Reasons for Outsourcing in Supply Chain Management

Mar 07 2022

The Reasons for Outsourcing in Supply Chain Management

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Reasons for Outsourcing in Supply Chain Management

The conventional way regarding supply chain management was to handle the entire process in-house. However, with the massive transformations happening in the business realm, companies are embracing outsourced supply chain management. For example, the benefits of outsourcing manufacturing can translate to an improved and optimized supply chain. Additionally, trends like eCommerce shopping are becoming huge, forcing companies to streamline processes such as shipping. As a result, businesses find many reasons for outsourcing supply chain management.

The modern supply chains consist of different functions and elements, including product development, finance, customer service, IT management, etc. It can be challenging to manage and optimize all the processes, especially when the skills and resources are lacking. Nevertheless, supply chains are vital to the expansion and progression of every business. Optimizing these processes results in reduced costs and streamlined production. Outsourcing is an excellent strategy to achieve such results. However, before deciding whether to outsource, it's crucial to learn the advantages and disadvantages of outsourcing in supply chain management. So what are the benefits of outsourcing?

The following are the reasons for outsourcing in supply chain management:

  • Increased flexibility- Today's business realm is changing rapidly, and companies need to learn how to adapt fast. Businesses require to scale up or down as per the market's demand. One of the ways to scale down is downsizing, which can result in massive losses of jobs, and most companies can't handle several lawsuits. Unfortunately, modern labor laws can be unfavorable to companies, and they try to avoid rising employee lawsuits. The excellent news is outsourced supply chain management eliminates the risk and allows for flexibility. The third-parties logistics companies are better equipped to handle the transformations and easily adapt. In addition, a business can quickly scale up when collaborating with a supply chain partner.
  • Increased efficiency- Third-party supply chain partners are great at streamlining processes. For example, with the increased popularity of eCommerce shopping, businesses shorten cycles like shipping. Third-party companies have the relationships, technologies, and infrastructure to ensure seamless shipping. Depending on a particular in-house department to streamline accounting, manufacturing, IT management, etc., can take time. Additionally, training people can result in hefty bills that you can avoid by outsourcing. Sometimes the training process doesn't bear successful results, making companies incur losses.
  • Reduced expenses- One of the advantages of outsourcing is reduced operational costs like overhead, infrastructure, regulatory fees, and wages. Most companies outsource overseas because it saves them money. Hiring a third-party company from a different continent can mean lower salaries depending on the region's per capita income. Additionally, outsourcing overseas reduces regulatory costs. Many developing countries don't have Medicare, social security, and unemployment insurance plans. If you pay an outsourced employee the same amount as a European or American worker, lower regulatory expenses help your business save money. Companies find it cost-effective to outsource supply chain processes.
  • Improved customer service- Among the top 10 benefits of outsourcing is enhanced customer satisfaction. To have a sustainable, long-term enterprise, you need an excellent track record regarding customer satisfaction. Inefficient supply chains can destroy customer relationships and profitability. Fortunately, third-party companies help increase efficiency, which results in smooth operations. You can outsource any services, including manufacturing, infrastructure, and more. For instance, supply chains partners can provide excellent manufacturing services, resulting in quality products. When you're offering high-quality products to your customers, they always come back.
  • Reduced risks- Risk management is at the top 5 reasons companies outsource. Hiring a third-party company can help you enhance your business' visibility. Additionally, outsourcing can help you control reasons for Outsourcing in Supply Chain Management lead times, inventory levels, and compliance. Enhanced visibility can enable you to recognize risk points and work on them to mitigate the results. You can collaborate with your supply chain partner to attain backup suppliers, lower lead times, improve safety stock, and prepare for audits.

Some businesses may find outsourced supply chain management a foreign concept, but it's beneficial. The reasons mentioned above for outsourcing in supply chain management are vital factors to consider when deciding. However, it's crucial to look at some of the disadvantages of outsourcing.

Here are some of the disadvantages of outsourcing:

  • Poor quality- The significant risk of outsourcing in supply chain management is having a third-party company cut corners. If your supply chain partner is utilizing cheap materials, the quality of your products may decline. Additionally, it can be problematic if the third-party company doesn't have comprehensive knowledge of your services or products. Such habits can significantly lower sales. Therefore, before you outsource, ensure the third-party company prioritizes quality.
  • Additional costs- Some third-party companies have numerous hidden expenses like boxing, labeling, etc. Such extra costs can get out of control, making your business suffer. To avoid this situation, ensure you get a supply chain partner that is transparent with their expenses. Such measures help you safeguard your profit margins.
  • Poor integration- Another risk of outsourcing in supply chain management is integration issues. Smooth operations are possible if the transition process is brief and straightforward. The transition phase requires proper communication, money, and time. However, if either party relaxes, it can result in setbacks and delays. Ensure you select a third-party company that has a simple integration process.

You can put different measures to mitigate some of the drawbacks of outsourcing. Today, most businesses are seeing and appreciating the benefits of outsourcing. Studies show that as of 2020, 42% of companies were planning to utilize fourth-party logistic services, while some were looking to increase their outsourcing budget. Most companies choose to outsource to optimize their operations and expand their businesses.

What is the top reason for global outsourcing? The principal reason most businesses go for global outsourcing is to lower operational costs. Overseas outsourcing is associated with lower wages, regulatory fees, and more. In addition, you get to access talent from any part of the globe at a lower price.

What is Outsourcing?

Businesses are reaping the benefits of outsourcing. With the evolution of supply chains, the process transforms into an interconnected network. As a result, some businesses consider outsourcing to third-party and fourth-party logistic companies. But what is outsourcing?

Outsourcing meaning- The meaning of outsourcing in supply chain management is hiring another company to offer services such as manufacturing, IT management, customer support, and more. Traditionally, such services were handled in-house by the enterprises' staff.

Extensive research helps identify the drivers of outsourcing. And studies seem to have a consensus concerning the critical drivers of outsourcing in supply chain management: reduced costs, increased flexibility, improved focus, enhanced efficiency, and improved customer relations. In addition, you can outsource any process, including manufacturing, inventory, transportation, and information.

Different types of outsourcing in supply chain management exist. Here are some examples:

  • Professional outsourcing- deals with professional services including accounting, legal, digital marketing, administration, etc. The third-party company needs a license or vast experience to offer the services. You can access any service you want when you need it. For example, you may have a one-time legal need and outsource it, which is better than hiring an in-house employee. The advantages of professional outsourcing are money-saving, lower overhead costs, and easy access to talent. Additionally, you can access talent on a global scale. For instance, you can have a remote worker providing top-notch legal skills worldwide.
  • Manufacturing outsourcing- Manufacturing can be challenging for small enterprises. When the business starts expanding, most companies outsource instead of manufacturing in-house. Outsourcing gives small businesses a chance to compete with large enterprises. Most large companies have the resources, technologies, and equipment to handle production in-house, which is not the case with small businesses. And despite the resources, some large corporations, including Apple, outsource manufacturing to lower operational costs.
  • Project outsourcing- You can outsource the entire project or a section of it. It's common in the business world, especially when a company faces inadequate skills, funds, or time to finish a project. Some services include redesigning a website, marketing campaigns, writing an eBook, etc. Today, you can hire a remote worker to complete a section of your project at a lower price.
  • IT outsourcing- Most large corporations like Google, Skype, Wise, WhatsApp, and more, outsource IT development jobs to overseas developers or remote workers. Sometimes, these corporations hire remote workers as full-time employees due to successful results. Additionally, IT outsourcing is excellent for small businesses to maintain security and manage networks. It's an affordable way to acquire quality IT services for startups and small enterprises.
  • Multi-sourcing- You can choose to combine services like IT and infrastructure. Multi-sourcing is excellent for any business that desires to top experts. However, it's ideal for large companies looking into outsourcing various services to multiple vendors. It's crucial to have a plan and a system of governance before multi-sourcing.

These are the main types of outsourcing in supply chain management. However, you can find other examples like process-specific, operational, and business process outsourcing. In addition, you can choose to outsource locally, offshore, or nearshore. Outsourcing is becoming an essential facet in the business realm.