Outsourcing
in Supply Chain Management (SCM) has become an important aspect to provide a
competitive edge. Earlier outsourcing was just an option which was never taken
seriously as the total production was less along with competition. However, now
the scenarios have completely changed, there is huge competition in the market
and hence the final product should be produced at minimum possible cost for
maximum profitability and availability should not be affected as there are
competitors to ready to grab your place. However, there are various pros and
cons of using Outsourcing in Supply chain Management
Let
us first list down the Benefits of Outsourcing in SCM
- Cost
effective
- Focus
on core business
- Continuous
improvement
- Labour
Issues
1. Cost effective: Outsourcing
certain process can be cost effective. Logistics can be one such example. If
you are a start-up it is not advisable to buy your own logistic system which
includes Vehicles (trucks), storage facilities as it would be too much of
investment which will adversely affect your profitability and breakeven point.
2. Focus on core business: In
many scenarios, we have seen that core competency of a company is its
competitive edge in the market. For such companies it is important to focus on
its core areas rather than diverting the attention on managing other related
processes. This in turn will affect the core competency of the company and it
may lose its competitive edge. Hence, we have seen companies like Apple
outsource all its other processes except for their core competencies which is
designing.
3. Continuous improvement: Generally
outsourcing is done for a supporting activity which is not your core strength
but to a vendor who has expertise and experience in executing that sub-process.
This can be easily seen in e-commerce world where all the online shopping sites
focus on their website but their logistics and distribution is outsourced to
vendors who are experts in this field. For example, Jabong outsource its
logistics to Blue dart who have years of experience in their field and are
focusing on continuous improvement in terms of mode of transportation,
locations of storage facilities so that the products are delivered without any
damage and in time to the rightful owner. If Jabong tries to have its own
logistics division they may be able to manage it but will not be able to
consistently improve on their methods and functioning of the whole process.
4. Labour Issues: This
is major issue which can be tackled by outsourcing supporting processes. If you
are hiring employees for those processes then you need to invest on various
other related requirements like infrastructure, dedicated HR team for
maintaining their salaries and appraisals, other benefits, employee retention
and conflicts. This can affect your profits as well as divert your focus from
the core business. Hence, outsourcing is one possible foolproof solution for
this issue.
These
are some of the benefits of outsourcing. However, this does not imply that
Outsourcing in SCM does not have any drawbacks or risks. There are many risks
in outsourcing which are listed below:
- Outsourcing
decision
- Vendor
Selection
- Structured
contract and monitoring
- Trust
1. Outsourcing decision: This
is a very important decision which if not taken correctly can adversely affect
the success of the business. The Top management need to understand which
processes in the company can be outsourced which will result in maximum
profitability with zero errors and stoppages. Here, the top management needs to
analyze which processes are critical to business and which they are not able to
manage as per expectation. Also, they need to forecast the benefits post
outsourcing respective processes. If core business processes are outsourced and
the final outcome is not satisfactory then the company will face huge financial
losses along with their brand name getting affected.
2. Vendor Selection: Vendor
selection is a real challenge when it comes to outsourcing. As through
outsourcing you are allowing a stranger to perform activities under the
Company’s name and your brand name. Hence, if anything goes wrong the Company
will get affected. If a wrong vendor is selected he can not only cost u
financial loses but also Company’s brand name is at stake.
3. Structured contract and monitoring: Contract
creation with Vendors and monitoring is a major concern for the Management of
the company. If the contract creation goes wrong there is always a possibility
that the vendor may exploit it and can cause financial lose to the company.
Monitoring is also a major concern as in outsourcing; management does not have
complete control over all the activities carried out by the Vendor.
4. Lack of Trust: This
is commonly observed situation between Vendors and Management of the Company.
After outsourcing if the company does not show trust in vendor or vice versa
then it can adversely affect the business process that are outsourced and the
interlinked process. For example, if extra effort hours are required to
complete certain process and if the company does not trust the vendor then it
will not pay for the extra hours resulting in conflict and affecting the
quality of the next cycle as vendor will not spend extra time or take special
care making sure that the output is of the best quality.
Thus, it can be seen that Outsoucing
is very important tool in SCM which holds the key to success and growth of the organization
only when it is managed and executed correctly for the right processes and at
the right time.
About Author:Amol Bhembre is a consultant in Systems Plus Pvt. Ltd. Within Systems Plus, he actively contributes to the areas of Technology and Information Security. He can be contacted at: amol.b@spluspl.com
