here is this really the case or are there additional factors that need to be considered (WATERS, 2010). For instance, a vendor may give a quote that is quite less from the cost that would result from the activity being carried on in-house; however is it of the same quality? Quality is one of the key areas of concern that decision making managers often overlook in a bid to save costs. But it needs to be understood that compromise in quality may, and often does result in losing out customers. A manager who is responsible for taking decision regarding the outsourcing process should only go ahead with it if he can conclude that as a result of going ahead with the activity the company would actually create more value than before. Value can only be created if as a result of the decision, there is cost saving, or any other sort of benefit accruing to the company from additional sales to synergies being achieved etc. Other factors that can, and do often play a very important role in the decision making process include; processes, contracts, communication, quality and change. Change, for instance caused as a result of an outsourcing decision is very critical to be understood. Employees might take outsourcing as a signal of them being fired eventually and companies may witness a turnover in their employees. In such a scenario the benefits to be attained from outsourcing may be more than just offset by the cost and time involved to train new employees. Therefore managers who are in charge of taking outsourcing related discussion need to consider all these factors in mind. Another of the five key factors mentioned earlier includes quality. It is essential to keep the quality component in mind before any decision to outsource is made because it is highly possible that a company’s success is achieved to its high quality, and if the vendor is not able to provide the same quality then that could result in loss of massive sales. Reliability is also one of the key factors that need to be considered before going ahead with crucial outsourcing decisions. There is no point in getting in to contract with a vendor who is not reliable, as failure to deliver work on time can, and often does result in loss of not only revenue in dollar terms, but often important clients whose worth cannot be put to account. Before moving onto signing a contract with a vendor four outsourcing supply chain functions both the Companies should ensure there are clauses relating to failure of the outsourced party to deliver timely work, its remedy/backup and compensation to be made to the other party. Most importantly, one of the key areas that influence the decision to outsource the supply chain function is to consider the ability of the other party as a reliable and efficient supply chain contractor. It needs to be ascertained if the vendor has sufficient vehicles, equipment and manpower to be able to carry on the supply chain function smoothly. It is the essence of supply chain management that while the function is working well no one would be raise fingers, but when an irregularity in terms of excess or short supply is detected there can be a lot of noise in the department. Therefore, ensuring the other party’s capabilities is an important step that must be followed before taking crucial supply chain outsourcing decisions (KIM, 2005). Possible Difficulties and Barriers in Operational Implementation of Outsourcing of Supply Chain Management The operational implementation of outsourcing a supply chain structure is not the easiest of things. The thorough implementation of the outsourcing a supply chain functions and ensuing that it works within the predefined perimeters would face a lot of difficulties and barriers. We now discuss each of these factors in details. It is not the easiest of tasks to find out a vendor who is able to provide the kind of supply chain activities that you expect. For instance, a small scale ice cream manufacturer who currently deals with his supply chain function on his own with the help a small pickup would find in readily incompatible to outsource his function to a Company who only has large containers. Another problem that may occur in implementation of outsourcing the supply chain function of a company may stem from incompatibilities in the work style of the two companies. For instance, a company that is looking to outsource its supply chain function might be used to supplying all of its products made in one particular day to stores by the end of every day. However, when the very same company looks out for vendors to carry out their supply chain function, there is a fairly high possibility of them being unable to find one who handles the supplies in the same manner (MENTZER, 2001). Oftentimes when work is being outsourced, specially supply chain functions, there needs to be a ready agreement between the two parties, where both have to adjust a little bit from their pre-defined terms in order to find a solution that is feasible with both the parties in concern. Finally, and most importantly the issue that many companies have to face while outsourcing their supply chain function is that of resistance. The employees in the company who are currently handling the functions of supply chain feel that they would be made redundant and that is the key reason why they create barriers in the way of peaceful transition of the department to be outsourced. This is a key issue, and these employees need to be briefed in detail about the plans of the company so that both the employees and the company can be on the same page and the process of outsourcing of the department is carried out smoothly without any issue (SMITH, 2007). The Benefits and Risks Associated With Outsourcing Supply Chain Management There are many risks and benefits that may arise as a result of outsourcing the supply chain management function. We now consider each of them at a time, starting off with the risks first. Risks related to outsourcing the supply chain management function may include unanticipated costs, potential for setbacks, difficulties in integration and compromise on quality. Looking at the unanticipated costs first, there are often many costs that are not clear at the outset of the project but become known once we proceed. For instance, increased tax on outsourced supply chain activities and their failure to handle excess supply loads are just a few examples of how costs may go unanticipated (MONCZKA, TRENT & HANDFIELD, 2002). There are potential for setbacks too like mentioned earlier. The vendor to whom the supply chain function has been outsourced may make up unrealistic deadlines, as a result of which there can be shortage of supplies in stores. This again is a key risk possibility that must be borne in mind. Another potential risk is that of integration difficulties, and that usually come up in the transition period. Once the supply chain vendor and the company are on the same page difficulties do not usually arise, however lack of communication in the transition phase can mean major mishaps and failure of proper supply chain working (KOTABE & MOL, 2006). Unlike risks, outsourcing supply chain function also brings in key benefits for the Company. The key benefit is that it allows the key personnel of the company to focus more on their core competencies rather than wasting time on additional activities that might not even yield much value. Since supply chain management can eat away hours, outsourcing it would mean giving more time to management to work on key areas. Outsourcing supply chain management would also mean saving a lot on costs as the outsourced company would know their line of work, enable economies of scale as they work on a large scale and also design the most cost effective scale that one could have thought of. Moreover, outsourced companies are usually kings in their line of business and may find alternate ways to handle the supply chain function, thus resulting in more efficiency for the business than earlier expected. Outsourcing also enables flexibility as by working in close contact with the vendor would mean having access to their resources when required, and these very resources can then eventually be used in times of need when, for instance the business receives huge supply orders that it would have otherwise been unable to process. Bibliography DOLGUI, A., & PROTH, J.-M. (2010). Supply chain engineering useful methods and techniques. London, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=645890. MENTZER, J. T. (2001). Supply chain management. Thousand Oaks, Calif, Sage Publications. KIM, B. (2005). Supply chain management. Singapore, John Wiley & Sons (Asia). SMITH, D. L. (2007). Strategic outsourcing. Scottsdale, AZ, WorldatWork. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=543232. (n.d.). Strategic Outsourcing. [S.l.], AMACOM. http://search.ebscohost.com/direct.asp?db=bth&jid=3CBP&scope=site. WATERS, C. D. J. (2010). Global logistics new directions in supply chain management. London, Kogan Page. http://site.ebrary.com/id/10404157. MONCZKA, R. M., TRENT, R. J., & HANDFIELD, R. B. (2002). Purchasing and supply chain management. Cincinnati, Ohio, South-Western College Pub. KOTABE, M., & MOL, M. J. (2006). Global supply chain management. Cheltenham, Elgar Reference Collection. Read More