Supply Chain Strategy: Advantages and Risks of Outsourcing

To deal with supply chain challenges such as demand and supply uncertainties businesses set up different types of strategies to address the different sources of uncertainty associate with demand and supply in the various industries.

Some supply chains adopt strategies that aim to increase cost efficiency (efficient supply chains), in some others the aim is to reduce the supply disruption risks (risk hedging supply chains), while some supply chains aim to be flexible and responsive to changing customers’ needs (responsive supply chains) or combine responsiveness with disruption risk control (agile supply chain).

The most common practice employed by organizations to reduce operational costs and create a competitive advantage is outsourcing. Business process outsourcing is a trend that gains more ground as it results in significant financial, quality and organizational benefits. For instance, moving some of a company’s internal activities and decision responsibility to external providers can improve the ROA by reducing inventory and selling unnecessary assets and reduce operational costs through a lower cost structure. Outsourcing can also have impact on the overall performance of the firm by improving quality, productivity, reduce risks, enter new markets and make available expertise, skills, and technologies that would not otherwise be available. Outsourcing non-core activities allow to focus on what the business does best and increase product and service value by improving response to customer needs.

And although the benefits of outsourcing outlined in this article are considerable, firms that decide to outsource their activities will also have to consider the equally considerable associated risks: Suppliers’ poor performance that could result in product/service poor quality, supplier’s commitment, leakage of business sensitive information and intellectual property, monopolies and supplier dependency, reputation risks and hidden costs.

These risks of course are not unsurpassable: Identifying the risks and their source, assessing their impact and ultimately develop a plan to mitigate these risks will control the probability and the severity of such undesirable occurrences.

Organizations of all sizes, now more than ever, successfully outsource functions such as logistics, assemble and production, ICT, etc. Amongst the reputable firms that outsource non-critical activities are Hewlett-Packard that turned over its inbound raw materials warehousing in Vancouver to Roadway Logistics and Apple that sources its materials and components from other manufacturers that operate throughout the globe.