OBJECTIVES
As a person with knowledge of outsourcing, the author has always brought up to his superiors the viability of strategy formation regarding the analysis of this issue and at times fail to understand the reasons or logic behind certain strategic implementations imposed on it.
By delving into this project paper, the author intends to have better insights into how outsourcing in relation to purchasing and supply chain management is thought up, formulated and then imparted down. The author hopes to have an in-depth understanding as to how the process of outsourcing enables companies and organizations to compete effectively and profitably in this era of internationalization where competition is extremely intense.
In order to reinforce the learning objectives, two key focal issues were focussed upon, i.e. innovation and diversity. Innovation was discussed with regards to outsourcing where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the author considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in order to better understand the issues being discussed.
EXECUTIVE BRIEF
This essay utilized outsourcing companies as the model organizations to review their present Purchasing / Supply Chain management and how they dealt with critical situations. From the analysis, key trends in the Purchasing / Supply Chain management were then identified, how they worked and their effectiveness in dealing with critical situations was ascertained. The paper then moved on to assess these Purchasing / Supply Chain management strategies of most outsourcing companies with regard to their suitability to critical situations, during which the internal capabilities of these Purchasing / Supply Chain management in relation to the strategy being followed by most outsourcing companies were determined also. An overall analysis of the performance and effectiveness of the Purchasing / Supply Chain management was also conducted to assess and compare the capabilities of these Purchasing / Supply Chain management strategies with those of others. Gaps in the Purchasing / Supply Chain management capabilities were then identified.
Finally, several choices of strategies to improve the Purchasing / Supply Chain management of the author’s organization as effective means in critical situations were recommended and evaluated in terms of appropriateness to the issues reviewed, feasibility in carrying out the options and acceptability within the key stakeholders and decision makers. Several key implementation issues related to managing strategic change were also addressed as well.
INTRODUCTION
Nowadays businesses are cutting back on operations to focus on the core business, reorganizing their business norms through downsizing, restructuring or reengineering, as well as contracting out various functions and tasks. Commonly known as outsourcing, this particular business trend had started in the manufacturing business in the early 1980s, mainly as a means of cutting back staff and savings on wages. (2002) define outsourcing as the allotment of work to suppliers and distributors to provide needed services and materials to perform those processes that the organizations do not perform themselves. To put it simply, outsourcing means going outside your organization to get a job done. While such a definition is easy to comprehend, knowing when and how to outsource is much more complex. Modern businesses must consider several factors when thinking about outsourcing. Not only do they have to consider functions that are traditionally outsourced but also the rapid evolution of information technology (IT) requirements ( 2003).
Often a task is considered for outsourcing if the work performed by a consultant would require hiring additional staff if it were done in-house (1996). Moreover, work-handled by a former employee who may perform a specific service is also considered as outsourcing. The term outsourcing may be new to the business; however, the practice of it is not (2003). Historically, numerous businesses have enlisted the help of outside experts to assist with tasks too cumbersome to complete in-house. Legal and financial experts, along with countless other specialists, have long been called on to assist businesses in areas outside their core competencies. Outsourcing (2000) has been a common term for approximately 20 years.
There are many reasons for outsourcing in a company or an organization. The decision of businesses to outsource is mainly based on cost, set-up time and the availability of the expertise. The most common reasons for outsourcing are the needs for expertise, that is due to lack of learning curve and re-creating; manpower, for having not enough staff; time requirements, because of the limited time available to accomplish the job; needed for economics, owing an overall cost savings; shifting of responsibility as for deniability; and removing of stumbling blocks in keeping the work for flowing.
Outsourcing, according to current literature, is a business trend that will most likely continue in the coming years (1996). At present, there are two types of outsourced services of which include technology and business processes. Each can be inert partial to the subsequent areas. The first type of outsourcing is the technology services. This type covers the electronic commerce, infrastructure networks, software applications, telecommunications and website development and hosting. The second type of outsourcing is the business process outsourcing. Under this type of outsourcing are customer contacts (customer relations management), equipment, finance/accounting, human resources, logistics, procurement/supply chain management and security.
Advantages of Outsourcing
Outsourcing has many benefits (1996). These includes freeing up management resources, sharing costs, creating integrated networks, building new organization structures, training staff, and interfacing with other information systems. It offers a company functional specialization and flexibility. For years, companies have been outsourcing payroll and accounting functions but only recently have they discovered the benefits of relinquishing control over their IT departments.
Specifically, (2002) identify Enrol Corporation’s 1989 0 million contract as the first important IT outsourcing arrangement, while (2002) credit Kodak similarly, noting its 1989 landmark move to outsource IT needs. To keep pace with the information technology advances of the last decade, many large organizations have chosen to outsource the departments that handle their information systems and network services. Companies embracing IT outsourcing have benefited from the expertise and technological capabilities of their vendors, but they have had to deal with decreased control as well. For example, four case studies presented by (2000) demonstrate the highly influential role IT vendors can play in the development of public projects. Rather than merely working to meet the needs of the bureaucrats employing them, these vendors incorporated elements of their own political agendas into their work.
Disadvantages of Outsourcing
Still, some of the drawbacks of outsourcing include difficulties in maintaining confidentiality, retaining control and confronting transition problems. At present, issues on the outsourcing of IT professionals have been raised. Disadvantages identified in outsourcing have significantly affected other nations, that effort and ideas are being integrated together so as to prevent outsourcing. In this paper, emphasis on the significance of self-leadership in the prevention of outsourcing is highlighted. The discussion evolves mainly on the assessment of collaboration and leadership in increasing productivity among individuals, their efficacy and various requirements.
Outsourcing: Purchasing and Buying
Buyers and purchasing agents in the outsourcing process are tasked to evaluate suppliers on the basis of price, quality and service support. They review catalogs as well as industry and company publications in order to help them in their search for the right suppliers. Fortunately for them, a majority of this information can be easily accessed in the Internet. They also do some researching about the reputation and background of the suppliers and may also do some advertisements regarding the foreseen purchase actions in the hope of soliciting bids. At meetings and conferences, they perform the examination of products and services, the evaluation of the productive and distributive capabilities of suppliers, and the discussion of business considerations that have the possibility of influencing the purchasing decision. As soon as all valuable information about the suppliers is gathered, the placement of orders and contracts are started to be awarded to those suppliers who are able to meet the needs of the purchasers. The typical contracts range for several years and may even have the stipulations of the range of prices, which would allow the purchasers to reorder whenever necessary.
In some companies, however, there is a clear distinction between the work of a buyer and that of a purchasing manager. Purchasing agents and buyers focus mainly on the daily purchasing tasks. They specialize in wines. Purchasing agents perform the tracking of the conditions of the markets, trends in prices, as well as the future of the wine markets. Purchasing managers, on the other hand, are in charge of the more complex and critical wine purchases and handles a team of purchasing agents.
Outsourcing: Production Planning
Production planning is a necessary function within the outsourcing process. In manufacturing companies this process is often very difficult because of the fast rate of change and the occurrences of unplanned events. Most outsourcing companies use several methodologies depending on the rate of demand of the customer and the price of the product / service. Nevertheless, the objectives of outsourcing companies for every transaction do not change: efficiency and effectiveness.
Production planning is being implemented by most outsourcing companies in order for their activities and resources to be coordinated over time. These enable the outsourcing companies to achieve their goals with minimal resource utilization. Production planning also enables outsourcing companies to monitor the progress of their plans at regular intervals and maintain their control over operations. Production planning within outsourcing companies involves four elements: scheduling, labor planning, equipment planning, and cost planning.
- Scheduling involves the specification of the beginning, the length or the duration, and end of the planned activities.
- Labor planning involves allocating the necessary personnel and delegation of responsibilities and resources
- Equipment planning involves identifying the types and needs in terms of equipments.
- Cost planning involves determining the costs and the possibility of their occurrence.
Outsourcing: Supply Chain Management
Supply Chain Management in most outsourcing companies involves working across multiple enterprises in an effort to limit the supply chain time of delivering products and services to the consumers.
The uncertainty of demands in supply chains within outsourcing companies is easily solved through the implementation of faster response times. The product supply chain of most outsourcing companies has the luxury of longer lead times in terms of batch production of products in order to meet the demands. Most supply chains of outsourcing companies are moving in a position to support faster changes of demand by the consumers (2001).
Because of the agile supply chain of most outsourcing companies, they are able to enjoy so many advantages. As mentioned above, the supply chain analysis tends to shorten the supply chain itself. Also, this will significantly reduce company inventories. Forecasting, scheduling and planning, on the other hand, will significantly improve.
Critical Purchasing / Supply Chain Management Improvement Factors
For outsourcing companies to become a viable player in the industry, the following Purchasing / Supply Chain Management improvement factors are critical:
· Financial Stability
Financial stability is crucial especially in the pursuit of Purchasing / Supply Chain Management and development activities. In any industry, it is important to remain updated with the latest Purchasing / Supply Chain management developments to be able to stay competitive in the market.
· Product Performance and Price
The outsourcing of the best products comes as a result of well-funded Purchasing / Supply Chain management and development activities. The strong performance of outsourced products in the market could also be linked to their cost-effectiveness. However, outsourcing companies have to be aware of the positioning in terms of process so as to maintain satisfactory profits margin and remain competitive in the market.
· Marketing Strategy and Distribution
High brand awareness among the buyers has created the need for aggressive marketing, and access to strong distribution channels is critical for the introduction of new models.
Benefits of Efficient Purchasing / Supply Chain Management
· Economies of Scale and Scope in manufacturing and operations management and development.
· Unique Quality Technology owing to heavy emphasis on Purchasing / Supply Chain Management
An outsourcing company’s commitment to Purchasing / Supply Chain management & development activities has always been one of the top strategies to remain competitive in the market.
· Differentiated Products
Through the production and marketing of differentiated products originating from the Purchasing / Supply Chain management and development activities, the outsourcing company is able to create its own firm-specific advantages. The continuous pursuit of Purchasing / Supply Chain management and development processes enables the outsourcing company to produce a steady stream of originally differentiated products which makes it difficult for competitors to find substitutes. Because of this differentiated approach, the outsourcing company is able to market their products worldwide, which enables them in turn to maximize the returns on Purchasing / Supply Chain management and development expenditures.
STRATEGIC OPTIONS
Deriving from the analysis between the industry, Purchasing / Supply Chain management and capabilities of the outsourcing companies involved, many strategic options would become imperative. It is therefore essential to evaluate these strategic options as to whether they are appropriate to the issues addressed, whether they are feasible enough to be implemented and their acceptability to key stakeholders.
A. Business Level Strategy
There is definitely a need to reconcile both the inside-out and outside-in capabilities. While our organization’s Purchasing / Supply Chain management involves focusing on its core competencies with market position following its resource base, our organization will be put into a disadvantageous position should we choose to neglect both the macro as well as the industry environment. Therefore, our organization has to be aware of the latest Purchasing / Supply Chain management changes, as well as changes in political, economic, legal and even demographic trends in order to develop the outside-in capabilities, such as market sensing, customer linking, channel bonding and technology monitoring.
The advantages enjoyed by our organization may come in the form of increased revenues. Knowing what the market demands and the latest trends could help our organization fully exploit its research and development capabilities to come out with products and services which are not only cost-effective but also high in quality. The strategic option can even be used as marketing tool where the focus is on staying close to the customers of our organization and listening to their feedbacks. On the flip side of the coin, there will be huge mobilization of resources involved, and the associated risks bestowed on our organization.
Nevertheless, the mentioned strategic option seems the most practical in the wake of globalization, since there is a sudden shift towards a more integrated and independent world economy. The key stakeholders too should not have any objections so long as our organization’s core business is not threatened. By virtue of our organization’s centralized control of its business, it is being expected that major barriers should not exist in carrying out such an option except additional time may be required given the scope and span of the operations.
Understanding the strategic importance of Purchasing / Supply Chain management is something our organization has to be familiar with. Our organization normally practices a centralized and globally scaled configuration of operations and capabilities. This allows information dissemination to be retained.
B. Network Level Strategy
There are various strategic options available for our organization. These are enumerated as follows:
· Tie up with various local outsourcing companies
· Collaborate with major competitors
· Alliances with leading players such as suppliers
RECOMMENDATIONS
A tie-up or merger with various local outsourcing companies offers tremendous benefits in terms of access to their Purchasing / Supply Chain management policies, infrastructure and even its resources. However, our organization must not lose sight of its core competencies while pursuing these tie-ups. Otherwise, the image of our organization might be put in jeopardy.
Meanwhile, the collaboration of our organization with our major competitors can be seen as a ridiculous move at first. However, upon close examination, this move could pave the way for our organization to improve even more our Purchasing / Supply Chain management. The bottom line is both sides would be able significantly gain in such an alliance. Our organization’s strengths in product development combined with the Purchasing / Supply Chain management capabilities of our competitors can transform us suddenly into an unbeatable force to reckon with. One possible setback, however, is the differences in the cultures of the outsourcing companies involved. Another possible setback could be whether any of our organization’s competitors has the need to form alliances. The third option also focuses on alliances, but this time with one of the leading suppliers. The benefits of these alliances should outweigh the costs in the long run.
In terms of appropriateness, all three options are able to directly address the current issues mentioned. However, the question remains whether our organization could be able to implement any of these options, and whether these options can be acceptable to the key stakeholders. Any merger or alliances may also involve the sharing of expertise. Our organization has traditionally relied on the inside-out approach. It is important to note that any merger transactions would have many implications on our organization’s values and culture as well as the resources. The key stakeholders definitely would be concerned with such options and need to be convinced of the positive aspects.
CONCLUSION
The results of the analysis carried out on the Purchasing / Supply Chain management of outsourcing companies indicated very significant effects, even amidst the threats of unrest. Therefore, we could conclude that the Purchasing / Supply Chain management of these outsourcing companies could still be expected to improve faster than average.
The review of the Purchasing / Supply Chain management capabilities and resources of most outsourcing companies revealed very little inconsistencies regarding their overall strategies. This is coherent with their traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now for outsourcing companies like ours.
The analysis among the environment as well as the Purchasing / Supply Chain management and capabilities of our organization revealed certain gaps, most of which are biased towards the environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the competitiveness of our organization.
Also, our organization has to find a balance between adherence to internal forces within the management and to the changing forces of the environment in order to implement such strategic options.
Credit:ivythesis.typepad.com
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