The Importance of Supply Chain Outsourcing - Book Report/Review Example

THE IMPORTANCE OF SUPPLYCHAIN OUTSOURCING SYNOPSIS Today business competition has entered new phase where companies that fail to offer their customers something innovative will go out of the business. In this context, managements cannot effectively concentrate on each and every supply chain activity as they need to invest a considerable amount of their time on product innovation and sales improvement. As a result, today most of the large organizations outsource some parts of their supply chain operations to external vendors. Evidences suggest that the practice of supply chain outsourcing can provide firms with competitive advantages on the ground of cost savings, performance efficiency, and smooth production flow. Table of Content SYNOPSIS 1. INTRODUCTION 2. SUPPLY CHAIN OUTSOURCING 3. KEY DRIVERS OF SUPPLY CHAIN OUTSOURCING 4. CURRENT ISSUES AND THEIR INFLUENCE 5. BENEFITS/ADVANTAGES 6. CONCLUSION 7. REFERENCES 1. INTRODUCTION The current business world is characterized with fierce market competition, and every company strives to gain a competitive edge over their rivals. Even for a newly established industry, the degree of competitive rivalry becomes very high within months. As a result, today organizations trim down their operating costs and improve the overall operational efficiency with intent to deliver superior quality products and services to the end consumers. Firms that fail to restrict their expenditures to annual budgets are likely to go out of the business because modern consumers are very price sensitive. In order to increase the supply chain efficiency and to gain a sustainable competitive advantage, today companies widely follow a new strategy called supply chain outsourcing (Fang et al (n.d.)). This paper will discuss the strategic importance of supply chain outsourcing and the key drivers of this supply chain practice. The paper will also address the current issues that increase the strategic importance of the concept of supply chain outsourcing in the today’s business environment. 2. SUPPLY CHAIN OUTSOURCING In the contemporary business environment, supply chain outsourcing is a common practice that maximizes operational efficiency and cut down the total cost of production. The concept of supply chain outsourcing can be simply defined as “the method of dislocation of supply chain activities to the third parties, with the purpose of organizational simplification and expenditure flexibility” (Biz-Development, Jan 2009). Scholars identify supply chain outsourcing as a great business opportunity covering almost all segments of the supply chain. Supply chain outsourcing mainly includes production outsourcing, warehouse outsourcing, delivery outsourcing, and supporting services outsourcing (USAID, July 2010). Under production outsourcing, a part or the whole production process is outsourced to the third party vendor with intent to reduce production complexity and to enhance the pace of production. According to McIvor (2005, p. 21), today companies increasingly depend on warehouse outsourcing to make full use of the available factory space. Delivery outsourcing gives organizations the opportunity to cut down transportation costs and focus more on sales. 3. KEY DRIVERS OF SUPPLY CHAIN OUTSOURCING The key drivers of supply chain outsourcing include increased efficiency, reduced operating costs, value chain optimization, better productivity, improvement in sales, and low complexity. Firms mainly rely on supply chain outsourcing to improve their operational efficiency (Lahmar 2007, p.vii). To illustrate, when the production process is outsourced to third parties partially or fully, the firm can effectively test the quality of products. Some companies may not have adequate skilled workforce to produce goods in the required quality and quantity, and in such situations they find supply chain outsourcing as the better option to meet their business needs. Firms operating in the automobile industry and IT sector often outsource a part of their production to external firms so as to reduce complexity in their own plant (Domingues 2007, p.59). Companies identify supply chain outsourcing as potential choice when their sale volume fails to satisfy the expected financial standards. In addition to the advantages of simplified production processes, organizations expect cost efficiency by adopting the practice of supply chain outsourcing. For instance, a growing firm may not have an extensive logistics network to transport its finished goods to delivery points. In this circumstance, it is not a financially sound option for those firms to purchase trucks and other supply vehicles, and hence they turn to supply chain outsourcing (Cecere, Feb 20, 2014). When firms are forced to perform tasks in which they are not mastered, the situation would negatively affect their overall organizational productivity and ultimately profitability. Hence, firms choose to outsource some of their complex tasks to third parties to better utilize their human capital, to avoid scrap products, to eliminate production delays, and to maximize the organizational productivity and profitability. Value chain optimization is another major key driver of supply chain outsourcing (Gassmann et al 2004, p.92). The process of supply chain outsourcing contributes to supply chain efficiency and thereby improve value chain performance by modeling value chain processes (Borgstrom, n.d.). When the organization wants to broaden its operational boundaries, it needs to invest additional time on business expansion. Under such circumstances, firms generally outsource their time consuming supporting services like maintenance to third parties so as to focus more on new venture expansion or existing business development. 4. CURRENT ISSUES AND THEIR INFLUENCE While analyzing the major current issues necessitating supply chain outsourcing, it seems that stiff modern market competition plays an inevitable role. The intensity of market competition in the modern market environment is very high, and therefore it is essential for companies to gain a competitive edge over rivals to ensure their long term sustainability (Luger 2008). In order to earn sustainable competitive advantages, organizations should enhance their innovativeness and cut down operating costs. A large organization would be forced to compromise supply chain efficiency when they need to manage all supply chain tasks ranging from raw material collection to transportation of final products to the delivery point. Even an organization with comprehensive supply chain management policies would struggle to enhance innovation or cut down costs when they need to handle all supply chain activities without an external support. Most of the companies choose to outsource some of their supply chain tasks to third party vendors in order to improve the supply chain performance and to confront with competitors successfully (Kwak and Lee 2007, p.325). Growing government regulations and environmental activism are some other crucial contemporary issues that compel managements to adopt the practice of supply chain outsourcing. Today’s people are increasingly concerned about the long term environmental sustainability, and hence they would not support any business operation that raises serious challenges to the environment. In addition, environmental activism is on its peak today, and environmentalists organize movements against businesses that pose threats to environment and ecosystem. Considering the needs of future generations, national governments follow strict environmental policies to reduce toxic emissions like CO2 and dumping of environmentally harmful industrial wastes so as to fight dreadful issues such as global warming and climate change. In this context, companies are forced to outsource some of their production processes or other supply chain operations that cause harm to the environment to overseas countries where more liberalized environmental laws are in force. To illustrate, US and other industrially developed countries depend on overseas outsourcers to perform their production processes that result in huge volume of CO2 and other toxic emissions. Rising human resource management (HRM) costs constitute another significant issue that influences current business organizations to follow the approach of supply chain outsourcing (Entrekin and Scott-Ladd 2013, p.49). As mentioned already, today every company strives to cut down their expenses in an attempt to vie with their potential competitors. In this situation, mounting HRM costs would really hurt firms’ business expansion plans and they often find supply chain outsourcing as an effective strategy to reduce the size of their workforce and thereby improve their HRM budget. Third World countries and developing nations are the hot destinations for corporate enterprises that plan to outsource their supply chain operations. American and British IT companies outsource most of their BPO works and other related tasks to developing countries like India where the cost of labor is relatively cheap (Paul 2010, p.341). Delay in the production process and the resulting shortage of finished products also force firms to rely on the practice of supply chain outsourcing. Uninterrupted flow of supply chain operations is vital for companies to enhance their brand reputation and to keep customer faith and loyalty. Evidences suggest that the concept of supply chain outsourcing benefits companies to promote smooth flow of production and hence to produce adequate quantity of goods in a timely schedule. 5. BENEFITS/ADVANTAGES Past experiences suggest that the practice of supply chain outsourcing can benefit a corporation in several ways. Maintenance of a flexible infrastructure is one of the notable advantages of this outsourcing strategy. Firms obtain an extensive exposure and flexibility to use the pieces of the supply chain required on a variable cost basis by leveraging technology and process management infrastructures all over the corporate world. The supply chain outsourcing strategy can assist organizations to take advantages of expert supply chain planning and logistics (Sinha 2012, p.190). Evidently this innovative supply chain practice may aid companies to reduce costs by developing more efficient processes, redesigning supply chain, optimizing inventory and transportation, and promoting a sustainable package review. Such activities and streamline processes would result in cost reduction. A potential outsourcing partner can assist companies to design and implement an apt supply chain according to their needs. Another significant benefit of supply chain outsourcing is global expansion. Management professionals indicate that the outsourcing strategy provides firms with an opportunity to test the potentiality of a new market on a variable cost basis and to analyze the feasibility of making infrastructure investments in that market. Outsourcing greatly benefits corporate enterprises to access new channels. To justify, new capabilities acquired through outsourcing such as e-commerce solutions in multiple regions, support center services, and subscription management can help the organization obtain access to new channels and revenue streams. Supply chain outsourcing assists companies to perform well in terms of risk management (Olson 2011, pp.47-48). Today some outsourcing partners have well structured contingency plans to assist their clients to reduce various risks to a great extent. On the strength of such plans, firms can easily shift their production facility to another in times of contingencies and thereby ensure uninterrupted flow of production. 6. CONCLUSION From the above discussion, it is clear that the concept of supply chain outsourcing is of strategic importance in the contemporary business environment. Increased efficiency, reduced operating costs, value chain optimization, better productivity, improvement in sales, and low complexity are the key drivers of supply chain outsourcing. In the highly competitive current business environment, firms find outsourcing as a potential strategy to assign complex and time consuming supply chain tasks to third party vendors and improve overall operational efficiency by reducing operating costs. Increasing environmental regulations represent a major issue persuading organizations to adopt the outsourcing strategy. This supply chain practice assists large corporations to shift their production processes to another country where environmental policies are not very strict. Flexible infrastructure, cost savings, global expansion, access to new channels, and risk management are some of the major benefits of supply chain outsourcing. References Biz-Development (Jan 2009) ‘Supply Chain Outsourcing (E)’. available at: http://www.biz-development.com/SupplyChain/6.6.Supply-Chain-Outsourcing.htm Borgstrom B (n.d.) Exploring efficiency and effectiveness in the supply chain: A conceptual analysis. Research Paper. Available at: http://www.impgroup.org/uploads/papers/4670.pdf Cecere, L (Feb 20, 2014) Managing the Supply Chain: If Only I Could See. Forbes. Domingues, JM (2007) Latin America and Contemporary Modernity: A Sociological Interpretation. US: Routledge. Entrekin L, Scott-Ladd BD (2013) Human Resource Management and Change: A Practising Managers Guide. US: Routledge. Fang F, Guo Z & Whinston AB (n.d.) Collective Outsourcing to market. Available at: http://public.csusm.edu/fangfang/Research/JAIS-1-30.pdf. Gassmann O, Zedtwitz MV & Reepmeyer G (2004) Leading Pharmaceutical Innovation: Trends and Drivers for Growth in the Pharmaceutical Industry. US: Springer Science & Business Media. Kwak NK and Lee CW. “An application of multi-criteria decision-making model to strategic outsourcing for effective supply-chain linkages”. In MJ Schniederjans & Schniederjans AM (eds.) (2007) Outsourcing Management Information Systems. US: Idea Group Inc. Lahmar, M (2007) Facility Logistics: Approaches and Solutions to Next Generation Challenges. NY: CRC Press. Luger K (2008) Chinese Railways: Reform and Efficiency Improvement Opportunities. US: Springer Science & Business Media. McIvor, R (2005) The Outsourcing Process: Strategies for Evaluation and Management. US: Cambridge University Press. Olson DL (2011) Supply Chain Risk Management: Tools for Analysis. NY: Business Expert Press. Paul J (2010) Bussiness Environment. New Delhi: Tata McGraw-Hill Education. Sinha A (2012) Supply Chain Management. New Delhi: Tata McGraw-Hill Education. USAID (July 2010) Emerging Trends in Supply Chain Management: Outsourcing Public Health Logistics in Developing Countries. Available at: http://deliver.jsi.com/dlvr_content/resources/allpubs/guidelines/EmerTrenSCM_Outs.pdf Read More