Feb
2
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.
Jan
24
In times of crisis Supply Chain risk management
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Whilst risk management is often thought of in terms of Project Management disciplines – risk management is also a crucial process in the world of supply chain.
Supply chain has a key role to play in supporting business continuity – with so many facets of a business susceptible to crisis (especially where undesirable change is either imminent or underway) – organizations must develop suitable processes that are enable a business to operate whilst deliver a positive outcome.
But how does this relate to supply chain? Consider for a moment the impact of delays (or a business that is at complete stand-still) for commodities or raw materials. An interruption in the material flow of parts can at best make it uncomfortable for the business and at worst create an environment that puts it under considerable financial threat. Being able to manage these issues and crisis in terms of material flow typically falls under the remit of the supply chain function.
Types of supply chain crisis
Supply chains are open to various influencing factors both internal and external – from government legislation through to logistics and distribution channels, from local supplier networks through to outsourced providers on the other side of the world. But whilst interruptions within the supplier network are all too common causes for interruptions it must be remembered that it is not just businesses that may impact an organization – disruption caused by natural events and disasters should also be considered and impact this might have.
Clearly when understanding risk – the scale of the impact should be considered – this can help determine the importance of mitigation and possible capital outlay required. Determining scale can be complex for example if a crisis occurs will it impact just a single supplier or the commodity? Can alternate supply be found and transitioned quickly?
Whilst consideration must be given to identifying and mitigating concerns, when an organization determines its processes they must not overlook the potential for an issue to occur and be realized and therefore processes must include how an organization will respond and what activities it will undertake to recover.
Conclusion
Disasters confront the supply chain every day – from missed deliveries that may hold up a production line through to niche suppliers going out of business or key parts becoming obsolete. What is crucial is that organizations plan on how they will sustain their business in times of challenge.
Whilst it would be impossible to have foresight of every issue that a business might face developing appropriate processes and systems that attempt to capture and mitigate issues before they arise whilst protecting a business with appropriate systems that can deal with challenges and emergencies if they do occur.