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International Supply Chain Management - Outsourcing for a competitive advantage

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International Supply Chain Management - Outsourcing for a competitive advantage

  1. 1. 1
  2. 2. Table of Contents1.0-Introduction ....................................................................................................... 32.0-Outsourcing For a Competitive Advantage ................................................... 3 Figure 1 – Decision Making for Outsourcing ........................................................ 3 2.1 Advantages and Risks of the Outsourcing Process .......................................... 43.0- Strategic Implications of Outsourcing Logistics ........................................... 4 3.1 Benefits of Outsourcing Logistics.................................................................... 5 3.2 Risks of Outsourcing Logistics ........................................................................ 54.0 Conclusion .......................................................................................................... 55.0 References and Bibliography ........................................................................... 6 2
  3. 3. 1. IntroductionAfter the Industrial Revolution which started in UK, companies around the world embarked newbusiness strategies to increase their market share and profits by focusing on their competitiveadvantages (Handfield, 2006). The main of these companies were to achieve profit stability, loweringthe cost of production and increasing the company’s market share. Diversification of businessesthrough expansion to achieve economies of scale was the trend in the 1960’s; however, for some ofthese organizations, establishing the correct management structure was arduous. Therefore companiestended to lack the agility that was required to conduct the business. Companies who drifted away fromtheir core businesses developed new strategies to bring flexibility and creativity. The idea of focusingon core competencies and outsourcing the other activities within the organisation got progressivelyfavourable over time. Outsourcing has become a critical enabler for strategic sourcing and a globalmarketing strategy that provides companies with the agility to adjust to rapidly changing marketconditions (Trunick, 2008)Therefore, this report will examine the general impacts of outsourcing in organizations and thestrategic implications of outsourcing logistics by assessing the advantages and risks of the process.2. Outsourcing for a Competitive AdvantageOutsourcing decisions are complex and include a number of trade-offs and long-term consequences(Wasner, 1999). From the beginning of 1980’s to 1991 the percentage of the value added by foreignaffiliates of parent company’s tripled to %6 of the world GDP (Gross Domestic Product) (The WorldInvestment Report, 1996). The outsourcing decision made by the board of directors is undertaken bygoing through numerous means, such as the identification of competencies within the organisation andthe comparison of their output values with the external opportunities (Barrar, Gervais, 2006). As canbe seen in Figure 1, decision making process of outsourcing can be evaluated better by identifying thecore competencies and measuring its efficiency in the organisation. If the supply chain is noteffectively and efficiently managed, the organisation is likely to face problems like customerdissatisfaction, increasing costs, lower stock turnover rates, low internal efficiency, reputationaldamage etc... The corporate strategy of the organisation which is usually determined by the externalbusiness environment, opportunities which can create flexibility or can provide labour arbitrage andcustomer demands in this sense, affect how the supply chain is managed. Companies are faced withnumerous strategic choices when handling supply chains and the strategic decision is what determinesthe implications of outsourcing for organisations. In this case, the success of IBM can be a goodexample on how outsourcing is managed. Outsourcing being a key factor in their business strategy,IBM has increased their net income by %9 in 2011 (Ottawa Business Journal, 2011). However, nomatter which supply chain strategy is adopted, the objective is always the same: gaining competitiveadvantage in the industry. A mixture of supplier’s competencies and the core competency theorganisation shelters within is argued to be a way of gaining competitive advantage overall. On theother hand, outsourcing also has specific risks which can have unforeseen negative effects to businesspractises.Figure 1 - Decision-making of outsourcingSource: Navarrete, 1996 Low OUTSOURCING INTERNAL EFFICIENCY INSOURCING High Core COMPETENCES Non-core 3
  4. 4. 2.1. Advantages and Risks of the Outsourcing ProcessNoticeably it is not possible to establish companies that can take advantage of economies of scale forall inputs. Many inputs are outsourced even in the largest firms around the world. For instance, Pfizer,which is one of the largest pharmaceutical companies in the world, has been outsourcing their R&D(Research and Development) and manufacturing activities in Asia, (Arnum, 2008). To optimize thedegree of outsourcing and internal integration, some core competencies need to be developed tosupport the business model and achieve cost reduction rather than just deciding which corecompetency to outsource (Anderson, 2004). Based on a large survey of companies (Deavers, 1997),the top five reasons for outsourcing can be listed as: - to improve company focus; - to gain access to world-class capabilities; - to accelerate benefits from re-engineering; - to share risks; and - to free resources for other purposes.Outsourcing some of the primary activities and the support activities within an organisations valuechain is likely to provide cost savings. A poll of senior business executives reveals that most Irishfirms are achieving cost savings of between %25 and %39 percent by outsourcing their IT to externalproviders (Smith, 2010). Although cost savings can be achieved from outsourcing, it is also likely toslow down the supply chain. For example if the suppliers are located too far away, the shippingprocess would slow down the responsiveness speed of the supply chain. If the supplies are notdelivered on time, the loss the organisation is going to face can be even more than the estimated costsaving. Therefore a good JIT planning might be required in some cases to increase the efficiency ofthe supply chain. Yet, contracting nearby suppliers is still the rational way of protecting theorganisation from long-distance transportation delays.In addition, the suppliers may be able to provide innovation more quickly than the organisation itselfresulting in quicker response times, greater flexibility and better quality of service (Navarrete, 1996).Moreover, outsourcing not only reduces the risk taken in some cases, but also it results in theorganisation to acquire specific expertise from the suppliers. Therefore enabling the company tooperate within multiple parameters and compete in the global market. Briefly, the general advantagesand disadvantages of outsourcing can be listed as below:Advantages Disadvantages Cost Saving Loss of control Speed Possible cost increases Flexibility Lack of production quality Quality Risk reduction Competitive AdvantagesIn this sense the supply chain manager’s essential job is to: Avoid pitfalls, evaluating opportunitiesand aligning the supply chain strategy with the business strategy while executing supply chainstrategies like outsourcing.3. Strategic Implications of Outsourcing LogisticsThe close relationship between logistics and customer service, and its effects on a firm’scompetitiveness dictate that companies handle their logistics function prudently so as to achieve itsfull potential as a source of competitive advantage (Razzaque and Sheng, 1998a). Outsourcing the 4
  5. 5. logistics function in this sense, can be considered as an important approach to excellence customersatisfaction. A growing awareness that competitive advantage comes from the delivery process asmuch as from the product has been instrumental in upgrading logistics from its traditional backroomfunction to a strategic boardroom function (Razzaque and Sheng, 1998b). Moreover, in the concept ofthe value chain (Johnson et al, 2005); logistics is a value-adding activity in the creation of competitiveadvantage (Stock, 1997). However, if an organisation is planning to outsource, they should take intoconsideration the strategic and operational implications, so that outsourcing the logistic function canadd value to the organisation rather than causing a problem. 3.1 Benefits of Outsourcing LogisticsOutsourcing can contribute to profits by enabling users to gain competitive advantage, addingmeasurable value to products, enhancing customer service, assisting in opening new markets, andproviding dedicated resources (Foster and Muller, 1990). Rather than spending time on logistics,companies tend to focus on strategic planning and management concerns. The utilization of contractlogistics enables the firms to do so and focus on their core business competency. In addition, the use ofthird-party logistics enables the organisation to cut transportation/distribution and internaladministrative cost as well as reducing the staff. Moreover, outsourcing the logistics function alsoenables firms to respond quickly to marketing, manufacturing, and distribution changes (Byrne,1993a) 3.2 Risks of Outsourcing LogisticsSimilar to the outsourcing process in other activities within the organisations value chain, outsourcinglogistics shelters the same risk: loss of control. As Byrne indicates, the loss of control to third-partyproviders appears to be the most commonly cited reservation that inhibits firms from outsourcing theirlogistic operations (Byrne, 1993b). Besides the loss of control, the inability to select and manage thesuppliers appropriately as well as the supplier’s probable lack of alignment with the organisationsbusiness strategy is likely to cause problems such as undesired costs due to the change of suppliers.After determining all the benefits of outsourcing and contrasting them with their corporate objectives;strategy and strengths; market conditions and environmental concerns, the organisation is left with thedecision of make-or-buy.Horne indicates that there is a growing need to be more responsive to customer service and market(Horne, 1989). This need can be achieved by using logistics as an to deliver better customer service ascustomer service is getting progressively important as the competition degree in the world is roaringhigh.4. CONCLUSIONThe outsourcing decision is a part of most organisations business strategy and is becomingincreasingly important as the world market is getting more and more globalised. The risingcompetition in the business world has been turning the outsourcing activity into an inevitable businesspractice.Therefore, in this report the growing trend of outsourcing have been assessed to have a betterunderstanding of how and why the outsourcing decisions are taken. Minor operational details, generaladvantages and risks of outsourcing have been used to better explain the strategic role of outsourcingin organisations. Apart from the general implications of the outsourcing process in organisations, thesignificance of outsourcing logistics is particularly emphasized, on account of its strategic importance. 5
  6. 6. 5. REFERENCES AND BIBLIOGRAPHYAnderson D. (2010). Outsourcing; The Reality For Cost Reduction. Available at:http://www.halfcostproducts.com/outsourcing.htm. [Last accessed] 15th Feb 2011.Arnum, P. (2008). Outsourcing R&D in Asia: A Case Study of Pfizer. Available at:http://pharmtech.findpharma.com/pharmtech/Outsourcing+Article/Outsourcing-RampD-in-Asia-A-Case-Study-of-Pfizer/ArticleStandard/Article/detail/541995. [Last accessed] 14th Feb 2011.Barrar, P. Gervais, R. (2006). “Global Outsourcing Strategies”. Hampshire, England: Gower Publishing Ltd.Byrne, P.M. (1993ab), “A new road map for contract logistics”, Transportation & Distribution, April, pp. 58-62.Deavers, K.L. (1997), “Outsourcing: a corporate competitiveness strategy, not a search for low wages”, Journalof Labor Research, vol. 18, no. 4, 503-19.Foster, T.A. and Muller, E.J. (1990), “Third parties: your passport to profits”, Distribution, October,pp. 30-32.Handfield, R. (2006). A Brief History of Outsourcing. Available at:http://scm.ncsu.edu/public/facts/facs060531.html. [Last accessed] 14th Feb 2011.Horne, R. (1989), “Charting a course for integrated logistics”, Transportation & Distribution, October, pp. 45-51.Johnson, G, Scholes, K, Whittington, R (2005) Exploring Corporate Strategy Text and Cases. 7th edition.London: Prentice HallNavarrete, F. et al (1996). New trends in organizational flexibility: Outsourcing. Available at:https://docs.google.com/viewer?url=http://www.uam.es/personal_pdi/economicas/pomeda/docs/new_trends.doc&pli=1. [Last accessed] 16th Feb 2011Ottawa Business Journal. (2011). IBMs net tops Street estimates as outsourcing, a key part of IBM strategy,picks up. Available at:http://www.obj.ca/Technology/2011-01-19/article-2132648/IBMs-net-tops-Street-estimates-as-outsourcing,-a-key-part-of-IBM-strategy,-picks-up/1. [Last accessed] 23th Feb 2011.Power, M.J, Desouza, C.K. & Bonifazi, C. (2006) The outsourcing handbook: how to implement a successfuloutsourcing process. Kogan Page Ltd: London and Philadelphia.Razzaque, M.A. and Sheng, C.C. (1998ab), “Outsourcing of logistics function: a literature survey”,International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 2, pp. 89-107.Smith, G. (2010). Cost saving remains top outsourcing benefit. Available at:http://www.siliconrepublic.com/strategy/item/17892-cost-saving-remains-top-out. [Last accessed] 15th Feb2011.Stock, J. R. (1997), "Applying Theories from other Disciplines to Logistics," International Journal of PhysicalDistribution & Logistics Management, vol.27 no. 9/10: 515-539.Trunick, P. (2008). The Rise of Outsourcing. Outsourced Logistics. 5 (2), p23-25.United Nations. (1996). World Investment Report. Available at:http://www.unctad.org/en/docs/wir1996_en.pdf. [Last accessed] 14th Feb 2011.Wasner, R. (1999). The process of outsourcing – strategic and operational realities. Linköping: Department ofManagement and Economics, Linköping University. 6

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