Outsourcing means acquiring or obtaining products or supplies that are actually a part of an organization from the external suppliers. A company that outsources its internal activities is called as client firm and the company that provides outsourcing services is called as outsource provider. At the earliest stages of the business, most of the companies handle their business activities internally, but as business grows and mature, they hire specialized and professional outsourcing firms that will help them to gain competitive advantage over the competitors.
Outsourcing is the new term used in the supply chain and nowadays it becomes the major strategy used by the business owners worldwide. Outsourcing is continuing to grow vastly because of the following reasons;
Outsourced manufacturing, which is also known as contract manufacturing is becoming standard practice these days.
Types of outsourcing
A company may outsource the following functions from the outsource provider; Purchasing, logistics, R&D, operations of facilities, management of services, human resource, finance/accounting, customer relations, sales/ marketing, training and legal process.
Today, every supply chain function can be easily outsourced. When you talk about the outsourcing in the context of supply chain, the business functions include;
Usually a logistic service integrator which is also known as 4th party logistics provider takes the responsibility of managing the company's outsourced functions by utilizing his expertise that brings value to the organization.
Benefits Of Outsourcing
Best outsource capabilities
Best outsourcing capabilities by the outsource provider company make significant investments where ever they think is suitable for the business because as you outsource a particular function to them, then it’s their business. They are more experienced people dealing with the same challenges in the industry from years and their specialization and expertise turn your business towards success through dramatic improvements in the performance measures like cost, quality, speed, and service.
One of the most important reasons that most of the companies decided to outsource various business functions is the cost saving particularly labor cost.
Focusing on core competencies
An outsource provider brings its core competencies to the supply chain. This way the client firm frees from the human, physical, and the financial resources to relocate to core competencies.
Gaining outside expertise
By outsourcing the business activities, businesses access to the broad base of skills that were not available in-house. An outsourcing provider is a source of innovation and creativity for improving products, processes and services.
Gaining updated technology
An outsourcing provider will provide the state of the art technology instead of using legacy systems. So, it would be a great advantage that the client company does not need to invest in the technology.
There are several disadvantages of outsourcing as well;
Increased transportation cost
Transportation or delivery cost may rise due to the distance increases from an outsourcing provider to the client firm.
Loss of control
The major disadvantage of outsourcing is the loss of control. When managers lose control to access the business operations, then the cost may likely to increase.
Negative impact on employees
Outsourcing may negatively affect the morale of the employees when business functions are outsourced. Employees believe that they may be next, as their friends lose their jobs. It will ultimately affect the productivity, loyalty and the trust.