After reading this article we will learn about the importance of outsourcing for the success of any business firm.
First, we should know about the purchasing and sourcing. Purchasing or procurement is the process by which company acquires raw materials, components, products, services and other resources from suppliers to execute their operations. Sourcing is the entire set of business processes required to purchase goods and services.
Sourcing is related with the selection of suppliers, design of supplier contracts, procurement of material and evaluation of supplier. One of the most important decision is to make about sourcing is that whether to produce components assembly, process or service within the company i.e., in sourcing or whether to purchase that same material component assembly, part of services from an outside supplier i.e., outsourcing.
The selection of insourcing or the outsourcing is very critical and complex decision in any company. It is based on several factors. A number of variables have to be considered to make a decision about insourcing or outsourcing.
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Generally process of outsourcing is preferred when process of insourcing are found to be difficult and costly to management. Selection of insourcing or outsourcing is very important for the success of any business firm. Outsourcing that is buying from outside allows the firm to focus on activities that represent its core competencies. Thus a company can create a competitive advantage while reducing cost.
Major reasons for selection of outsourcing are given below:
(a) Cost reduction,
(b) Manpower reduction,
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(c) Efficiency improvement,
(d) More attention on core competencies, and
(e) Minimum material handling and indirect costs.
Advantages of Outsourcing:
The following are the advantages from outsourcing:
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(i) Flexibility:
A major advantage of outsourcing is that it often provides a greater degree of flexibility. As market demand level changes, a purchaser can more easily make changes in its product or services in response to the market demand.
(ii) Lower investment:
Due to lower level of investment in particular assets it is easier to make unexpected changes in its own production resources, machines, methods etc.
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(iii) More attention on core competencies:
Both buying and supplying firms can concentrate on their core competencies by outsourcing products and services which doesn’t need expertise, but necessary for competing effectively.
(iv) Reducing labour cost:
Reduction in labour cost can be achieved by transferring production to an outsource which has lower wages or higher efficiencies.
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(v) Lower investment risk:
There is a lower investment risk for the buyer as the supplier assumes the uncertainty inherent in plant and equipment investment.
(vi) Minimum Material handling:
It reduces the material-handling because purchasing from outside eliminated those materials and equipment which are required to process or making of parts in same firm.
Disadvantages:
Although the advantages from outsourcing are more but have following few disadvantages also:
(i) Wrong supplier:
There is a greater risk of choosing wrong supplier to provide the product or service being outsourced. This may be due to the supplier capabilities may have been mis-assessed, the process technology may be obsolete, or the supplier’s performance may not meet the buying firm’s requirements.
(ii) Loss of control:
Another disadvantage is related with the loss of control. The buying firm may perceive that if has lost the ability to effectively monitor and regulate the quality, availability, confidentiality or performance of the goods or services as they are not produced under the firm’s direct supervision.
(iii) Long Lead Times:
Long lead times is also one advantage of outsourcing as it will require sometime to transport goods or services which may be crucial sometimes.
(iv) Making competitors:
To begin with this outsourcing concept was developed by the North-American firms, who outsourced their production to low cost suppliers who later become their global competitors.