Outsourcing in Operations Management
The scope of operation management is vital to the economy of all territories and companies in existence. More precisely, the aspects of supply chain management are of much importance in all businesses entities, and the organizations ought to grasp the concepts of supply chain management for them to realize their authoritative objectives. Supply Chain Management constitutes planning, design, implementation, and control of various aspects (Amaral & Tsay 2009). The aspects include procurement, warehousing, inventory control, distribution, manufacturing, functions concerning sales order fulfillment, and outsourcing. The study shall focus on one aspect, and this is outsourcing. The study shall focus on the utilities that relate to outsourcing, and its accompanying benefits and challenges. Outsourcing refers to contracting a portion of the company’s operations management functions to respective third party providers.
Many organizations have to respond to the increasing worldwide competition by lowering the costs that relate to their supply chain frameworks. Outsourcing is a viable option for achieving the reduction of costs (Anatan 2014). It is imperative for an organization to maintain consistency in net profits in both domestic and international regions. In the contemporary business environment, outsourcing is a mandatory practice for the reduction of supply chain costs. For instance, IBM outsources the services that relate to the transformation of its own business from materials processing to information processing from Infosys (Christopher & Ryals 2014). In addition, Dell outsources operations management functions to multiple overseas suppliers, and this enables them to nurture their mass-customization framework. Outsourcing is an endowment to any business because it cuts down on the supply chain expenditure, and guarantees consistency in net profits.
2.0. Utilities that Relate to Outsourcing
The study reviews a framework that relates to the recurrent activities that concern outsourcing relationship in daily business operations. More intently, the study focuses on a systematic process, which can function as a blueprint for the processes of planning, designing, implementing, monitoring, and controlling outsourcing functions (Folinas 2013). As depicted in figure 1, it is essential to perform particular steps and sub-steps while executing the outsourcing function in operations management.
Figure 1: Outsourcing systematic processes
2.1. Feasibility Study
The top-level management in most companies does the assigning of any operation management functions to third parties. The strategic viability and the feasibility of this particular decision occur in line with the operational, technical, and financial business principles (Figure 2). In terms of operations, the identification of the operation management functions that require outsourcing from third parties has to be successful (Hofmann, Busse, Bode & Henke 2014). Technically, the third party provider has to identify with requirements of the organization. Moreover, the third party providers have to possess the capacity to adhere to the requirements that concern details and specifications of the particular operation management functions.
In terms of finances, the outsourcing activities to the respective third parties have to be cost effective so that the company maximizes on its net profits. In the feasibility studies of contemporary business environments, the company has to analyze various factors. Such factors include the skills of the company, the expertise of the third party providers, and the comparison of insourcing and outsourcing operation costs (Marsanic 2014). Moreover, the company has to consider the possible effects on its employees, its competitive advantage, and its financial and capital frameworks. Finally, the organization has to scrutinize the realizable benefits of the respective outsourcing activities.
Figure 2: Feasibility in Outsourcing activities
2.2. Requirement Analysis
The organization identifies the qualitative and quantitative requirements of outsourcing the particular operation management function to a respective third party. More precisely, the organization ascertains the manner in which the third party provider will execute various activities (Narasimhan 2014). The jobs that have to occur have to be clearly articulated, and an assessment of the requirements that the logistics provider must meet occurs. The organization also reviews the criteria that relates to the provider’s selection, and evaluation in regards to the provision of outsourcing services.
The company ought to be keen in this stage, and incorrect decisions will affect the operations management practices in an adverse manner (Reddi & Moon 2013). For instance, if the concerned employees fail to record the warehousing and transportation requirements, there will be massive errors and delays, and the resultant effect on the company is catastrophic. The company should review the degrees that relate to the standardization of logistics practices executable by the organization. In addition, the business must focus on the deployment frameworks and techniques for evaluating the performance of the respective outsourced functions. Moreover, the company ought to consider the operational costs, interrelations between operations management functions, and its size (Schoenherr 2010). At the end of this process, a statement of work document (SOW) has to be present. The statement articulates all the objectives, tasks, and the respective time schedules of the outsourced operations management functions.
2.3. Market Research
The company ought to search for a reliable third party provider, and the company searches for such providers on the net, market databases, e-market platforms, and logistics, and supply chain associations. In addition, the company has to retrieve files that relate to its previous third party providers, and this enables the business to locate an efficient third party service provider (Xu 2011). More intently, the organization has to conduct research on various outsourcing activities by conducting in-depth reviews of various case studies and materials. Moreover, different advertisements linked to third party providers will also come in handy. The company has to conduct a survey of the performance of operations management frameworks of its competitors who have utilized the services of the respective third party providers (Amaral & Tsay 2009). In addition, it is crucial to obtain insights from advisory firms and various annual reports that relate to outsourcing activities
Figure 3: Market Research in Outsourcing Activities
In the selection stage, three critical aspects come into play. They include a systematic and conventional procedure that is going to propose the selection steps (Anatan 2014). Secondly, it is essential to embrace particular criteria that can indicate the viability of various third party providers. Thirdly, it is mandatory to document the procedures that were applicable in the selection of third party providers. In the selection process, the company aims to select third party providers based on particular criteria. Such criterion encompasses the company’s lead-time, brand image, and cost (Christopher & Ryals 2014). For instance, a company endeavors to exhibit a quick execution of orders at all instances. For such a company, their fundamental criterion when selecting third party providers would be the lead-time. In addition, the company evaluates the reputation, viability, and years of experience of the third party provider and then a selection occurs. More intently, the company considers if the selected provider has the intention or capability to become the company’s strategic partner. More importantly, the company should also seek to ascertain if the provider would enhance its chances of achieving its set objectives.
2.5. Planning of the Partnership
The company establishes an agreement with the third party provider, which articulates the nature, purpose, responsibility, duration, and costs of the outsourcing services. The contract highlights and addresses instances coupled with controversial issues, such as a low level of provided services (Folinas 2013). In addition, the agreement articulates the terms that will lead to the termination of the contract. Moreover, performance metric indices are also availed in the agreement. In this stage, it is essential to ensure that the negotiations become successful, and the contract should certify the negotiations. The third party providers and the company ought to nurture a mutual relationship because they need each other (Hofmann, Busse, Bode & Henke 2014). Thus, the negotiations have to be successful in all scenarios. More intently, this stage is dependent on a contract because the contract articulates the rules of the partnership, and both parties become confident of the agreement in place.
Figure 4: Planning of the Partnership when Outsourcing
2.6. Development and Operation of the Partnership
Various management tasks are essential to initialize the outsourcing function, and the acts attributed to change management to the transformed state (Marsanic 2014). In this stage, it is mandatory for all the involved stakeholders of the company to grasp the concepts in the contract. The company’s employees must understand the contract and they ought to undergo various tutorials on it. In addition, they should cooperate with the employees of the outsourcer by sharing their insights and experiences when it counts. There ought to be communication channels, committees, aimed at enhancing all logistics functions including outsourcing.
Figure 5: Development and Operation of Partnership
2.7. Partnership Management
In this stage, aspects such as accounting, order handling, performance management, and financial management of the provider ought to be vivid. Moreover, the management problems concerning conflicts and risks ought to be explicitly stated. In addition, the monitoring and control of the tasks linked with scheduling and budgeting have to be evident. It is also important to realize future changes in the contemporary business environment (Narasimhan 2014). Changes in the business environment can affect the contract between the company and the outsourcer. The outsourcing processes incorporate three stages, and these are the input, steps and tasks, and the results. In addition, in this stage, the organization engages in standardization and automation of the outsourcing practices. The company embraces the techniques attributed to quality control, and total quality management (Reddi & Moon 2013). More intently, the organization also ensures that performance metrics and channels of communication in the partnership are successful in all operations.
Figure 6: Partnership Management
2.8. Re-Identification of the Partnership
A partnership between the company and the outsourcer changes when the contemporary business environment transforms in any way whatsoever. It is crucial for both parties to reaffirm their commitment to the outsourcing agreement at all times (Schoenherr 2010). The organization has to measure the performance of the outsourcer at regular intervals. In addition, the organization evaluates the levels of satisfaction of the customer based on the outsourcing services availed by the outsourcer. More precisely, the management of the business attempts to ascertain the acceptance rates of the outsourcer among the company’s customers (Xu 2011). The internal factors of the contemporary business environment also affect outsourcing activities. Such factors incorporate organizational structures, mergers, and acquisitions, re-engineering of outsourcing procedures, and changes in strategy. Moreover, this stage also analyzes the external factors that influence outsourcing in the contemporary business environment. They include the changes attributed to the market base, and they can be economic, social, or political.
3.0. Benefits and Challenges of Outsourcing
Outsourcing enables the company to realize lower operations management costs. More precisely, the capital expenditures attributed to equipment, transportation, warehousing, and distribution activities substantially reduce. Moreover, the standard costs tend to become variable costs, and this comes in handy (Amaral & Tsay 2009). Secondly, the outsourcers avail higher standards of quality to the company’s consumers. They enhance customer service frameworks and improve the operational efficiency. Among other benefits of outsourcing are reduced response time, the appropriate response to changing consumer demands, and the promotion of lean supply chains hence minimizing wastes and disposals (Christopher & Ryals 2014). Concerning the challenges, there are massive shortcomings associated with the design and control of outsourcing activities. More precisely, many companies encounter challenges relating to inadequate services and inappropriate performance management scores by the outsourcer.
Outsourcing is a critical aspect of any company, and research indicates that the companies shown in figure 7 embraced proper outsourcing frameworks from 2005 to 2009 (Anatan 2014). The supply chain is a critical component of operations management, and outsourcing certifies and complements all supply chain platforms in organizations at all times.
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Figure 7: Top Supply Chain Companies from 2005 to 2009