Outsourcing in Supply Chain Management

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

1. Cost effective
2. Focus on core business
3. Continuous improvement
4. 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:

1. Outsourcing decision
2. Vendor Selection
3. Structured contract and monitoring
4. 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