Importance of Outsourcing in Purchasing

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Table of Contents

Introduction
Reasons and Benefits of Outsourcing
Drawbacks of Outsourcing
Remedies to the Drawbacks
Process of Outsourcing Purchasing
Levels of Outsourcing
Outsourcing and Purchasing
Conclusion
Works Cited

Introduction

Outsourcing is a process of seeking external services from another company or group other than getting the services from within the company or organization involved. It has become an important tool in shaping business especially as globalization takes place. It is growing very fast as people realize its importance.

Although outsourcing has many benefits, it also has some shortcomings and it is therefore necessary for a company to evaluate its needs and consider if it is essential to outsource its services. Purchasing on the other hand is a process by which an organization obtains goods and services in order to attain its goals.

It is a crucial element in a company and should be given due importance and ranked high in the organization structure as it is a top-management task. Communication in purchasing, both internal and external, is a very essential tool and should be taken into consideration in every stage of the purchasing process. This paper discusses the reasons and benefits of outsourcing, the drawbacks and remedies that should be taken, the process of outsourcing, the levels of outsourcing, and finally application of outsourcing in purchasing.

Reasons and Benefits of Outsourcing

The major reason why companies embrace the concept of outsourcing is to cut cost involved in the provision of a service or a product compared to when the products and services could be produced in-house. Any business aims at attaining high productivity while maintaining efficiency and cutting the operating costs.

This is so because the outsourcing company evades most processes involved in the production of a good or service for example quality ascertaining and pricing all of which incur costs. The outsourcing company is able to lower its purchasing costs of some of its inputs by taking advantage of the suppliers’ low costs.

Outsourcing also enables access to the best services and products in terms of quality since the services are usually obtained from specialized and qualified vendors, which would otherwise be too difficult and time consuming when done in-house; there is also exposure to a wide range of skills and expertise because of specialization.

The skills help the outsourcing company improve its services and overall image. Outsourcing also brings about the aspect of positive change in a company as ideas from the outsourced company are incorporated in the outsourcing company.

It is as well viewed as a way to manage risks as the risk is minimized through partnership between the outsourcing and the outsourced companies and in most cases the suppliers take the responsibility of catering for the costs incurred in the procurement process. In addition it fosters innovation since the outsourcing company is able to supplement the skills they have with the skills and knowledge acquired from the outsourced company and hence improve their ways of carrying out activities.

Outsourcing also enables a company to concentrate well on the core functions and values as it outsource other services from specialized providers enabling the company to utilize its resource on most important aspects as the others are taken care of by the outsourced company. It also creates time for leisure which is very important in balancing work and in some cases where the outsourcing is done from another country; there is the reduction or elimination of taxes as there are usually some provisions of incentives.

It generally reduces operating costs and helps a company achieve its goal even if it doesn’t have all resources required internally through combined efforts and in the long run, it enhances the company’s efficiency and capital income. It leads to competition as people are eager to learn the skills and knowledge they see with others (Barrar & Roxane 4).

Drawbacks of Outsourcing

Every aspect has its advantages and disadvantages. Some of the disadvantages of outsourcing are that there is communication breakdown between the company and the clients since they are not usually in direct contact. Communication is a very essential tool in any business as it helps the company to ascertain the satisfaction of their clients through their feedback and grievances and also assist the company to make any necessary changes as needed by the clients.

There is also the risk of sharing the control of the company with the outsourced company and the possibilities of delays in carrying out of the operations as there is no close monitoring of the suppliers. The company’s decisions are determined by the agreement between it and the suppliers and failure of one party leads to the fall down of the business.

Lack of commitment of the outsourced company is also an issue especially where the company may terminate its services before the agreed time and the outsourcing company is left with the problem of looking for another provider and time may not be there, it may also be difficult to identify a company with the same quality of products and services and this leads to breakdown of the progress of the whole process.

Security is also undermined by outsourcing as some staff members are transferred to the outsourcing company and also the fact that another party is being involved in the process since the outsourcing company does not have full control of them.

It may also cause unemployment to some people as they get displayed by the more qualified people from the outsourcing companies. To the suppliers, their work may be eliminated when their skills and knowledge are learnt by the outsourcing company’s staff and hence the services or products are produced in the same manner on an in-house basis.

On the part of the management, it is often difficult to identify the right partners or suppliers as it is usually difficult to know all their strengths and weaknesses in provision of the services. It is also a challenge to establish an effective control for the relationship between the outsourcing company and the suppliers. The outsourced activities may also affect the management of the company in a negative manner since they may not be compatible with the prevailing management style.

Remedies to the Drawbacks

To reduce the possibility and negative effects of outsourcing, there should be constant communication between the outsourcing company and the suppliers or the outsourced company so as to easily ascertain the possibility of any occurrence of a problem and to be prepared to make any adjustments.

The clients of the products and services should also be informed of the agreements involved and the specific outsourced suppliers. The ordering process should also be done in a user- friendly manner that allows compliance of the parties involved and the top management should ensure the agreed terms are followed through stipulation of rules and regulations to govern the entire purchasing process so that all parties are accountable and responsible for their deeds.

To avoid unhealthy competition and imitation of capabilities, the suppliers should ensure that their work has unique historical conditions that can not be traced today; there is a path of dependency such that inability to identify a single step leads to failure of the whole process and that there is social complexity and some difficulties in identification of the origin of the capabilities possessed by the suppliers (Brown & Scott 24).

Process of Outsourcing Purchasing

To ensure that the process of outsourcing purchasing is successful, the following steps should be adhered to; one should first evaluate the options of outsourcing.

In this, the outsourcing company should identify the additional costs associated with the personnel and operation of the process for example the maintenance of data accumulated in the outsourced company which is necessary in documenting the process of purchase and compare it with the costs that would be incurred if the services would otherwise be provided internally.

This aims at minimizing cost by looking at the cost benefit analysis. An outsourcing model should then be designed to show the targets expected the roles and responsibilities of all participants and also outline the whole purchasing process. After this, the purchasing process is now handed to the external providers or the outsourced company.

All information associated with the whole purchasing process is also handed over the contract begins. The final and most crucial process is that of monitoring the performance of the outsourcing company so as to ensure that it adhere to the specifications and terms agreed on. This helps in quick identification of problems and easy rectification incase any predicaments occur (Schuh et al 63).

In summary, the outsourcing company should select the right suppliers, ensure that the suppliers are aware of the company’s goals and objectives so that they can operate in line with them, carefully and clearly structure the contracts to avoid any misunderstandings, monitor the suppliers regularly, have a clear outsourcing vision, provide the necessary support needed by all the participants, review performance of the suppliers and constantly check on the cost benefit analysis so as to have monetary justification at all levels of the purchasing process.

Levels of Outsourcing

There are mainly three levels of outsourcing and an organization can choose any or all of them depending on the needs and expected results. They include; tactical, strategic and transformational outsourcing. Tactical outsourcing is done where there n already a problem in the business functions.

It is aimed at eliminating the problem which could be a financial crisis or even a production problem. When a company is unable to produce quality and adequate products and services, it may opt to outsource purchasing to counter the problem. Tactical outsourcing enhances better products and services for low costs and fewer resources. It offers immediate but short term solutions. Care should be taken in establishing the contract and identifying the best suppliers.

Strategic outsourcing is triggered by the desire of companies and organizations to involve themselves in more strategic functions of the business leaving the basic functions to the outsourced suppliers. For example a company may opt to purchase some items from external vendors as it produces those products it consider most important. Strategic outsourcing aims at establishing long-term value as opposed to the tactical outsourcing aimed at providing immediate but short term solution.

It involves high class and qualified suppliers that are maintained for a long time due to the mutual benefits associated with the relationship. The other level of outsourcing is the transformational outsourcing which combines tactical and strategic outsourcing and aims at creating value through reduction of costs and improved flexibility.

It brings about long term improvements of the business in terms of productivity in all managerial levels leading to high outputs and well established relationships with executive partners (Brown & Scott 21).

Outsourcing and Purchasing

The main aim of outsourcing in the purchasing process is to ensure that clients are satisfied in the products and services provided by the outsourcing company. Outsourcing helps add value to the items involved in purchasing by eliminating some costs such as processing and labor cost that would be incurred if the items or services were to be produced in-house. Its is as well a means through which an organization increases its productivity, efficiency and effectiveness through sharing of responsibilities.

Various processes involved in purchasing can be outsourced for example; purchase request, selection of bidders, bidding process, technical evaluation, commercial evaluation, negotiation, post-award administration and closing of the order.

In purchase request, the company deals with issues like determining the items and products needed by different departments in the organization to deliver their services effectively. In selection of bidders, the company should identify the suppliers that can best cater for the needs of the company, the suppliers qualifications are analyzed in relation to the products and services they offer, after which the bidding process is done.

Technical and commercial evaluation is done where the organization checks on whether the selected suppliers meet the expected standards and quality, based on their proposals, to decide on whether they qualify to be given the work of supplying the goods and services.

Additional changes to the specifications may be included here. Negotiation is the other step where the company starts negotiation with the suppliers selected, after evaluation of cost estimates and specification, on the terms and conditions that will be related to the contract.

Post –award administration include making of minor changes to the agreement incase there is a necessity that have been identified in the course of the process. All changes however minimal should be documented for reference and audit purposes. There should be mutual agreement between the parties so that the necessary action may be taken incase of any breach of the contract. The process is now carried out in accordance to the contract for example delivery and payments procedures are carried out as stipulated by the contract.

The importance of outsourcing the purchasing process is that all the responsibilities involved in purchasing procedures are undertaken by an external body relieving the company of the hustles involved and saving on time and other important resources like personnel.

Conclusion

Outsourcing is an important tool in business due to the various benefits that outweigh the drawbacks associated with it. It is however important to carry out a cost benefit analysis before any outsourcing activity so as to know whether the outsourcing will be beneficial to the company as compared to when the products and services would be produced on an in-house basis.

Works Cited

Barrar, Peter., & Roxane Gervais. Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships. London: Gower Publishing, Ltd., 2006.

Brown, Douglas., & Scott Wilson. The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities. New Jersey: John Wiley and Sons, 2005.

Schuh, Christian et al. The Purchasing Chessboard: 64 Methods to Reduce Cost and Increase Value with Suppliers. New York: Springer Publishers, 2008.

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