Discussion-Outsourcing Strategy

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Outsourcing Strategy

Is outsourcing advantageous? If so, to whom? If not, why so?

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Logistics Management – Week 5 Lecture Outsourcing Outsourcing is a business strategy that a firm can utilize to manage portions or all of its supply chain and logistics activities. Outsourcing is “the process of having suppliers provide goods and services that were previously provided internally’ (Blackstone Jr., 2014). A firm may outsource products or services for which it does not have a core competency in producing the product or providing the service. Core competency defines what processes, goods, or activities that a company is proficient in providing that is considered ‘best’ or ‘world-class’ within its industry. Depending on the type of business and its reasons to outsource, a business may realize that it does not have a core competency in certain business activities. This can be in relation to all functions within a business – sales, marketing, production, or distribution and logistics. For example, a manufacturer’s set-up time, labor, and material necessary to produce a component is extremely costly compared to a firm who specializes in manufacturing the item as its core competency; or a firm that does not have the facility capacity or labor necessary to manage and distribute its finished goods to their customers compared to a distribution or warehousing service which specializes in storing and shipping goods throughout the United States and around the world. Additionally, a firm may consider outsourcing to reduce and control operating cost, gain access to world-class capabilities, and to free up internal resources for other purposes. Outsourcing decisions generally are made to improve service or cost for the supply chain. An outside firm is selected to provide a good or service that currently is provided internally. Outsourcing normally occurs when off-site resources are better suited for a particular task; however, these tasks typically are not core competencies of the firm. In the mid-1900s, a typical business strategy was to manage and directly own as much of the supply chain as possible. This vertical integration approach resulted in economies of scale. As competition became more global in the 1970's and 1980's, organizations found that vertical integration had somewhat bloated their management structures. As a result, they had lost their ability to adapt to changing markets and their demands. As a result, many businesses resorted to outsourcing as a strategy so that they could focus on their core processes while handing off the non-core business activity to be managed by third parties.Someimportant factors to consider when deciding whether or not to outsource are: costs of production; costs of transportation; costs of ordering, which can range from a simple pull signal to bulk orders in more complex systems; costs of delivery time, such as transportation time for a part or service agent; quality assurance of the potential supplier; and the loss of proprietary processes or other trade secrets. Also influential are any flexibility benefits the supplier can offer, especially where the supplier might be able to trade capacity or products between multiple customers, such as a freight forwarder using truck space to ship product from more than one customer, and any other competitive considerations, such as the supplier's relationship with the firm's competitors. One of the most frequent areas of outsourcing in recent years is in the use of third- party logistics (3PL) providers. This usually means subcontracting traffic operations, but sometimes more comprehensive services are provided. This choice is based on the same cost-benefit analysis as any other sourcing decision. In many such decisions, economies of scale are brought to bear in the 3PL's ability to negotiate with freight companies. Unique skill and knowledge requirements drive many global shipping and receiving transactions; subcontracting these duties is often attractive due to cost considerations. The benefits of using 3PL providers can include the following: • Reduction of total cost. Using 3PL providers should reduce the logistics costs along a supply chain. This may come from improved route planning, lower negotiated transportation rates, optimized selection of transportation modes, and more. • Shortening of time from origin to destination. Lead time to replenish inventory is important, and a 3PL provider should be able to help in this area through close coordination of goods movement, especially when changing from one mode to another; more accurate paperwork, which is important in customs and other transfer points; and tighter scheduling of routes to reduce transit delays. • More consistent processing with less time variability. A 3PL company with a global perspective should provide a holistic view of the total supply chain so that each movement of goods can be planned to minimize interruptions and delays. Reducing variability in elapsed time enables inventory managers to avoid stockouts and excess inventory. • Better concentration on core functions. Logistics management in extended supply chains is a complex process. Reducing or eliminating the time spent on day-to-day logistics activities enables professionals to concentrate on primary business functions. • Increased supply chain flexibility. When there are new developments in the marketplace, a business may need to find a new supplier or move goods to a new location. A 3PL provider can provide this flexibility better than a company with other concerns. • Market development. 3PL providers can aid in the demand side, as well, suggesting new market opportunities and assisting with marketing in new territories. These businesses understand how to work in many different parts of the world, and sharing this information with the customer is a win-win for both parties. Access to specialized knowledge. Likewise, a 3PL provider accumulates information about activities along the supply chain beyond logistics functions and shares some of this knowledge with its closest relationships. Potential growth areas include new products, new processes, trends in business climates in foreign countries, trends in transportation modes, and more. In summary, outsourcing is a strategy that allows a business to have an outside entity manage its business, supply chain, and logistics activities. A company may outsource to cut costs or to focus on its core competencies. References • Ackerman, K. (2000). How to choose a third-party logistics provider. Material Handling Management 55 (3): 95. • Armstrong & Associates. 2013. “A&A’s Top 50 Global Third-Party Logistics Provider (3PL) List.” http://www.3plogistics.com/Top_50_Global_3Pls.htm, accessed May 30, 2013. • Berglund, Magnus, Peter van Laarhoven., Graham Sharman, and Sten Wandel. (1999). Third-party logistics: Is there a future?” International Journal of Logistics Management 10 (1): 59–70. • Burnson, P. (2011). Demystifying the 4PL. Logistics Management 50 (4): 40–44. LOG320 Logistics Management Week 5-Discussion-Outsourcing Strategy Outsourcing Strategy Is outsourcing advantageous? If so, to whom? If not, why so? Outsourcing is advantageous mostly to corporations’ or large business. When a company outsources they do not have to invest in hiring and training new personal. By outsourcing, management can hand off the responsibility of merchandising and focus on the critical aspects of the business that will see the production increases and the company grows.
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Discussion - Outsourcing Strategy



Discussion - Outsourcing Strategy
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