Improvement in the Supply Chain Offered by Outsourcing Development - Essay Example

?IMPROVEMENT IN THE SUPPLY CHAIN OFFERED BY OUTSOURCING DEVELOPMENTS EXECUTIVE SUMMARY Outsourcing in supply chain offers great deal of benefit to businesses. The growth in the field has expanded to the point that has increased outsourcing of complete supply chain of business model. The report reviewing the academic literature and practical examples related to outsourcing of supply chain reveals that the strategy of outsourcing has become strategically important for the organizations in order to fuel the process of growth and development. Upon provision of guideline for strategic outsourcing the report provides the business with suggestion to outsource functions in order to reap the benefits offered. INTRODUCTION Supply Chain management is originally implemented by companies in order to streamline operations of the business. Overtime importance of the field of management grew more towards art featured science where exploiting different prospects from the business supply chain determined core of success. For instance, well knitted supply chain of high fashion retailer ZARA has been centre of attention for its supply chain being vertically expanded yet offering low response time to market. On contrary to this model of vertical integrated supply chain, outsourcing of supply chain factors have also gained considerable attentions. Hence, in both cases the objective of the in-sourcing and out-sourcing have been to increase company performance (Williamson, 2008). The underlying report provides intends to develop the possible improvements that outsourcing of the supply chain components offer to the business. Upon developing reference from the academic literature and practical example for the outsourcing of the supply chain components the report suggests business to gain increased benefit by outsourcing of its certain components. To mention, the risk associated with this model has also been attended in detail in order to provide comprehensive assessment of the consideration. LITERATURE SURVEY Supply Chain management has taken the driving seat in determining business model of the business. Simchi-Levi et al (2003) noted that supply chain excellence of the business model is its capacity to provide leading excellent experience to customers. The debate on the supply chain has attended both aspects addressing details to dependency on the supplier as well as taking greater control of supply chain components in organizational control. Business giants prefer developing supply chain model with combination of the outsourced as well as in sourced activities considering the role of the activity in respective business model. For instance, Emirates Airline has outsourced its queue management services to Wave Tech in order to provide customers with high quality services, owing to its expanded operations. On contrary to this, businesses have also set examples of in sourcing business function activity for increasing strength of competitive positions such as STARBUCKS has invested in coffee bean farming in China in order develop long term control over business supply chain. Similarly, small business outsource various secondary functions of supply chain such as accounting, payroll functions etc to reduce the cost burden of hiring expert for the purpose on the firm. Flexibility and adaptability of the supply chain are critical factors in the growingly competitive business world. Therefore, businesses are growingly moving towards outsourcing business functions. Respective to the business functions outsourced emerging trends are giving rise to management businesses ranging from 1PL to most recent 5PL (where number refers to level of functions outsourced or party providing logistics). The concept has been explicitly presented in the image below: (E-logistics Control, n.d.) Expansion of outsourcing the function of supply chain is being adopted for numerous benefits it offers to business. Some of the benefits that outsourcing offers include following: FLEXIBILITY BENEFIT: Outsourcing of a function does not require firm to invest in the infrastructure. The flexible infrastructure of the business allows business to take the core component required on variable cost and hence enjoying the flexibility to switch from service provider as and when needed without incurring loss of fixed investment. COST BENEFIT: Outsourcing of business functions reduces the level of cost commitment firm requires in case of performing function personally. The cost benefit directly generates from the direct investment as fixed investment as well cost incurred for the supporting functions such as HR required for the purpose. EXPERT ORIENTATION BENEFIT: Outsourcing allows firm to increase expert orientation in the entire supply chain. Business cannot develop expertise in entire supply chain functions; while outsourcing to service provider is the expertise of facilitating firm. EXPANSION BENEFIT: Capital and other resource commitment reduce with outsourcing the function; hence enables business to expand its market beyond local boundaries to global level. INCREASED ACCESS TO NEW CHANNELS BENEFIT: Outsourcing allows business to benefit from wider channels than originally available to business. For instance, recent technological wave of e-commerce allows business add value to business with additional channels. RISK REDUCTION BENEFIT: Outsourcing of business function reduces the chances of risks with respective functions. Owing to the increase level of expertise from outsourced function service provider, risk of discrepancy reduces to greater extent. Above mentioned benefits from outsourcing form a domain in itself and level of benefit depends upon the efficiency in developing supply chain strategy. Gartner research has identified list of best practices that firm shall leverage will taking outsourcing decision. Best practice in outsourcing strategy requires business to align the outsourcing strategy with corporate and supply chain strategy (Marzyani, Mazlan, and Ali, 2006). Further, companies intended to compete in market with extreme differentiation such as personalized product or service or low cost differentiation can take benefit from outsourcing strategies. The company looking for personalized product or service can take core product or service from external service provider with increased capability to adapt changes while the company looking for low cost differentiation can outsource business functions to low cost product or service providers, reducing related cost and hence develop cost related competitive edge over competitors. However, best practices in outsourcing require business to take initiative on strategic perspective than cost only. This cost understanding of factor further requires business to identify core competency that business own while the point of overlapping of business as well outsourcing service provider (TOI Tech, 2011). Outsourcing strategies require business to develop concrete understanding of the fact as any overlapping can affect business losing its success factors and competencies. Along with the benefits those outsourcings offer there are still factors that can result in disadvantage from outsourcing business function. Gavin and Matherly (1997) defined possible disadvantages from outsourcing into three broad categories of people, process and technology. Peoples perspective refer loss of morale among the employees over reduced level of expertise within organization, while processes related disadvantage refer to the inabilities of the firm to decide the level of the process to be outsourced while percentage to be retained in anticipation of the future prospects (Marzyani, Mazlan, and Ali, 2006). In addition, Elmuti and Kathawala (2000) reported that outsourcing result in the firms control over the function of business. Hence, outsourcing can be regarded as business strategy that has been moved from being traditional aspect to taking the position of strategic perspective Franceschini et al (2003). Therefore, in order to undertake strategic level decision business are required to follow well defined model capable of clearly guiding business relating to outsourcing of certain function while retaining other. Accenture, global business consulting, outsourcing and technological solution provider presents framework guiding business to take decision related to outsourcing (Alvarenga and Malmierca, 2010). Accenture’s outsourcing model requires business to critically address the given below test of functions (Alvarenga and Malmierca, 2010): TEST 1- CORE COMPETENCY TEST: In order to make a particular function the core competency for the organization it should be a source of competitive advantage. It is important to consider that any outside specialist cannot provide such service as of company’s standard (even at higher cost) and the firm retains well understanding of the risks associated with externalizing the function of business. Therefore, any function that is successful in meeting the criterion forms the core competency and hence shall not be outsourced. TEST 2- KIND OF KNOWLEDGE FUNCTION REQUIRES: Like economies businesses are also growing towards knowledge driven success. Business develops competitive advantage based on the knowledge that is function, industry as well as internal business related. Decision to outsource function based on the knowledge are to follow given matrix for decision making: (Alvarenga and Malmierca, 2010) TEST 3: FUTURE SOURCE OF IMPROVEMENT IN FUNCTION: Source of improvement in future generally originated from third party service provider. Reason for the fact that multiple applications of similar service with fine tuning generates considerable understanding of the deviations. However, in cases where internal company operations are considered source of superior knowledge shall then not be outsourced. TEST 4: EXTERNALIZATION RISKS: Along with benefits of the externalization of function there are direct and indirect risks associated with it. Some risks have been identified as follows: (Alvarenga and Malmierca, 2010) In addition to the direct risk associated with supply chain outsourcing of the business, indirect risks associated include liability vulnerability in case of anything going wrong. Hence, critical factors of the business being affected by the business outsourcing functions that increases vulnerability shall not be outsourced. Hence the decision of outsourcing business function is strategic in nature and therefore requires to be undertaken from the comprehensive understanding of the relevant factors. JUSTIFICATION OF ARGUMENT The comprehensive understanding of the factors provides guideline to the businesses related to the outsourcing of business functions. Growth in the field has increased to extend that significant portion of public health logistics are being outsourced in developing countries (USAID, 2010). For instance, Government in Senegal and Madagascar has taken services from the NGOs in order to improve the health conditions with nutrition intervention (Loevinshon 2008). Combination of 3PL, non- Asset based 3PL, and 4PL has been assigned tasks which are based on the services to be outsourced as well as on the basis of the timing and service provider. In addition to the referred countries various other countries have undertaken such measures while giving special consideration to possible benefits as well as costs and risks associated with it. Hence, following timeline that determines the combination of what is to be outsourced, when a particular function shall be outsourced as well as determining key decisions related to fact of how function shall be outsourced as shown in the image below: (USAID, 2010) Therefore, the above example of developing countries provides key rationale to the outsourcing function of the business. The example provided also adhered considerable attention in deciding three key factors. These considerations are in harmony with the factors discussed in the literature review. Therefore, following guideline of four key tests, business can identify its core competencies and sources of competitive advantage. In addition, upon exploring the relevance of the factor to the business and risks of externalization, business can outsource its function and attempt to develop the compatibility of the business with updated model. Based on the resulting situation and learning from success stories, increased level of adaptive model can form source of competitive advantage to business. CONCLUSIONS AND RECOMMENDATIONS Outsourcing business supply chain function has taken considerably dominant position in the competitive market of today’s business world. Explored from literature review, fact asserts that successful outsourcing can bring immense benefit to business; however, at the same time the strategy poses serious threats to business. Therefore, outsourcing has become strategic imperative for the business and requires business to undergo litmus test function before outsourcing and forecasting its future results. Based on the comprehensive literature review and case study based references it can be concluded that outsourcing can benefit business greatly, conditional to its pre-requisites well addressed. The results can however, be otherwise in case assessment does not fulfill requirements. Therefore, it is recommended that business should draft its own details and should explore the sections of supply chain that can be outsourced. While based on its own capability to perform certain function as well as capability to integrate and align outsourcing strategy with corporate strategy business can exploit possible benefits from outsourcing. List of References Alvarenga, C., and Malmierca, P. (2010). Outsourcing core competency 2.0: the case for outsourcing supply chain management. Accenture. Available from http://www.accenture.com/SiteCollectionDocuments/PDF/282Accenture_Core_Competency_20_The_Case_For_Outsourcing_Supply_Chain_Management.pdf [Accessed 8 April 2013] Elmuti, D. and Kathawala, Y. (2000) The Effects of Global Outsourcing Strategies on Participants’ Attitudes and Organisational Effectiveness. International Journal of Manpower, vol. 21, no. 2, pp. 112 – 128. E-logistics Control. (n.d.). Supply chain coordination for your business. Available from http://www.e-lc.biz/nl-BE/Layout001.aspx?PID=94 [Accessed 7 April 2013] Franceschini, F., Galetto, M., Pignatelli, A., and Varetto, M. (2003) Outsourcing: Guidelines for a Structured Approach. Benchmarking: An International Journal, vol. 10, no. 3, pp. 246 – 240. Gavin, T. A. and Matherly, C. M. (1997) Outsourcing: an Operational Auditing Perspective. Managerial Auditing Journal, vol. 12, no. 3, pp. 116 – 122 Loevinsohn, B. (2008). Performance-Based Contracting for Health Services in Developing Countries: A Toolkit. The International Bank for Reconstruction and Development / The World Bank. Available from http://siteresources.worldbank.org/INTHSD/Resources/topics/415176­1216235459918/ContractingEbook.pdf [Accessed 8 April 2013] Marzyani, R., Mazlan, R., and Ali, K. (2006). Relationship between supply chain management and outsourcing. Available from http://eprints.utm.my/650/1/CM_55%5B1%5D._Relationship_between_supply_chain._Raja_Marzyani.pdf [Accessed 8 April 2013] Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and Managing the Supply Chain; Concepts, Strategies, and Case Studies. New York: McGraw Hill Professional TOI Tech. (2011). Eight best practices for supply chain outsourcing. Available from http://articles.timesofindia.indiatimes.com/2011-09-07/services-apps/30122628_1_supply-chain-outsourcing-current-capabilities [Accessed 8 April 2013] USAID. (2010). Emerging trends in supply chain management: outsourcing public health logistics in developing countries. Arlington, VA: USAID. Available from http://deliver.jsi.com/dlvr_content/resources/allpubs/guidelines/EmerTrenSCM_Outs.pdf [Accessed 8 April 2013] Williamson, O. E. (2008). Outsourcing: Transaction Cost Economics and Supply Chain Management. Journal of supply chain management, vol. 44, no. 2, pp. 5-16. Read More