WHAT ARE THE ROLES THAT OUTSOURCING AND PROCUREMENT PLAY IN THE SUPPLY CHAIN? WHAT IS THE RISK AND BENEFITS ASSOCIATED WITH OUTSOURCING MANY OF FIRM’S ACTIVITIES?
An effective supply chain leads to a smooth process of continuous, uninterrupted production or service for the supply chain to be effective, all the limiting factors of the process are to be dealt in a thriving manner and an alternative should be identified against it to reduce any lead time. Constructive use of outsourcing and procurement can lead to an effective supply chain.
OUTSOURCING
There are many variables upon which a company decides if it should outsource any process or conduct it in-house. The concept of outsourcing arises when the task performed by the company can be done cheaply from any outside company, but outsourcing is not all about saving money for the company; there are advantages of outsourcing beyond that as said before if used constructively then it can bring synergies within the company and optimum utilization of resources by enabling the company to grow.
Focus On Core Activities,
Outsourcing can enable a company to focus on activities, which bring maximum benefit to the company and the non-core process that acts as complimentary to the main product, which can be performed by another company on the company’s behalf.
Zara currently manufactures three types of products that include: high quality segment, medium quality segment and low quality segment. The high quality segment is the core product; therefore, it requires greater focus than other two segments. In case, Zara outsources the other two segments then it can achieve strategic competitive advantage in the industry with its core focus on the high quality product.
Zara can even follow the outsourcing methodology that Nike follows. Nike only focuses on designing the product whereas the complete manufacturing is conducted in China through outsourced manufacturers.
Cost and Efficiency Savings
One of the major incentive of outsourcing is the fact that it leads to cost saving and efficiencies. The apparel manufacturing is an intensive labor operation process and due to the high labor cost within the European Union, Zara is facing very high wage rates but the similar process can be conducted in the similar way in a third world country with low wage rates that can bring down the cost of labor and increase efficiencies.
The transfer of call centers from US and UK into India is another example of cost saving for outsourcing.
Reduced Overhead
Overheads leading to cost of space that is rent, utilities etc. are another major cost that are saved when entire departments are outsourced, not only you will paying lower labor cost but all the other expenses regarding the labor are also saved. This will help Zara to reduce its overall cost of production.
Operational Control
Departments that cannot be handled or managed by any company are also contenders for outsourcing; this means specialist people will be running this department of the company by considering to whom the company decides to outsource the department to but most of all it gives complete control to the company regarding the department improving operational effectiveness and the supply chain.
There are many companies that outsource their finance departments, it is not the entire department that will lend services to the external audit team to create the financial statements, but this only happens in small scale companies.
Staffing Flexibility
Outsourcing relieves the company from fixed cost of the staff, when the services are rendered from an outsourced company during an On season with an increase in demand; the company ask for additional services and for Off season they can be reduced, however, the same step cannot be taken by the company itself.
Even with all the benefits that outsourcing can provide, there are still materialistic risks that need to be considered,
Loss of business knowledge
It needs to be considered that in case a company outsources a department only due to an increase in cost then it is also forgoing the operational excellence and business knowledge of that department; consideration should also be given to that fact that the company can perform at the same level with the outsourcing as it was performing before.
Vendor failure to deliver
One of the major risks of outsourcing is that companies become dependent on the supplier; if the vendor is not able to fulfill the order or had technical mistakes in the product then it will destroy the goodwill of the company rather than of the supplier.
Productivity fluctuations
Often it is observed during the first year of the outsourcing that the transfer of knowledge and expertise leads to a decline in productivity till the point when outsourcing becomes fully operational; which leads to a loss of sales. Secondly, the company will need to let go a lot of its staff after outsourcing......................
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