Supply Chain Management and Outsourcing

Supply Chain Management and Outsourcing

Today our business competitions become fiercer every day. Our competitors are emerging ubiquitously and incessantly. We have to adapt ourselves for these circumstances; therefore, improving supply chain management is one of the solutions.

Supply chain management is a set of approaches utilized to efficiently integrated suppliers, manufactures, warehouses and stores, so that merchandise is produced and distributed at the right qualities, to the right locations, and at the right time in order to minimize systemwide costs while satisfying service level requirement. (David Simchi-Levi, 2003)

Nowadays supply chain management plays more significant role than the past because it helps reduce uncertainty by matching supply and demand, and improving inventory forecasting. Moreover, improving supply chain management also affects to increase financial ratios, such as Assets turn over, ROI and ROA. Additionally, rising of financial ratios help increase creditability and satisfy corporation's stakeholders.

Nevertheless, corporations do not necessary to organize by themselves in every step of businesses. They are able to use outsourcing to make their business easier.

Outsourcing is the procurement of products or services from external sources of organization. (Lankford & Parsa, 1999) The main features of outsourcing consists of two parts; the transfer to a third party of the responsibility for the operation and management, and the provision of services to the organization by the supplier. (Marzyani & Nita Al, 2006)

Why outsourcing?

Using outsourcing has not only benefits but also risks; therefore, businesses have to take it into consideration before making any decision.

The benefits of outsourcing are

1. Reduce capital investment and save time while improving efficiencies. As businesses do not need to purchase technologies from vendors that would be too expensive for them to reproduce internally.

2. Help expand services and expertise. Businesses can focus only core competency.

3. Increased flexibility by reducing demand uncertainty. Companies do not need to invest all budgets for new technologies and new innovation.

4. Create a more positive corporate image by allowing the organization to refocus their resources on their core business.

5. Improve employee productivity and morale by focusing core competency. ( Behara, et al, 1995).

The risks of outsourcing

1. Loss of competitive knowledge. Outsourcing the manufacture of various components of different suppliers may prevent the new insights, innovations and solutions that require cross-function teamwork.

2. Conflicting objectives may occur because suppliers and buyers have different objectives. To illustrate, increasing flexibility is a core objectives of buyers, but reducing costs and maximizing profits are main purposes of suppliers. (David Simchi-Levi, 2003)

Therefore, the businesses have to attach significant to selecting matched outsourcing because selecting the right outsourcing helps maximize profits. On the other hand, selecting the wrong outsourcing may bring significant loss and damage.

Which function is required outsourcing?

As a following diagram shown which function would be required outsourcing and which function should be remained as a corporate core competency

Figure: Relationship among knowledge types and outsourcing decision (Alvarenga & Malmierca)