I’ve provided 3 discussions below that need to be responded separately. This week’s discussion is about “Outsourcing and Procurement”.
After the watching the video I can observe that outsource manufacturing consists of hiring people outside of the company to assemble parts of, or build an entire product. The main reason why companies chose to do this is to cut costs. Labor is often among any company’s largest costs. Outsourcing parts of the production line to a third party in a lower cost location leads to a significant decrease in production costs.
Disadvantages of Outsourcing:
Although there are several reasons to outsource, according to Webb (2017) there are also disadvantages to the practice such as:
- Risk of losing sensitive data and the loss of confidentiality by outsourcing activities or processes to external parties
- Loss of management control and the inability to control operations of activities or processes that are outsourced
- Outsourcing companies may impose hidden or unexpected costs by creating lengthy contractual agreements with lots of fine print
- Lack of quality control as outsourcing companies are often profit-driven rather than focused on doing a good job
Make or Buy Decisions for Manufacturing Industries:
The make-or-buy question has always been a concern of complex nature which represents a fundamental dilemma faced by many companies. The cut-throat competition compels all the manufacturing and services companies to re-evaluate their existing processes, technologies, products and services in order to find an opportunity to positively impact the bottom line by making strategically drawn out make-or-buy decisions (Sillanpaa, 2015). The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside vendor). The video described that, outsourcing decisions are based on the difference in the cost of purchasing or buying a product or service from an external supplier compared to the cost of producing the item or providing the service in house. One important aspect of cost management is determining whether to make or buy components in a product. A complete and correct assessment of the various elements of the cost is essential to make sound economic decisions.
Kraljic’s Supply Matrix:
The supplier suffers from a range of risks depending on its geographic location, business model and supply chain length. If the vendor is based in Switzerland, it is unlikely that political uncertainty or logistical delay will impact upon operations. On the other hand, facilities based in the developing world may be subject to legislative risk, political upheaval and unreliable transportation routes. According to Webb (2017), all such risk factors have bearing upon the buying company. Profitability describes the impact of a supply item upon the bottom line. For certain areas of spend, such as stationery, supplies have only a negligible effect on profits. In other categories, a single source of supply can make or break a business. For Apple, a large proportion of its profits are determined by Foxconn’s ability to manufacture the scale of products required to a precise specification.
2-)Outsourcing and Procurement
In this video Dr. Millar present topics on outsourcing, names of some companies that outsource, the products they outsource, reason for outsourcing, issues with outsourcing, benefits and risks involved, framework for make-buy model, hierarchical model for outsourcing decision, procurement strategy, link between procurement and outsourcing, and types of e-market . Outsourcing is a common activity and is on the rise due to its use by manufacturing and electronic industry. The concepts learned from this video are benefits of outsourcing, risks of outsourcing, Hierarchical Model for outsourcing decision and Kraljic Supply Matrix.
Benefits of Outsourcing
Economies of scale allows cost to decrease both in purchasing and manufacturing due to bigger orders or multiple orders. In other words, as the business grows or due to bulk product ordering cost of product can be reduced thus increasing profit.
Risk pooling is the ability for suppliers to spread the risk of demand and supply. Outsourcing allows transferring the risk of uncertainty to suppliers through the effect of risk-pooling.
Reduce capital investment allows to save the money allocated for the function or support of an activity. By transferring some of the non-core activities to the supplier, the cost of maintaining those activities are also transferred to the supplier.
Focus on core competency allows focusing on the talent available inside the organization so that performance can be increased.
Increased flexibility allows making use of talent available outside the organization (Millar, 2013, February 22).
Risks of outsourcing
Loss of competitive knowledge even though outsourcing can be considered an effective way to compete in the business world. Care must be taken not to outsource the processes at what the company is specialized at.
Conflicting objectives when an organization outsources only product and services are transferred not the responsibility of meeting quality and customer satisfaction. Therefore the organization can lose visibility as well as direct control on its transferred operations (Millar, 2013, February 22).
3-)In the shared video, Miller has explained procurement and outsourcing with few examples. Below are the few points which are discussed in the video:
Outsourcing is a process where an organization assign or delegate some organization’s activities to outside company by seeking benefits or fulfill some business need. Initially, manufacturing used to outsource, nowadays product design and innovation get outsourced. Benefits can get in terms of cost savings, competitive advantage, focus on core business etc. Likewise, outsourcing provides many advantages to organizations, whereas it can bring dependency issues. It can be competitive knowledge sharing to competitors. Therefore, in outsourcing secondary activities of business outsourced to other companies.
In general, there are two main reasons to outsourcing; dependency on capacity (Knowledge and Skills) and dependency on knowledge. Based on the product is modular or integral, outsourcing decision may differ. There are few parameters that need to consider while outsourcing, those are customer importance, component clock speed, competitive position, capable suppliers and architecture.
Procurement is the process of finding and acquiring the goods, services or works from the external organizations. Procurement decision should be made considering few parameters like types of products the firm is purchasing, level of risks and uncertainty involved.
Kraljic’s Supply Matrix:
This matrix works on two dimensions; one is profit impact and another is supply risk. Using these two dimensions, firm can decide where they land while procuring any service or product.
In a procurement process, getting suitable suppliers to business is challenging. Suppliers price negotiation depends on demand and supply gap. If the demand of procurement thing is high and supply is less, then suppliers offers high prices and vice versa. E-market provides a platform where may suppliers easily accessible and firm can find suitable suppliers easily. Advantages of e-market are; flexible revenue model and open market. There are two ways e-market service is accessible; one is licensing fees and second is subscription fee. Install.com for food service industry and Pefa.com for a fresh fish market are two examples of e-market.