Operations Management - Outsourcing

MGMT316 Khalid Rashid

2548446

INTRODUCTION

Production and Operations Management is concerned with the problems of developing, producing, and delivering goods and services. Researchers focus on how to combine concepts, models, and data to help managers develop better systems and make better decisions concerning operations. Recent research in the area has focused on inventory, international operations, forecasting, information systems, logistics, purchasing contracts, outsourcing, and more. Today’s highly competitive world business environment is forcing management to aggressively pursue ways to achieve efficiencies, improve customer service and save money. In their frantic search for new ways to streamline company operations, the concept of outsourcing "non-core" business processes and activities is a tempting new way to improve operations and costs. Management has become intrigued with the idea that they should be focusing on managing and controlling those key "core" business processes and activities that their organizations are best at doing and that represent the mainstay of the business instead of trying to dilute precious efforts in some of the business activities that do not represent the essence of the activities of the company.

WHAT IS OUTSOURCING?

Outsourcing is hiring someone whose expertise can perform a business function or activity better, more cost effectively and in a more timely manner than can be achieved in-house. The concept of outsourcing is not new. Outsourcing, by the old definition, was very specific, targeted, and often project based. The company might design a product, and then outsource the manufacture of various components, subassemblies, even the finished product. Outsourcing takes place when an organization transfers the ownership of a business process to a supplier. The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it such a challenging, painful process. In outsourcing, the buyer does not instruct the supplier how to perform its task but, instead, focuses on communicating what results it wants to buy; it leaves the process of accomplishing those results to the supplier. Outsourcing involves numerous steps:

At first, the agency identifies its requirements and lists down the options that are available to achieve the desired needs. Further on, the agency then establishes requirements for outsourcing and selects appropriate vendors and negotiates the required details. Next, the agency is outsourcuing its functions. Thus, they have to handle the entire managements of outsourcing in an effective manner and keep track of the vendors. Finally, the agency manages the close of the agreement i.e. payments and other formalities and tries to analyze if the outcome matches to their requirements i.e. what they had asked for is achieved or not according to their specifications.

Types of outsourcing

The four types of outsourcing are:

Out-tasking: This is basically buying ad hoc services.
Functional sourcing: Where corporations start to bundle certain services that have partners or providers, such as cleaning, control and architecture contracts for narrowly defined function.

Vertical sourcing: Where corporations pick one or two partners and give them rights to provide specific functions for a period of time.
4. Integrating outsourcing: Takes the people currently performing the function, invest in them and links the service delivery to the service delivery ...

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Types of outsourcing

The four types of outsourcing are:

Out-tasking: This is basically buying ad hoc services.
Functional sourcing: Where corporations start to bundle certain services that have partners or providers, such as cleaning, control and architecture contracts for narrowly defined function.

Vertical sourcing: Where corporations pick one or two partners and give them rights to provide specific functions for a period of time.
4. Integrating outsourcing: Takes the people currently performing the function, invest in them and links the service delivery to the service delivery of human resources, facilities management, procurement and 'back of house' functions.

Two other types of outsourcing are Total outsourcing & Selective outsourcing. In total outsourcing, the company outsourcers over 80% of their functions to other vendors. When a company outsource 20% to 80% to another vendor, it is concerned to be a selective Outsourcing.

Typically, there are two types of outsourced services, Technology (IT) and Business Process (BPO). They each can be broken into the following areas.

Electronic Commerce (eCommerce)
Infrastructure (Networks)
Software (Applications)
Telecommunications
Website Development & Hosting

Customer Contact (Customer Relations Management)
Equipment
Finance / Accounting
Human Resources
Logistics
Procurement / Supply Chain Management
Security/Facilities

IT outsourcing requires an understanding of the business and the link between IT and business process and the ability to implement new systems and business change simultaneously. IT outsourcing aims to improve the return on IT investments by generating new revenues. This can be done through licensing systems, capacity or technologies initially developed for in-house usage.

Business Process Outsourcing (BPO), means delegating the ownership, administration, and operation of a process to a third party. BPO is about solving a business problem. BPO provides clients with dynamic results, which facilitates in enhancing their shareholder value in the market.

Companies essentially have three kinds of processes:

Core processes – Provides strategic advantage.
Critical, non-core processes – there importance level is high. However, they do not competitive differentiators.
Non-core, non-critical processes- these are needed to make the environment work.

Few advisors suggest investing in outsourcing core processes, while many recommend outsourcing critical, non-core processes. Also, most advisors recommend outsourcing all non-core, non-critical processes. However, outsourcing does not mean handing over an entire process. It generally means turning over to a BPO provider for directions and help in “how” departments i.e. areas like systems, infrastructure, administration, execution, and some of the design of non-core processes.

Organizations themselves carry out other processes like governance, policy setting, decision-making, and strategy of these processes. Basically, the whole point of outsourcing is to give away the execution part of a process while retaining the planning and direction aspect.

Significance of outsourcing

In today’s competitive business environment, most of the companies are indulging in outsourcing. Firstly, Outsourcing helps in transformation process in an organisation by subcontracting, total outsourcing etc. For example, Nike utilizes an outsourcing strategy, using only subcontractors throughout the globe. Majority of their output today is produced in factories in China, Indonesia, and Vietnam, but they also have factories in Italy, the Philippines, Taiwan, and South Korea. Reebok, another leading footwear manufacture also utilize a 100% outsourcing strategy and manufacture their products throughout Asia. Secondly, by outsourcing companies can concentrate on their corporate strategy and operations priorities. IBM entered into a $5 billion manufacturing outsourcing arrangement with Sanmina-SCI, an electronics contract manufacturer. The agreement supports overall business strategy and operations priorities in both companies. Thirdly, outsourcing helps in product and process improvement activities by gaining advantage to latest technologies available through the vendor. For example, an outsourcing contract signed between Toyota Australia and Fujitsu helped Toyota gain access to the latest hardware and software, which improved product development. Further more, outsourcing helps managers to concentrate on core competencies. For example, Coca-Cola Amatil believes that outsourcing e-commerce allows us to focus on our core competencies rather than new technology. Further more, outsourcing helps in capacity management. For example, ‘Toshiba will support increased production by expanding outsourcing, including manufacturing at Matsushita Kotobuki Electronics Industries.

Lastly, outsourcing helps to reduce cost and adapt to changing demand. For example, Hewlett-Packard has embarked on an ambitious plan to outsource much of its manufacturing activity to electronics manufacturing service (EMS) providers. The object of this strategy is to reduce total manufacturing cost and provide higher manufacturing responsiveness to changes in volume. The above examples illustrate that outsourcing has helped many companies to gain competitive advantage, develop products with latest technologies and reduce cost thereby increasing profit.

Advantages of Outsourcing

Outsourcing leads to several benefits because it manages the entire process (people, process, technology, facilities, management, etc.) in an integrated manner. Some of the key advantages are:

Gives you access to professional capabilities.
Shares the risk- Risks, such as liability issues, can be transferred to the service provider, allowing the contracting agency to share or avoid risks associated with providing a service.
Companies do not have to worry to upgrade their technologies.
Improves service quality since specialists carry out the activities.
Frees up human resources – outsourcing helps the manpower concentrate and spend time on more important jobs.
Frees up cash flow – the company would invest money to complete the activity. Thus, by outsourcing, that money is free to be used for other activities.
Saves time and helps management focus – Time is money. Hence, by outsourcing, the daily operational activities and problems are handled by the concerned vendor. Hence, outsourcing saves time, which enables the managers to focus on more important issues for efficient running of the organization.
Lower Costs – sometimes its better to buy a product then to actually make it in-house. Also, some activities are seasonal in nature. Hence, outsourcing helps companies to save the overhead costs, which they would have to bear if carried out by them.
Shorter project delivery times.
Saving Capital: Ability to invest own capital in more core-oriented facilities.
Economies of scale: Institutions can take advantage of economies of scale achieved by vendors. Specifically, private vendors specialize in a particular service area, allowing them to purchase goods or services at a lower cost.

Disadvantages of Outsourcing

Fear of the service provider ceasing to trade (bankruptcy, etc).
Lost of control of the process.
Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users.
The company may lose focus of the customer and concentrate on the product (the outsourced process).
The loss of talent generated internally – loss of in-house expertise.
Employees may react badly to outsourcing and consequently their quality of work may suffer.
Outsourcing costs more in many instances.
Vendors need to be managed well to achieve cost savings and quality enhancements – time consuming to manage vendors.
Outsourcing can result in the leakage of internal secrets to the competitors
Supplier might compromise on quality to increase his/her profit margin and reduce costs without notifying the company, which can jeopardize the company’s goodwill and future in the market.
Some functions cannot be completely outsourced; in-house staff is still required to handle the toughest cases.

Making outsourcing successful

While there are many benefits to outsourcing, there are inherent risks involved as well. Many of these risks can be alleviated via a well-structured contract with clearly defined responsibilities, project scope, and expectations. To ensure that successful outsourcing takes place, the fallowing points should be kept in mind:

Detailed analysis of requirements: Before outsourcing, the company should analyse its requirements and choose the vendor accordingly.
Maintain Communication: Outsourcing managers are basically a bridge between the organization's business needs and the providers' services. Communication becomes the essence of a successful outsourcing relationship.
Detailed specification: Poorly defined contracts are a common cause of outsourced project failure. Some of the provisions that should be included in the contract to avoid ambiguity are:

Exact service to be delivered
Project requirements
Pricing arrangements
Penalties for non-conformance
Confidentiality/ security provisions
Delivery time

Develop project in stages: The project should be developed in stages so that it is easy to monitor its progress and make timely changes.
Verify credibility: before choosing the vendor, to whom the activities would be outsourced, company should ensure that the vendor has a good reputation in terms of stability, history, financial background etc.
Maintain control: Even though the company’s activities are outsourced, the company must make sure that it retains enough control over the outsourced activities.

Conclusion

Today’s volatile economy has forced most manufacturers to explore outsourcing. Many companies see it as an opportunity to reduce costs, improve flexibility and streamline production processes. As the face of business changes, more and more businesses are looking to reduce costs and share services. Not only are more and more companies looking to outsourcing as a management solution, but the range of services to be outsourced is also expanding and adapting. Hence, in a nutshell, if the right kinds of jobs or activities are outsourced to the appropriate sources, it would be very beneficial for the organization. Thus, many organizations are outsourcing various activities as it not only helps in lowering costs, but also provides better outputs that in turn increase the profitability and credibility of various organizations in their respective industries.