the globalization of businesses, and the increasing rapid changes in economic
and technology have challenged companies to compete on global scale. Companies
facing challenges in their supply chain such as high inventory levels, low
customer service, late deliveries times or benchmarking analysis that show the
performance is deficient compared to others in the same industry has allowed
operation managers to redesign their operations for a unique and strategic
the possible configurations for the supply chain, such as outsourcing and
insourcing decisions can lead the company to make noticeable improvement in
their daily operations. Making the decision to outsourced selected processes or
functions to a third party can be challenging to the company because outsourcing
requires trust in the supply chain. While, companies who choose not to
outsource and maintain control of their supply chain internally have very
complex process with significant regulatory, political and customer challenges
(Outsourcing versus Insourcing). The decision between outsourcing and
insourcing, it’s how those configurations perform in the organization to define
the supply chain strategy that is aligned with mission’s company.
Outsourcing can be
defined when an organization transfer the ownership of a service or function
that used to be done in- house to a supplier (Outsourcing and its role in Supply
Chain). Historically, outsourcing was used when an organization could not
perform some processes or functions with higher standards due to many factors
such as incompetence of staff, lack of management, financial or technological
deficiency. Basically, outsourcing was not use with the potential to build
competitive advantage in business processes, it was applied with the function
to cover a particular area with specialists.
Outsourcing was recognized as a strategy to
create competitive advantage with the constantly evolving of globalization, technology,
and critical service level in complex supply chains. Global competition and
operating costs allowed companies to reevaluate the way to do business.
other words, outsourcing has given the opportunity to improve performance in
the organization, mostly giving more access to third party to optimize core
business activities. Managers who has decided to outsource, need to do a carefully
analysis of the company’s supply chain. For example, what is the company doing
better? -what area are expertise? – or have the potential to become a
differentiator strategy. In fact, those types activities should keep in- house
and managers try to improve it internally. Outsourcing it’s mostly for
activities that a third party could do better, faster, and cheaper (Outsourcing
and its role in Supply Chain).
the range of arrangements between purchaser and suppliers, variety of
outsourcing can be classified into total or selective outsourcing. Total
outsourcing is when an organization choose to contract out its service to large
single, preferred, trusted supplier. This type of contract last for five or ten
years. Also, this type of outsourcing allows the company to concentrate on its
core business activities, and not to manage non-core activities. While,
selective outsourcing are shorter and single contracts, which allows the
company to have overall control of the activity and evaluate supplier’s
expertise (Effective Papers). For example, companies can outsource only part an
activity and preform the rest of the activity in- house (Effective Papers) or
activities such as preparing the payroll or manufacturing component that can be
manage for an outside specialist.
decisions are generally made to improve services or cost thought the supply
chain (To outsource or not outsource). Outsourcing occurs when resources are
better suited “outside” for a particular task. Outsourcing means improvement in
productivity, quality, flexibility and cost reduction. Companies outsource to
realize that creating value chain does not required to control directly
resources. Rather, strategic alliances with those who provide expertise in a
particular area could be an effective way to gain results (Outsourcing versus
Strengths and Weaknesses
In order to provide a
better analysis of outsourcing process in the supply chain the strength and
weaknesses are as follow (McIvor et al 21).
Cost reduction: Organizations are
motivated to reduce costs adopting outsourcing strategies. Outsourcing provides
an efficient way to control operating cost and eliminating cost for future
development of employees, current training, recruitment, payroll and benefits. Most
companies prefer to outsourced their business in developing countries such India
because is very popular for talented professional and has a wide range of
service offered. Cost reduction in the supply chain can be reflected in
managers must be focuses in areas, where companies have competitive advantages.
Having many specialist suppliers can achieve higher levels of performance in
activities that can’t not be completed in-house. For example, outsourcing in
India offers cost advantage and high-quality work. Also, specialization allow companies to
achieve companies of scale, producing good and services more efficiently while
provides flexibility to the customer as the buyer can change a supplier if
required. For example, changing a vendor in case of poor delivery is easier
than changing a full- time employee. Outsourcing can incorporate conditions that
can changes requirements or termination of contract ensuring flexibility.
Risk – Sharing: Outsourcing
can help the organization to minimize risk. After a contract agreement, its
responsibility of the supplier to look daily business operations.
Access to Innovation: Outsourcing
innovation can help operation management to increase efficiency and
productivity in their operations. Also, help to build more value to the chain
and be more competitive.
first perception why companies decided to outsourced is for the reason to
reduce cost in organization. Rather to have the opportunity to increase efficiency
in the organization, different types of outsourcing will lead to different types
of cost and benefits. Following the attributes of performance and allowing
suppliers to the supply chain, companies can lose power and control of their operation,
and also increase cost over time.
fact that outsourcing creates organizational change, one particular question is
bases which activities should be internalized by the organization. Managers
should have decided the numbers of stages of activities performed by suppliers
and how outsourcing strategies will have a significant impact on the long- term
performance of the organization. The countervailing effects of outsourcing can
be reflected in outcomes, such as quality of product and services, introduction
of new services, and revenues (Outsourcing and its role in Supply Chain). For
example, companies could have lost the ability to monitor performance of
products and services, because they are not longer under direct supervision. Another
example, when Apple experienced outsourcing problems when demand for a new line
of Macintosh computers increased during 1990’s, company incurred an order backlog
of more than $1 billion. Apple was unable to meet demand for late deliveries
times of important parts, including model and custom chips (McIvor et al 33)
a result, operation managers must understand the implications of outsourcing
processes, they must understand how outsourcing is integrated with other departments
in the organization. Taking a big picture of outsourcing engagement requires
role clarity and planning the process. The fact is that every aspect of outsourcing,
need to be planned and make sure that it doesn’t deviate the mission alignment
of the company. Documentation, analysis and integration with an outsourcing model
that fits your current needs can leverage failing during the process.
an importantly, outsourcing requires the exposition of confidential data. For
example, organization outsourcing payroll, recruitment services, involves a
risk to a third party. As a result, trust is important consideration before
adopting outsourcing options because opportunistic can take advantage and make
the organization vulnerable,
Viewpoint of Supply Chain
and Customer Satisfaction
know that supply chain systems are extremely complex. One of the reason they
tried to make improvement is to be more efficient in their operations specially
to boost customer service. As we know, customer expect the correct product, quantity,
and right location to be delivered, and the increase of e- commerce makes them
more demanding. For those reasons, right
deliveries times, reducing operating cost, and the desire to expand the
business can be done outsourcing logistics. Deciding to outsource logistics, organizations
can achieve customer service improvement, gain global market, and benefit from
economies of scale.
a third party can help you to improve operations and save to your company time.
Also eliminate the need for you to invest in extra cost such as warehouse
space, transportation, and technology. Decreased responsibility because 3PL can
take care of administrative work, including paperwork, billing, auditing, and training.
(Logistics Bureau). In the same manner, its outsourcing is practiced towards to
build lasting and successful relationship, this can achieve value chain and
is the practice of bringing specialist to fill temporary work or training in-
house personnel to perform activities that can’t be outsourced. While the most
general trend among companies is to increased outsourcing activities, there are
also companies whose choose not to outsource and maintain control of their
supply chain internally. The fact is companies insourcing have very complex supply
chain with significant political and customer challenges (Outsourcing Within a Supply
of the primary reasons to outsource is to achieve cost saving. It’s generally
expected that the third party can perform activities at lower cost, but it’s
expected that costs increase over time. For this reason, organizations may bring
activities back-in-house. Moreover, when services levels are not met by supplier,
companies will carry with cost to bring back in – house. Even though, if a
third part is meeting the service levels, but customers is dissatisfied with outsourcing
arrangements, for example, customer perceives that a third party doesn’t provide
effectively support of products and services.
reason, that influences to bring back in- house operations could be the
concerns about security. For example, if a third-party logistics provider suffer
theft, damage, spoilage of a client’s product, the customer may decide to retuning
to an insourced operation (Logistics Bureau);
outsourcing, there are several questions to consider (Insourcing: An Unexpected
Way to Solve Staffing Needs).
you have the infrastructure to handle project in- house? Consider employees, system,
processes, material, and equipment needed for the job.
will outsourcing affect employees? Using in- house staffs means saving cost of
freelancer or independent contractor. It’s need restructured or redesign jobs
and scheduling to handle new projects.
you need to hire new employees? If the insourced project is big, justify new hires.
For example, try to promote within company an expertise. Operation managers must
know which employees have the skills if they are considering insourcing,
and growth not come without challenges. However, outsourcing faces challenges
in your organization because you can’t communicate easily with providers. Outsourcing
is involved by several stakeholders and trust is not easily to build when
business is apart. Communication is vital to gain trust and built lasting
relationship. For those reason, collaboration trough the supply chain with
managers and provider is important to make sure about a successful performance.
the other hand, a key challenge for insourcing will be rebuild internal
capabilities (). Effective insourcing
call for talented people that are capable to perform project within the
company. As the same like managers that opt for outsourced activities, managers
insourcing activities need to have clear goals what are they trying to achieve,
for example, improve service? faster innovation? personnel requirement against
competitive markets standards (9 Questions to consider before Insourcing
is a powerful business strategy, by using correctly delivers benefits such as
cost reduction, ability to focus more in core business activities, improves
quality, reduced time and increase competitive advantage in global markets.
However, outsourcing can bring some disadvantages such as lack of communication
between providers and hidden costs, outsourcing in certain ways decreases risk though
the supply chain.
companies that are facing direct impact of outsourcing and some operations are affected,
one of the best option is to bring back in – house business activities. Emphasizing
the consideration of insourcing, it is an option in critical sourcing decisions
can allow companies to optimized