Outsourcing risks and benefits

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Outsourcing can be defined as a company contracting another firm to do provide a service which is essential in the company’s production and function. This may be in the form of outsourcing things which are not in direct involvement with production, such as accounting, advertising or other jobs which require extremely specialized knowledge. Thus, outsourcing could be considered to be a division of labor, only the labor is divided outside the company.
However, due to its counterintuitive nature, outsourcing is considered to be an extremely sensitive political matter. Many people consider outsourcing to be an unfair trade practice, especially since it allows companies to take advantage of cheap labor elsewhere, leading to unemployment in the home country. Thus, outsourcing has been a very hotly debated matter. Below are some benefits and risks of outsourcing:
Benefits
• Labor Arbitrage

Outsourcing allows you to take advantage of wage differentials from all over the globe. This is called labor arbitrage. Less developed countries have citizens which generally charge less than their counterparts in the First World, hence many companies outsource jobs to them, to earn more profit. However, given the current trend, there will be less advantage with arbitrage since the wage gradients are now lessening, until it becomes equal the world over.

• Focus

Supply chain optimization calls for focus in your field. It would be best if you can hire more people to do the end product, and not being muddled up in tasks which do not directly affect the production. For instance, a polymer factory will find it prudent to outsource its accounting than to hire a resident accountant full time, since accounting is only done sparingly and does not affect the quality of the end-product. However, accounting is a necessary activity for any business, so you would save if you hire an accountant only when you need to.

• Cost Savings for Specialists

Some jobs require extremely specialized knowledge in different fields. This is particularly true in technology and science. For instance, you may outsource the design of a power plant to an engineer, and have him do jobs for you on contract. This is cheaper than hiring him full-time, particularly if his skills are very particular.

Risks
• Dispute Resolution

Outsourcing is a relatively ambiguous field in law. Contracts may be signed but you may never know when either party may have a differing interpretation of the contract, necessitating litigation. This is also complicated when you outsource offshore, since the jurisdiction itself will be under question. It would be best if you agree fully on how to go about the contract and ensure that both parties are respected and well-compensated.

• Differing Cultural and Trade Practices

Different cultural and trade practices may also result in supply chain risk. This may be due either to differing marketing practices, or even existing law. Religion sometimes would play a role, such as the prohibition of lending with interest in Muslim countries. This may affect the supply chain, since complications may arise from the handling and the procurement of the goods and supplies.

• Lack of Tenure

The most often point of contention in outsourcing is the lack of a sustained job or tenure. This tenure provides security for the employee and will be able to attract him or her to stay in your company. Also, secrecy may be compromised when a former consultant joins a competitor. This may expose your plans and will preempt your efforts. Thus, precaution must be taken in order to keep these freelancers loyal and a tight policy on trade secrets must be enforced.

Providing outsourcers better supply chain visibility can drive performance

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One of the main attributes of OEM’s is that they regularly surpass the performance of typical outsourcing providers. With companies making increasing use of outsourcing to improve financial performance, overcoming the challenges of working with outsourcers, and erratic support capabilities is a key critical success factor. Indeed when considering outsourcing activities, especially manufacturing tasks OEM’s must continuously consider customer needs and the effect of product introductions which can be difficult to translate for 3rd parties.
In developing capabilities that meet the agility and response requirements— business processes that help organizations successfully control changes whilst providing the adequate supply chain visibility within their outsourcing activity—is the answer.

It could be argued that OEMs are the only ones with significant visibility of their total supply chain and are thus able to ensure its smooth operation. Replicating this with an outsourcing solution can be an overwhelming activity with complex issues such as the sheer volume of parts that need to be coordinated. Where the demand profile is erratic (with significant peaks and troughs) this can further influence results with issues such as neglected shipments, excess inventory (to buffer service levels), little factory production and increased cost of materials
Developing response management processes that offer visibility throughout the complete supplier network, providing manufacturers tools to foresee problems and carry out real-time scenario based (what if) reviews and be more engaged with the supply chain and the organizations requirements. This can help eradicate the many challenges faced with outsourcing enabling OEM’s to:

* Monitor inventory through close attention to lead times and changing demand.
* Make sure there is ample, well-timed material coverage within supplier network that encourages a reactive organization that can quickly respond to issues
* Enhance the management of product lifecycles through better collaboration and scenario based evaluation
* Better deploy cost reduction activities through introducing lower-priced materials by correctly monitoring and live stores data and planned production.

The key challenge remains that any outsourcing activity that includes supply chain requires close system based collaboration that provides appropriate visibility. Where needs are evolving (which is typically the case with New Product Introduction) – organizations must ensure a degree of agility and responsiveness is embedded within the outsourcer. This requires the development and management of key business processes coupled with a suitable (and trusting) relationship with the OEM.